Notesale: Turn your study into money

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Financial markets
Money Market
It refers to the institutional arrangement facilitating borrowing and lending of short-term funds
for periods varying from a day to 1 year
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Call money market, Certificate
of deposit, Commercial paper and Treasury bills are the major instruments of the money market
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Features of Money Market
1) Short term funds
It purely deals with short term funds or financial assets called near money
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The assets in the money market can
be easily converted into cash at minimum transaction cost
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There is a coexistence of both an organised and
unorganised money market in India
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Both markets
operate independently, and hence, no coordination between the two
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Busy season when demand for funds is
higher and 2
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These two seasons are a byproduct
of agricultural operations in India
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During the slack season, May to
September, crops are usually sown, and hence the demand for funds is low
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4) Multiplicity of interest rates
The rate of interest charge by the public sector banks, private sector banks and cooperative banks
differ from each other
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This creates a problem in the minds of
customers at time of either borrowing or investing
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This is
because the unorganised sector operates in India without any control and regulations
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Besides this, various institutions in money market like commercial,
cooperative, regional, rural banks compete with each other, rather than complementing each
other
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The most common instruments used are cheques, demand drafts and not any other, like Treasury
bills, commercial papers, etc
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7) Pre- dominance of government and semi government security
Unlike developed country, the bill market in India is dominated by government and semi
government security, such as Treasury bills dated government security, promissory notes and
government bonds
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Hardly any flow of
funds take place between the two markets
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Functions of Indian Money Market
1) Provides short term funds
The money market provides short term funds in the economy
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It is a mechanism
through which financial intermediaries help investors and borrowers by matching small deposits
with large loans and large deposits with small loans
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The financial instruments used in money market are called as near money
as they are close substitutes of cash
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3) Facilitates Trade
The money market facilitates domestic and international trade by providing short term finance to
business firms
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Existence of discount and acceptance houses
makes trade more transparent
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If the RBI intends to reduce the money supply, then interest rate
could be increased and credit would be made expensive and vice versa
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5) Growth of industries
Working capital takes care of finances required for day-to-day operations such as purchase of raw
material, water bill, etc
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Adequate availability of short-term funds helps the industries to
increase the production capacity, helping in promotion of industrial growth
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Sometimes when commercial banks find it difficult to meet financial needs, they can
easily borrow loans from Interbank or money market which may be cheaper than loans taken
from the central Bank of a country
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7) Helps government to raise short term funds
The money market helps the government to raise short term funds through the issue of Treasury
bills which have a lower interest rate compared to borrowings from the open market
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8) Helps in financial mobility
The financial intermediaries operating and the financial instrument traded in the money market
facilitates a smooth and easy transfer of funds from one sector to another, or from one place to
another, without much of the difficulty which helps in development of Commerce and trade within
and outside the economy
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The two types of
Treasury bills are:
•
•

Adhoc bills: which are issued only to the state governments, semi- govt departments and
nationalised banks
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2) Certificate of deposits
Certificate of deposits is a negotiable money market instrument
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Investors can even renew the certificate if they want to continue investment for more than a year
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Commercial Paper (CP) is a short-term debt
instrument issued by corporations to raise funds for immediate financing needs
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Denomination of commercial
paper is 5,00,000 and multiples thereafter
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Bills of exchange facilitate trade transactions
by providing a secure payment method
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Bill of exchange is the maturity period of three months
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The seller gets immediate cash, and the buyer earns interest
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6) Cash management bills
The government of India in consultation with RBI has introduced cash management bills as a new
short-term instrument in 2010 to meet the temporary mismatches in the cash flow
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7) Promissory note
A promissory note is a legal instrument in which debtor promises in writing to pay a specified
sum of money to the payee at a specified period of time
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They provide legal
enforceability in financial agreements, creating confidence between parties
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Some of the asset management companies offering money
market mutual funds in India include Aditya Birla Sun Life Money manager fund, UTI money
market fund, L&T money market fund, etc
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Participants of Money market
1) Central government
Central government is mainly a borrower in the money market
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Treasury bills are usually subscribed by
banks and financial institutions
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The RBI conducts open market operations (OMOs) by buying and selling government securities
to manage liquidity in the system
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It aims to ensure price stability, regulate
credit, and promote economic growth
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Commercial banks borrow to meet short term requirements of the cash
through call money market, repurchase agreement and cash management bills
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They grant short term loans to borrowers;
discount and re-discount the bills of exchange
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4) Public sector undertakings

