Meaning and classification of financial market

2. Definition of Financial market
Brigham Eugine F has defined a financial market thus: “ The
place, where people & organisation, wanting to borrow money,
are brought together with those having surplus funds, is called a
financial market”

4. Location of Financial Market:
A financial market may or may not have a particular place or
location.
For example, the New York Stock Exchange is physically located
on wall street in New York & Bombay Stock Exchange is located
in Mumbai.
OTCEI Over the counter exchange of India has also no definite
location.

5. Objectives of Financial Market
a. Mobilisation of savings
b. Investment
c. Entrepreneurial growth
d. Industrial development
e. National growth

6. a. Mobilisation of Saving: The primary objective of the financial
markets is mobilisation of savings from the savers or surplus
units such as household individuals, business firms, public
sector units, central governments, state governments, local
governments etc.
b. Investment: The co-related objective of financial market is to
invest the savings so collected in those units which are in need
of the same for productive purpose, thereby leading to capital
formation.

7. c. Entrepreneurial Growth: Another objective of the financial
market is to contribute to the development of the entrepreneurs by
making available the necessary financial resources etc.
d. Industrial Development: Another objective is to enable the
different components of the financial markets to help an
accelerated growth of industrial & economic development of a
country thereby contributing to raising the standard of living & the
well being of the society.

8. e. National Growth: Finally, the financial markets aim at
contributing to the nations growth by ensuring an unfettered flow
of surplus funds to deficit units and for productive purposes.

9. Features or Characteristics of Financial Market
1. Larger volume
2. Types / Segments
3. Domination of financial intermediaries
4. Highly volatile
5. Interdependence of Financial market

10. Functions of Financial Market
I. Intermediary Functions
1. Transfer of functions
2. Enhancing income
3. Productive Usage
4. Capital formation
5. Price determination
6. Marketability & Liquidity
7. information

11. II. Financial Functions
1. Provision of funds
2. Provision of earning assets
3. Provision of liquidity

12. Intermediary Functions
Transfer or resources: Financial markets facilitate transfer of
resources (i.e., funds) from savers/lenders to ultimate
investors/barrowers.
Enhancing Income: Financial markets enable savers/lendors to
earn a regular income in the form of interest/dividend on their
surplus investible funds, thereby contributing to the enhancement
of the individual income as well as national income.

13. Productive Usage: Financial markets help in the productive
use of the funds borrowed , thereby raising the income level of
the people & gross national production of the country.
Capital formation: Financial markets mobilise savings
effectively & allocate the savings so mobilized efficiently
among the ultimate users of funds viz investors & thereby aid
capital information.

14. Price determination: Financial markets provide for the
determination of the prices of the financial assets like
shares, Government securities, bonds, mutual fund units,
debentures etc.
Through an interaction of buyers & sellers. They also
provide for a signal for the allocation of funds in an
economy & such a signal is based on the demand for &
supply of securities through the mechanism called “price
discovery process”.

15. Marketability & liquidity: Financial markets provide for a
mechanism for selling financial assets by investors
whenever they are in need of money or cash & thus
ensure ready marketability & liquidity for the financial
assets.
Information: The operations of the dealers in the
financial market lead to the generation & the consequent
distribution of the market information to the various
segments of the market with a view to reducing the cost
of the transactions of financial assets.

16. Financial Functions
Provision of funds: The financial markets provide funds to the
investors/borrowers so as to enable them to carry out investment
activities.
Provision of earning assets: The financial markets provide
earning assets to the lenders/savers so that they can earn wealth
by developing the assets in productive projects.
Provision of liquidity: The financial markets provide
marketability & liquidity to the financial assets in markets so as
to facilitate buying & selling of these assets.

18.  Organised market: The organised market where financial
transactions are carried on as per standardised rules &
regulation.
 Where there is a strict control & supervision by the SEBI &
RBI.
 The organised market is classified in two kinds. They are
1. Money market
2. Capital market

19. Money Market: Money market is a market for borrowing &
lending short term funds. It’s a market where financial assets
& securities which have maturity period of up to one year are
bought & sold. It’s a market for purely short term funds.
Money market is thus a center for dealing primarily in short
term financial instruments. It means the short term needs of
the borrowers. It provides cash or liquidity to the lendors.

20. Sub Markets of Money Market
1. Call Money Market
2. Commercial Bill Market
3. Short – term Loan Market
4. Treasury Bill Market

21. Call Money Market: The call money market is a market for
extremely short period loans, say, one day to fourteen days.
It is therefore highly liquid. It is also called money at call &
short notice market.
The rate of interest at which funds are borrowed & lent in
this market is called the call money rate.
The interest rate varies from day to day & even from hour to
hour.

22. In India, call money markets are associated with
the presence of stock exchanges & therefore, they
are located in major industrial centers like Mumbai,
Kolkata, Chennai, New Delhi, Ahmedabad etc.

23. Commercial Bill Market: The commercial bill market,
another sub market of the Indian money market, is a
market for commercial bills or trade bills.
When goods are sold on credit, the seller draws a bill of
exchange on the buyer. The buyer accepts the bill
promising to pay the amount of the bill at a later date
specified in the bill & sends the accepted bill back to the
seller. But the seller need not wait until the due date.
Instead, he can discount the bill with his banker and get
immediate cash.

24. Short-term Loan Market: It is a market where short term
loans are given to corporate customers for meeting their
working capital needs.
Commercial banks play a very important role in such a
market. They provide short term loans in the form of cash
credits & over drafts.

26. Capital Market: Capital market is a market where long term funds
are lend & borrowed. It refers to all facilities & the institutional
arrangements for borrowing & lending term funds. (i.e., medium
term & long term funds).
It is a market, not for dealing in capital goods, but for dealing in
long term securities which have a long maturity or indefinite
maturity.
Such long term funds are used for investment purpose.

