Financial Markets

Financial markets refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, forex market, and derivatives
market, among others. Financial markets are vital to the smooth operation of
capitalist economies.
• A financial market brings buyers and sellers together to trade in financial
assets such as stocks, bonds, commodities, derivatives and currencies.
• The purpose of a financial market is to set prices for global trade, raise
capital, and transfer liquidity and risk.

CLASSIFICATION OF FINANCIAL MARKETS

• Money market : Money markets are used by government and corporate

entities as a means for borrowing and lending in the short term, usually for
assets being held for up to a year.
 • Capital market: Capital markets are more frequently used for long-term
assets, which are those with maturities of greater than one year. Capital
markets include the equity (stock) market and debt (bond) market.

MONEY MARKET INSTRUMENTS

1. Call money market –
• Money borrowed or lent for a very short period of time.1-14 days it is
called notice money, else it is called call money. No collateral
required. Commercial banks, co-op banks, DFHI participate both as
lenders and borrowers. Market determined Interest rates.
2. Treasury-Bills:
• T-bills are short-term securities that mature in one year or less from their
issue date. They are issued 91, 182, 364 days of maturity periods. These
are issued at discount and redeemed at par, so no interest rate(zero
coupon instrument). Most secure as it is backed by government. Ensures
Short term liquidity.
• Banks, insurance companies and Financial institutions participate.
• These are dated securities issued by the Government of India and state
governments, managed by RBI.
• Zero coupon Bond: They don’t offer any interest rate. They are generally
issued at discount and redeemed at par.
 3. Cash management bills:
• They are like T-bills but are issued for maturities less than 91 days, to
adjust temporary mismatches in government cash flow. Like T-bills they
are Zero coupon.
4. Certificate of deposits:
• These are negotiable promissory notes, secure and short term issued by
scheduled commercial banks(>15days to 1 year) and Financial
institutions (>1year to 3year ).
• Regional rural banks and Local area banks cannot issue CDs.
• These are also issued at a discount to the face value to individuals and
firm.
5. Inter corporate deposit market:
• It is an unsecured loan extended by one corporate to another.
6. Commercial paper:
• It is a short term unsecured promissory note issued by top rated
Corporate and Financial institutions at a discounted value on face value
for 7days to 1year. They yield higher returns as compared to T -Bills as
they are less secure in comparison to these bills. They are issued in
denominations pf Rs.5 lakhs or multiples thereof.
7. Ready forward contracts (Repo):
• Covered in Banking section
8. Commercial bill:
• Bills of exchange are negotiable instruments drawn by the seller of goods
or services on the buyer of goods for the value of goods delivered, called
as trade bills. When trade bills are accepted by commercial banks for
discounting are called commercial bill.

Discount and Finance House of India

1. It was established by RBI in 1988
2. Objective: The main task is to develop a secondary market in the existing money
market instruments. Its main task it is to facilitate the smoothening of short-term
liquidity imbalances by developing active money market and integrating various
segments of money market.
MARKET TERMS
1. Shares
• Shares are units of ownership interest in a corporation or financial asset that
provide for an equal distribution in any profits, if any are declared, in the
form of dividends.
• Stock is the capital raised by a corporation through the sale of shares.
2. Debentures
• A debenture is a type of debt instrument that is not secured by physical
assets or collateral.
• Debentures are backed only by the general creditworthiness and reputation
of the issuer.
• Both corporations and governments frequently issue this type of bond to
secure capital.
• There are two types of debentures as of 2016: convertible and
nonconvertible.
• Convertible debentures are bonds that can convert into equity shares of the
issuing corporation after a specific period of time.
• Nonconvertible debentures are regular debentures that cannot be
converted into equity of the issuing corporation.
3. Bond
• Bonds and debentures represent the majority of issued debt capital.
Although the term bonds and debentures are often used interchangeably the
two are distinctly different:
• A bond is typically a loan that is secured by a specific physical asset. A
debenture is secured only by the issuer’s promise to pay the interest and
loan principal.
• Bonds have lower interest rates compared to debentures.
 • Bond – It is a debt instrument for a period more than 1 year with the purpose
of raising capital by borrowing.
4. Derivatives
• A derivative is a financial security with a value that is derived from, an
underlying asset or group of assets
• The most common underlying assets include stocks, bonds, commodities,
currencies, interest rates and market indexes.
• Derivatives can either be traded over the counter (OTC) or on an exchange.

TYPES OF DERIVATIVES
• Futures- It is an agreement between two parties for the purchase and
delivery of an asset at an agreed upon price at a future date
• Forward- It is a non-standardized contract between two parties to buy or to
sell an asset at a specified future time at a price agreed upon today, making
it a type of derivative instrument
• Options- The key difference between options and futures is that, with an
option, the buyer is not obligated to "exercise" the option, while the option
seller is obligated to either buy or sell the underlying asset if the buyer
chooses to exercise the contract.