They participate in the money market by issuing commercial papers
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Few of the public sector undertakings are cash rich
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5) Insurance Companies
Both general and life insurance companies lend their surplus cash in the money market
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The introduction of collateralized
borrowing and lending obligations in 2003, the insurance companies are finding it easy to invest
huge sums in the money market, as it is secured with collateral
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MMMFs invest in a diversified portfolio of instruments, including Treasury
bills, commercial paper, and certificates of deposit
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Funds invested can be
withdrawn by offering a one-day notice, and can be withdrawn through a bank, ATM
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They borrow through short
term loans from commercial banks, issue of commercial papers subject to required credit rating
and discounting of commercial bills
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8) Dealers and Brokers
Dealers and brokers act as intermediaries, connecting buyers and sellers for trading money
market instruments
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Capital Market
The capital market is a financial system where long-term securities, such as stocks and bonds, are
bought and sold
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In the capital market, stocks represent
ownership in a company, while bonds represent debt
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The capital market is crucial for allocating capital efficiently, allowing
investors to diversify portfolios and entities to secure long-term financing for projects and
expansion
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It channelises ideal financial resources in productive uses
by encouraging and increasing the size of savings
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2) Facilitating Capital Formation
One of the primary functions of capital markets is to facilitate the formation of capital
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Capital markets provide a mechanism for these companies to
raise long-term capital by issuing stocks and bonds to investors
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Capital markets enhance liquidity by providing a platform where investors can buy or sell
financial instruments
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4) Price Discovery
Capital markets serve as a hub for price discovery
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This process reflects the
perceived value of the underlying assets and incorporates all available information
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5) Help in industrial growth
The capital market provides long term funds required for the growth of industrial sector in the
country
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The availability of funds helps industries enhance their productive capacity
by creating productive assets and thus expanding or diversifying their area of operations
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The different annual reports, statistics published by
SEBI and different corporate houses, and institutions reflect the performance of economy in
general, and financial performance of companies in particular
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7) Diversification of Investment Portfolios
Capital markets provide investors with a diverse range of investment options
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Additionally, they can diversify across different sectors and geographical regions
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8) Provides insurance to investors
Interconnected stock exchange has set up an investor’s protection fund (IPF) to meet the claims
of investors against defaulter members (like brokers) in accordance with the guidelines issued by
the Ministry of Finance
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Organisations of capital market
1) Gilt edged market
The gilt-edged market, often referred to as the gilt market, is a financial market where government
and semi- govt issued securities are bought and sold
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In essence, the term "gilt-edged"
signifies the high credit quality and reliability of these bonds
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Based

on maturity periods they are classified as short-term and long-term bonds
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Due to their low risk,
gilts are often used as a benchmark for measuring interest rates in the broader financial markets
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It is classified into primary and secondary
market
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It is also known as new issue market
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The industries
raise funds through the issue of shares, bonds and debentures in the primary market
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Secondary market deals with buying and selling of existing securities
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It helps in providing liquidity in the capital market
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The trading in the
secondary market does not affect the capital available to the companies but only changes the
holder or the owner of securities
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DFIs offer various financial products, including loans, equity, guarantees, and technical assistance,
to support projects in infrastructure, agriculture, healthcare, education, and other sectors
essential for economic progress
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The primary objectives of DFIs include poverty reduction, job creation, and fostering sustainable
economic development
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ExIFCI, ICICI, SFCs, IDBI etc
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They facilitate the efficient allocation of capital by channelling funds from
those with surplus capital to those in need
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Instruments of capital market
1) Shares
Shares are a unit of ownership in a corporation
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An individual
subscribing to a share of a company is called the shareholder of a company
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There are two
different types of shares:

a) Preference Shares
It refers to shares which give preferential treatment to the shareholders in terms of right to
receive dividend at a fixed rate or a fixed amount before any dividend is paid to equity
shareholders and the right to receive repayment of capital on winding up of the company before
the capital of equity shareholders is returned
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Preference shareholders do not have any voting rights in the
companies
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Preferences can be of the following types:
i) Cumulative preference and non-cumulative preference shares
In case of a situation when a company does not have adequate profit in a particular year, and so is
not able to pay dividend to all its shareholders, then such unpaid dividend gets accumulated and
is carried forward to the future years to be paid when the company makes sufficient profit
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In case of non-cumulative preference shares the unpaid dividend is neither
accumulated nor carried forward to the future years
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ii) Redeemable and irredeemable preference shares
Redeemable preference shares have a fixed maturity and hence have to be repaid by the company
after the maturity
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iii) Participating and non-participating preference shares
Participating preference shares enjoy the benefit of participation in the additional profits of the
company, which is left over after payments of dividends to other preference and equity
shareholders
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Non participating preference shareholders do not enjoy the benefit of
additional profit of the company
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If the terms of issue do not include a right to conversion, then it is
a non-convertible preference shares
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Equity
shareholders do not enjoy any preferential rights with regards to payment of dividend and
repayment of capital
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Dividend paid vary
depending on the profits of the company
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The shareholders have the voting rights in major company decisions such
as mergers or acquisitions
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Bonds are long term borrowed funds of the companies, municipalities, state and
central government
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The
tenure of the government bonds ranges from 5 to 40 years
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Most of
the government bonds are fixed rate bonds
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b) Floating rate bond
These bonds do not carry a fixed interest rate
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c) Zero coupon bonds
These bonds are issued at a discount and redeemed at face value
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d) Capital index bonds
The principle in case of such bonds is linked to an accepted index of inflation with an objective
protecting the principal amount from inflation
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The option can be exercised after the
completion of five years from the date of issue
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To buy the bond, investor has to pay the issue price in cash to an authorised SEBI
broker
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One of the
advantages of these bonds is that assured interest per annum of 2
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No TDS is
applicable on interest
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It can be used as collateral security for loans
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The rate of return offered on company fixed deposits is higher than
the rate paid on bank FDs
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It means if the company defaults on
the repayment, then the investor does not have an option to sell the documents and recover the
capital
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4) Warrants
It is a security that authorises the holder to buy the underlying stock of the issuing company at a
fixed price until expiry date
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Warrants are of two types:
a) Call Warrant: It represents a specific number of shares that can be purchased from issuer at a
predetermined price within a specified period
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Warrants are transferable
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For example, a company might issue warrants along with bonds to make the offering more
attractive to investors
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5) Debentures
Long term borrowed funds of the company are known as debentures They have a fixed rate of
interest and a specified maturity
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They are usually in the form of certificate issued under the seal of the company
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There are different types of
debentures:
➢
➢
➢
➢
➢

secured and unsecured debentures,
First mortgage and second mortgage debentures,
Redeemable and irredeemable debentures,
Convertible and nonconvertible debentures
registered and unregistered debentures
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Mutual funds are
professionally managed by the fund managers
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The different types of mutual fund schemes include open end and close end funds,
load funds and no-load funds, tax exempt and non-tax-exempt funds, etc
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Few types of
derivatives are
a) Forward: It is a customised contract between two parties to buy or sell an asset at an agreed
price on a specific date in the future
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The two parties
involved can negotiate the terms of the contract, including the size, expiration date, and other

specific details
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If one of the party defaults, the other may face difficulties
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Futures contracts are standardized,
meaning that the terms are predetermined by the exchange
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Exchange-traded futures contracts are typically guaranteed by a
clearinghouse, which acts as a counterparty to both buyers and sellers
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c) Options: These are contracts, which gives the buyer the right, but not the obligation to buy or
sell an underlying asset at a specified price on or before the specified date
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For example, in an interest rate swap, one party might want a fixed interest rate, while the other
prefers a variable rate
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8) Commodities
These are physical goods like gold, oil, agricultural products, and more, traded in the commodity
market
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Role of stock exchanges in India
Stock exchanges are centralized marketplace where financial securities, such as stocks, bonds,
and derivatives, are bought and sold
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Examples of stock exchanges include the New
York Stock Exchange (NYSE), Nasdaq, London Stock Exchange, and Tokyo Stock Exchange and
Bombay Stock Exchange
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Through
the process of IPO companies can raise capital by issuing shares to the public
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The BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are
the two major stock exchanges in India that actively contribute to the country's capital formation
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Liquidity refers to the
ease with which securities can be bought or sold without significantly affecting their prices
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This liquidity is crucial for the
efficient functioning of the financial system
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Through the
continuous interaction of buyers and sellers, market participants collectively determine the prices
of securities
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4) Transparency and Disclosure

Indian stock exchanges enforce strict disclosure norms for listed companies
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This transparency enhances investor confidence and allows market participants to
make informed investment decisions
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5) Risk Diversification
Stock exchanges in India provide investors with a platform to diversify their investment
portfolios
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By facilitating the trading of a wide range of securities, Indian stock
exchanges allow investors to diversify their holdings, contributing to the flexibility of investment
portfolios
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Companies are accountable to their shareholders, and exchanges actively enforce governance
standards to ensure ethical business practices
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7) Facilitating Foreign Investment
Indian stock exchanges play a crucial role in attracting foreign investment
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The regulatory framework set by the exchanges ensures a transparent and accessible
environment for foreign investors contributing to capital inflows
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They conduct
awareness programs, seminars, and workshops to educate investors about market dynamics,
risks, and investment strategies
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