27. On the other hand, the supply of long term funds comes largely
from individual savers, corporate savings, banks, insurance
companies, specialized financial institutions and the Government.
The capital market is broadly divided into three types
1. Industrial securities market
2. Government securities
3. Long term loan market

28. 1. Industrial securities market: As the name indicates, it is a
market for industrial securities. (i)equity shares, (ii)preference
shares & (iii) debentures.
It is therefore a market where old & new companies raise their
capital & debt by issuing appropriate instruments. This market can
be further sub divided into
a. Primary market or New issue market
b. Secondary market or stock exchange.

29. 1. Primary Market: Primary market is a market for new issues or new
financial claims or new securities. It is also called New Issue Market.
It is a market for raising new capital in form of shares & debentures
which have been issued to the public for first time by companies .
There are three ways by which a new company raises capital in a primary
market:
a. Public Issue
b. Rights issue
c. Private Placement

30. 2. Secondary Market: secondary market is a market for secondary
sale of existing shares & debentures. It is a market for the existing
or old shares & debentures which have already been issued to the
public once & which have already passed through the primary
market in the past.
Such securities are old ones & are issued by the existing or old
companies & thereby are mostly traded in the secondary market.

31. Government Securities Market / Gilt Edged Market: It is a
market where government securities are bought & sold. In India,
there are several types of government securities, such as short term,
long term, state government, semi government etc.
Long term securities are traded in the gilt-edged securities market
while short term securities are traded in the money market.

32. The RBI arranges for the issue of these securities through banks &
financial institutions & acts as the manager & underwriter of the
issues, particularly with respect to central government securities.
The RBI acts as a manager of the public debt of the central
government.
It arranges for the accepting of subscriptions to the central
government loans, issue of securities, servicing of these securities
& repayment of loans.

33. Long Term Loan Market: Long term loan market is a market
where term loans are barrowed & lent. Commercial banks &
financial institutions play a significant part in this market by
supplying long term loans to corporate customers. Long term loans
market may be further divided into three as follows:
1. Term loan market
2. Mortgages market
3. Financial guarantee market.

34. 1. Term Loan Market: It is a market for lending & borrowing
long term funds. The lenders are various financial institutions like
IDBI, IFCI, ICICI, UTI, SIDBI & others established at the national
level & regional & state level. The borrowers are the corporate
customers.
2. Mortgage Market: Mortgage loan is a loan which is given
against the security of some immoveable property like real estates.
The transfer of interest in a specific immoveable property to secure
a loan is known as mortgage loan.

35. 3. Finance Guarantee Market: Guarantees market is a market
where finance is provided to a person against the guarantee of a
reputed person in the financial circle.
A contract of guarantee is a contract to perform or discharge the
liability of a third person in case of his default.
Guarantee acts as a security from the lenders point of view. If the
borrower fails to repay the loan on the due date, the guarantor will
be liable to repay the loan.
Therefore the guarantor must be known to both the borrower & the
lender & he must also be a person of sound financial position so
that he can discharge his liability.

36. Basis for Comparison Money Market Capital Market
Meaning
A segment of the financial
market where lending and
borrowing of short term
securities are done.
A section of financial
market where long term
securities are issued and
traded.
Financial instruments
Treasury Bills, Commercial
Papers, Certificate of
Deposit, Trade Credit etc.
Shares, Debentures, Bonds,
Retained Earnings, etc.
Institutions
Central bank, Commercial
bank, non-financial
institutions, bill brokers,
acceptance houses, and so
on.
Commercial banks, Stock
exchange, non-banking
institutions like insurance
companies etc.

37. Basis of comparison Money Market Capital Market
Risk Factor Low Comparatively High
Purpose
To fulfill short term
credit needs of the
business.
To fulfill long term credit
needs of the business.
Time Horizon Within a year More than a year
Merit
Increases liquidity of
funds in the economy.
Mobilization of Savings
in the economy.
Return on Investment Less Comparatively High

38. Unorganised Market: In such market, there are a number of
money lendors, Indigenous bankers, pawn brokers, traders &
landlord.
They lend money to the public either security or without security.
But they charge very high rates of interest. They lend at any time
& they do not follow any rules & regulation.

40.  Money Lenders: A money lenders is an individuals or group
that usually lends an amount of money at very high rate of
interest.
 Indigenous Bank: Indigenous bank are private firms or
individuals who operate as bank which deposit & give loans.
Example Co operative societies.
 Traders: A traders is an individuals who engages in buying &
selling of financial assets.

41. MONEY MARKET
Money market is a market in which short term funds are borrowed
& lend.
In other words of Madden & Naddler, “money market is a
mechanism through which short term funds are loaned and
borrowed and through larger part of financial transactions” .

42. Money Market: Money market is a market for borrowing &
lending short term funds. It’s a market where financial
assets & securities which have maturity period of up to one
year are bought & sold. It’s a market for purely short term
funds.
Money market is thus a center for dealing primarily in short
term financial instruments. It means the short term needs of
the borrowers. It provides cash or liquidity to the lenders.

43. Location of the Money Market
Geographically, the money market may be located in or associated
with a particular place or locality. London money market, New
York money market, Bombay money market, etc, are a few
examples which show that the money market is associated with
the name of a particular place.

44. CHARACTERISTICS OF MONEY MARKET
 It is a market purely for short term loans or financial assets.
 It deals with financial assets having a maturity period ranging
from a day to a maximum of one year.
 It deals with only those assets that can be converted into cash
readily without loss & within minimum transaction cost.
 Transactions on a money market can be conducted with or
without the help of the brokers.