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Financial Market and Services

  1. By Dr. DIVYA VIJAY Faculty, Madurai Kamaraj University College, Madurai.
  2. FINANCE: Management of Money or Fund. MARKET: A Place where commercial dealings are conducted. SERVICE: The action of helping or doing work for someone.
  3. A regular gathering of people for the purchase and sale of provisions, livestock, and other commodities.
  4. Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place.
  5.  Financial Services are required for mobilizing and channelizing savings to productive activities for producing final goods & services.  Financial Services interlinks all the activities in a financial system.
  6. The financial system acts as a connecting link between savers of money and users of money and thereby promotes faster economic and industrial growth. Thus financial system may be defined as “a set of markets and institutions to facilitate the exchange of assets and risks. It facilitates the flow of funds from the areas of surplus to the areas of deficit. It is concerned about the money, credit and finance. It consists of individuals (savers), intermediaries, markets and users of savings (investors).
  7. The formal financial system consists of four components:  1. Financial institutions  2. Financial markets  3. Financial instruments and  4. Financial services.
  8.  They are business organizations dealing in financial resources.  They collect resources by accepting deposits from individuals and institutions and lend them to trade, industry and others.  Financial institutions mobilize the savings of savers and give credit or finance to the investors.
  9. On the basis of the nature of activities, financial institutions may be classified into two 1.Banking financial institutions • Banking institutions mobilize the savings of the people. • Provide a mechanism for the smooth exchange of goods and services. • Extend credit while lending money. • Supply credit and create credit.
  10. 2. Non-banking financial institutions • The non-banking financial institutions also mobilize financial resources directly or indirectly from the people. • Lend funds but do not create credit. Companies like LIC, GIC,UTI, Development Financial Institutions. • Non-banking financial institutions can be categorized as investment companies, housing companies, leasing companies, hire purchase companies, specialized financial institutions
  11. • Financial markets are the centres or arrangements that provide facilities for buying and selling of financial claims and services. Financial markets exist wherever financial transactions take place. • Financial transactions include issue of equity stock by a company, purchase of bonds in the secondary market, deposit of money in a bank account, transfer of funds from a current account to a savings account etc.
  12. On the basis of maturity: Classified in to Two 1. Money Markets A market where short term funds are borrowed and lend is called money market. • It deals in short term monetary assets with a maturity period of one year or less. 2. Capital Markets • Capital market is the market for long term funds. • Market deals in the long term claims, securities and stocks with a maturity period of more than one year.
  13. Treasury Bills (T-Bills) The Treasury bills are issued by the Central Government and known to be one of the safest money market instruments available. They carry zero risk, so the returns are not attractive. Also, they come with different maturity periods like 1 year, 6 months or 3 months and are also circulated by primary and secondary markets. The central government issues them at a lesser price than their face-value. There are three types of treasury bills issued by the Government of India currently that is through auctions which are 91-day, 182-day and 364-day treasury bills.
  14. Call Money Market  Call Money is short term finance used for inter-bank transactions. It has a maturity period of one day to fifteen days.  The loans are of short-term duration varying from 1 to 14 days, are traded in call money market.  The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".  Term Money refers to Money lent for 15 days or more in the Inter Bank Market.
  15. Bills of exchange or commercial bills  A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date.  Bills of exchange are similar to cheque and can be drawn by individuals or banks and are generally transferable by endorsements (Legal Transfer).
  16. Capital Market can be divided in to Three 1. Primary markets  Primary markets are those markets which deal in the new issue of securities.  The markets where securities are issued for the first time.  Also known as New Issue Markets.
  17. 2. Secondary Market  Secondary markets are those markets which deal in existing securities.  Existing securities are those securities that have already been issued and are already outstanding.  Secondary market consists of stock exchanges
  18. 3. Derivative Market  The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.  The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages. 
  19.  A financial instruments are monetary contracts between parties.  They can be created, traded, modified and settled.  They can be cash, evidence of an ownership interest in an entity or a contractual right to receive or deliver.
  20. Short-term financial instruments last for one year or less. Securities of this kind come in the form of T-bills and commercial paper.  Medium Term Financial Instruments last for 1 to 3 years. Examples are Preference Shares, Debentures and bonds.  Long Term Financial Instruments have a longer time span varying from 1 to 30 years. Examples are Leasing, Term Loans, Public Deposits, Bonds.
  21.  A primary security is a share of stock of a corporation that is issued and sold directly by the corporation in an Initial Public Offering(IPO).  A secondary security is a share of stock that has been purchased by an investor (either directly from the issuing corporation or from another investor) and sold to another investor. 
  22. Innovative Financial Instruments  Participation in equity (risk capital) funds  Guarantees to local banks lending to a large number of final beneficiaries, for instance small and medium- sized enterprises (SMEs)  Risk-sharing with financial institutions to boost investment in large infrastructure projects The aim is to boost the real economy through increasing the access to finance for enterprises and industry producing goods and services.
  23. Services offered by financial and banking institutions. Concerned with design and delivery of financial instruments and advisory services to individuals and business in the area of banking and related institutions, insurance, financial planning, investments etc…
  24. Financial Services can be Classified in to Two  Fund Based Services : Services that used to acquire asset or fund for a customer. Examples: Leasing Hire purchasing Factoring Forfeiting Venture Capital Mutual Funds
  25.  Fee Based Services: Financial Institutions operate in a specialized field to earn income in the form of commission, brokerage, fee or dividend. Examples Issue Management Portfolio Management Corporate Counseling Merchant Banking Credit Rating
  26.  The financial system of a country is an important tool for economic development of the country.  It helps in creation of wealth by linking the savings with investments.  It also facilitates the flow of funds from the households (savers) to business firms (inventors) to aid in wealth creation and development of both the parties.