CAPITAL MARKETS
It refers to market for funds with a maturity of 1year.
• The capital market includes primary and secondary markets.
• The primary market is the part of the capital market that deals with the
issuance and sale of equity-backed securities to investors directly by the
issuer.
• The secondary market is where investors buy and sell securities which
they already own.
SIGNIFICANCE OF CAPITAL MARKETS
• Growth of savings.
• Efficient allocation of investment resources and
• Better utilization of the existing resources.

WAYS TO RAISE CAPITAL FROM STOCK MARKET

There are three ways in which a company raises capital in the primary market:
• Public issue
• Rights issue
• Private placement
PUBLIC ISSUE
• A public offer is open for all Indian citizens, the most broad-based method of
raising capital and the most prestigious.
RIGHTS ISSUE
• Raising capital from the existing shareholders of a company, it means it is a
preferential kind of issue restricted to a certain category of the public only.
PRIVATE PLACEMENT
• Raising capital by selling shares to a select group of investors, usually
financial institutions (FIs) but may be to individuals also.

G-SECS(GILT EDGED SECURITIES):

• It is a tradable instrument(bond) issued by central / state government. They
are risk free tradable instruments.
• Central government issues both short term(Treasury bills) and long term(G-
secs), whereas state government can issue only long term/ dated securities.
PLAYERS IN THE INDIAN CAPITAL MARKET
1. Merchant banks:
It manage and underwrite(Underwriting an issue means to guarantee to
purchase any shares in a new issue or rights issue not fully subscribed by the
public) ,new issues, provide consultancy and corporate advisory services for
raising funds and other financial aspects. They advise corporate clients on fund
raising. They generally deal only with corporates and not general public.
2. Mutual funds:
• A mutual fund is a type of financial vehicle made up of a pool of money
collected from many investors to invest in securities such as stocks, bonds,
money market instruments, and other assets.
• SEBI regulates MF’s.
• They are 2 types- open and closed MF’s.
TYPES OF MUTUAL FUNDS
• Open ended funds : an investor can buy or sell as and when they intend to.
• Close-ended funds: Usually issue units to investors only once, when they
launch an offer, called New Fund Offer.
3. Hedge Funds:
• A Hedge fund is an investment fund that pools capital from accredited
investors or institutional investors and invests in a variety of assets, often
with complex portfolio-construction and risk management techniques. This
is not allowed by SEBI.
4. Venture capital:
• Venture capital is a type of private equity, a form of financing that is provided
by firms or funds along with the management to small, early-stage, emerging
firms that are deemed to have high growth potential, or which have
demonstrated high growth.
5. Angel investors:
• He/she is an affluent individual who provides capital for a business start-up
usually in exchange for convertible debt or ownership of equity.
• Difference between AI and VC- AI invest in early stages while VC in later
stages. AI exit in early(min 7yrs for VC while gen 3yrs for AI).
6. Collective investment schemes (CIS)
• It is an arrangement which pools funds from investors to pool their money
for investment in particular asset. It is regulated by a Fund manager on behalf
of Investors. Mutual fund is a type of CIS. SEBI regulates players involved in
CIS.
7. Alternative investment Funds (AIF)
• It is a newly created investment vehicle for real estate, private equity and
hedge funds. SEBI regulates AIF in India.
• It does not include mutual funds, family trusts, a employee stock option or
CIS.
• It is established for the purpose of pooling capital from the Indian and foreign
investors for investing as per decided policy. Ex: National investment and
infrastructure fund(NIIF)
8. Foreign portfolio investor
• FPIs generally participate through the stock markets and gets in and out of a
particular stock at much faster frequencies.
• Globally FPIs are defined as those who hold less than 10% in a company.
• FIIs, Sub-Accounts and Qualified Foreign Investment (QFI) are merged
together to form the new investor class, namely Foreign Portfolio Investors,
with an aggregate investment limit of 24% which can be raised by the
Company up to the applicable sectoral cap.
• They are not permitted to invest in unlisted shares and also in T-bills.
9. QFI
• The Qualified Foreign Investor (QFI) is an individual group or association
resident in a foreign country that is compliant with FATF standards.
• They can directly invest in corporate debt, equities and mutual funds etc.
10. Participatory notes
• They are offshore derivatives. They are instruments through which a foreign
investor can invest in Indian stock market . There is no need to register with
SEBI. A participatory note, commonly known as a P-note or PN, is an
instrument issued by a registered foreign institutional investor (FII) to an
overseas investor who wishes to invest in Indian stock markets without
registering themselves with the market regulator, the Securities and
Exchange Board of India (SEBI).
11. Foreign direct investment (FDI)
• It is an investment from a party in one country into a business or
corporation in another country with the intention of establishing a lasting
interest.
• Lasting interest differentiates FDI from foreign portfolio
investments, where investors passively hold securities from a foreign
country.
• Foreign direct investment can be made by expanding one’s business into a
foreign country or by becoming the owner of a company in another country.
• As of March 2019, Singapore remains India’s top FDI source, twice that from
Mauritius.