FINANCIAL MARKETS

A presentation on Financial Markets, functions and classification

Divya Gupta

IntroductionFinancial markets refer to institutional arrangements for dealing in financial assets.

They are the markets for the creation and exchange of financial assets.

They refer to credit markets for meeting the

long-term and short-term credit needs of individuals ,

firms and corporate enterprises.

All the corporations , financial institutions , individuals and governments trade here directly or indirectly or through brokers and dealers.

The agents , brokers , dealers , lenders , borrowers , savers are all the participants in financial markets.

Functions of Financial Markets1.Financial markets improve the economy of

the country.2.They facilitate the creation of credit.3.They play a pivotal role in allocating

resources in an economy.4.Borrowing and Lending : Mobilization of

savings and their transformation into investment and consumption.

5.Price Determination : They provide means by which prices are set both for newly issued financial assets and for already existing stock of financial assets.

6. Information Aggregation and Coordination : Financial markets collect and aggregate information about financial asset values and the flow of funds from the lenders to borrowers.

7. Liquidity : They provide the holders of financial assets with a chance to resell.

8. Efficiency : They reduce transactions cost and information cost.

Classification of Financial Markets

a. Organized and unorganized markets.

b. Primary and secondary markets.

c. Money and capital markets.

d. Formal and informal markets.

e. Official and parallel markets.

f. Domestic and foreign markets.

Organized and Unorganized Markets

Organized markets : These are the financial markets where there is a high degree of institutionalization

and instrumentalization and standardized rules and regulations governing financial dealings . They are strictly controlled by RBI and

other regulating bodies.

Unorganized markets : These refer to financial markets where there are a

number of bankers , money lenders , private finance companies , chit funds who lend money to the public whose

dealings are inadequate and not standardized . Their activities are not

controlled by the RBI.

Primary and Secondary MarketsThe primary market is that part of the capital markets that deals with the issuance of new securities. The process of selling new issues to investors is called Underwriting.In the case of a new stock issue, this sale is an initial public offering.These markets deal in the new financial claims or securities where the securities are sold for the first time directly to the investors hence it is called the new issue market.They mobilize savings and they supply fresh or additional capital to business units.

The company receives the money and issues new security certificate to the investors.They facilitate capital formation in the economy.Going Public : Borrowers in the new issue market may be raising capital for converting private capital into public capital.

Methods of issuing securities :•Initial public offering •Rights issue(for existing companies)•Preferential issue

Secondary Markets : They are also known as Aftermarket.They are the financial markets where previously issued securities and financial instruments are bought and sold.After the initial issuance , investors can purchase from other investors here.The term secondary market is also used to refer to the market for any used goods or an alternative use for an existing product.It is important that secondary market be highly liquid.They do not contribute directly to the supply of additional capital , they do so indirectly by rendering securities issued on primary markets liquid.Stock market have both the primary and secondary market segments.

The Secondary markets for a variety of assets can vary from loan to stock , fragmented to centralized , illiquid to very liquid.Exchanges such as the New York Stock Exchange and the American Stock Exchange provide a centralized , liquid secondary markets.The accurate share price allocates capital more efficiently when new projects are financed through a new primary markets offering , but it also matters here because Price accuracy can reduce the agency costs of management and thus move capital into the hands of better mangers. Accurate share price aids the efficient allocation of debt finance.

Money and Capital MarketsMoney markets deal in the short term claims(with a period of maturity of one year or less).

They refer to an activity of borrowing and lending of short term funds in large volume against short term credit instruments like treasury bills , bills of exchange .

Dealers in the money market are :

Lenders like the commercial banks , the central bank , business houses

Borrowers such as government , stock exchange dealers , farmers and private individuals.

Money market is the major source of working capital finance.

In the money market , there is a price for the money borrowed and lent and is called as Interest which is generally high.The transaction need not be face to face at a particular place but can take place over phone or any other means of communication.It serves as a medium through which the central bank of a country can exercise its control over the creation of credit.It helps the government and plays a important role in financing of trade and commerce.It offers a channel to non-banking financial institutions for the investment of their short term funds.The two sectors of Indian Money market are : Organized or modern sector Unorganized or indigenous sector

Composition of Indian money market : It consists of several components , sectors or sub-markets , each specializing in a particular type of lending . The important sectors are :Call money marketBill or Discount market Acceptance marketCollateral loan market

Constituents of the Indian money market :RBISBISubsidiaries of SBINationalized Banks Foreign Exchange Banks

Defects of Indian money market : No all-India money market.Lack of uniformity in the interest rate.Seasonal financial stringency.Lack of adequate banking facilities.Shortage of financial instruments.Isolation foreign money markets.

Treasury bills market , call money market and commercial bills market are examples of money market.

Capital market : The term capital market refers to the market for long-term funds as well as short-term funds.It deals on long-term and medium-term loans . It is an organized mechanism for the effective transfer of long term funds in large amount from the investing parties (individuals , industrial investors and institutional savers) to industrial and commercial enterprises.Commercial banks belong to both money and capital market.Stock market and government bonds market are examples of capital market.Equity market , debt market and derivatives market are also part of capital market.

Ownership securities like equity and preference shares creditorship securities like debentures and bonds are dealt here.Capital market facilitates acceleration of capital formation.They help in procuring foreign capital for the quicker economic development of the country.It makes available to industry sufficient amount of long term capital at a reasonable rate of interest.Components of capital market :New issue marketStock marketMutual fundsVenture capital companiesSpecial financial institutions like IDBI,ICICI,IIBI,IFCI,SFC,IDFC,NSIC etc.

Differences between capital and money market

CAPITAL MARKET MONEY MARKET

It deals in long-term and medium-term funds.

It has limited and selected market.

Rate of interest here is generally low.

In the capital market , transactions take place at a formal place like stock exchange.

It deals in short-term funds only.

It deals in short-term funds only.

Rate of interest here is generally high.

In the money market , transactions take place over phone and so there is no formal place for the transactions.

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