Banking Awareness Topic Wise - Financial Market

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 Banking Awareness Topic Wise - Financial Market

Financial market:

 It is not a tangible market but it refers to a group of entities which participate in borrowing
and lending.
 The products are classified as bonds, equities, currencies and derivatives.
 It is a medium channel between depositor and borrowers.
Financial market are classified as:
1. Money market
2. Capital market
(i) Money market:
 It is used for short term credit.
 Borrowing and lending money is upto one year (1 day to 365 days).
 It includes Rbi, commercial banks, except rrbs, some Nbfcs, cooperative banks, primary
dealers, etc.
 T-bills, commercial papers, certificates of deposits traded in this market (banks and
primary dealers) to lend and borrow money when there is a mismatch of funds.
Call money: money is borrowed or lent for 1 day.
Notice money: money is borrowed or lent for 2 to 14 days.
Term money: money is borrowed or lent for exceeding 14 days to 365 days.
 In call money and notice money, both the borrowers and lenders need to maintain a
current account with RBI because trading happens for very short tenure.
1. Treasury bills(T-bills):
 It was implemented by 1986. It is also known as T-bills.
 In the money market, if we talk about the lowest risk instrument then it is T-bills.
 It is issued by the central government with fixed date and fixed time.
 They are highly liquid, bill holders can transfer or get discounts at any time from RBI.
 They are issued as well as auctioned by RBI only but can purchased by individuals, firms,
institutions and banks.
 T- bills are available at a denomination of 25000 and multiples of it.
 Its maturity periods are 91, 182, 364 days.
2. Commercial paper(CP):
 It was introduced in [Link] is issued in the form of promissory note.

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 Banking Awareness Topic Wise - Financial Market

 In this, the net worth of the company is not less than 4crore.
 All India financial institutions, primary dealers, big companies are permitted to issue
commercial paper to enable them to meet their short term financing requirements.
 The tenure of CP is 7 days to one year.
 CP is issued under the denomination of 5 lakh and multiple of it.
3. Certificate of deposits(CD):
 It was introduced in 1989.
 Scheduled commercial banks (except Rrb, local area banks), all india financial institutions
are permitted by Rbi to purchase the CD.
 The tenure of CD is 7 days to one year.
 Financial institutions cannot issue less than 1 year and not exceeding 3 years.
 The denomination of CD is 5 lakh and multiple of it.
4. Cash management bills:
 It is a short term instrument issued by the central government to meet the temporary cash
flow mismatches of the government.
 The announcement of the auction of bills made by Rbi.
 The tenure is less than 91 days.
(ii) Capital market:
 It is used for long term credit.
 Borrowing and lending are above 1 year.
 It includes stock exchanges, housing finance companies, insurance companies, etc.
 All institutions listed in the capital market are called NBFC.
Capital market comprising both
(i) Equity
(ii) Debts are issued and traded.
 This also includes private placement sources of debt and equity as well as organised
markets like stock exchanges.
1. Primary market (IPO):
 It is a market which deals with trading and issuance of stocks and other securities.
2. Secondary market(FPO):
 It is a market comprising equity and debt markets. It deals with the exchange of existing or
previously issued securities.
Composition of capital market:

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 Banking Awareness Topic Wise - Financial Market

(i) Security market

 It deals with shares and debt instruments. These instruments are used for fundraising. In
share instruments, we include equity share, preferential shares, derivatives. Investors
have
 In debt instruments, we include bonds, debentures, etc. In these instruments, we need to
pay interest to debt instrument holders regardless of profit or loss.
Equity shares:
 Holder has claimed over the capital, profit or loss.
Debentures:
 In this, the lender lends money to companies with some surety (may be plant, machinery).
But bonds lent by without any surety.
Preferential shares:
 Holder entitled to a fixed amount of dividend.
 In case of closing of the company preferential shareholders have the preference rights to
get back the capital.
 For trading securities, we have primary(new issue) and secondary (old issue) markets
(ii) Development financial institutions
 They provide long term loan, entrepreneurial assistance(technical advice etc)
Ex: IDBI, EXIM bank

(iii) Financial intermediaries

Rbi regulated:

 Asset finance company

 Loan company
 Investment company
Sebi regulated:

 Venture capital fund, angel capital fund

 Merchant banking companies.
 Stock broking companies
Bill discounting:

 Advanced selling of bills to an intermediary before it is due to be paid.

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