Financial Markets
Unit- 1
Indian financial system and markets-Structure of
financial markets in India & Types- Participants in
financial Market- Regulatory Environment-RBI,
CCIL, Common securities market-Money market
& Capital market-Governments philosophy and
financial market-Financial instruments.
Introduction
▪ A set of sub systems of financial
institutions, markets, instruments
and services.
▪ Intermediates with the flow of funds
between savers and borrowers.
▪ Facilitates transfer and allocation of
scarce resources efficiently and
effectively.
Financial Institutions
The Financial Institutions in India are broadly
divided into two categories viz. Banks and
Non-Banking Financial Institutions (NBFI). A bank
accepts demand deposits while NBFIs do not
accept them. The banks have been authorised to
issue checks but NBFIs cannot issue them.
[Link] :
a. Scheduled commercial banks
b. Non-scheduled commercial banks.
Financial Institutions
[Link]-operative Banks
a. Urban Co-operative banks (UCB)
b. Rural Co-operative banks
3. Public Sector Banks
4. Private Sector Banks
5. Foreign Banks
6. Regional Rural Banks (RRBs)
7. Local Area Banks (LAB)
8. DFIs - Development Financial Institutions
9. NABARD
10. Small Industries Development Bank of India
(SIDBI)
Financial Institutions
[Link] Bank
12. Non-Banking Financial Companies (NBFCs)
13. Primary dealers (PDs)
14. Credit Information Companies (CIC)
15. Payment Banks
16. Small Finance Banks
Components of the Financial System
1. Central Banks
2. Retail and Commercial Banks
3. Internet Banks
3.1 Digital banks
3.2 Neo banks
4. Credit Unions
5. Insurance Companies
Financial Markets
Financial Markets
The market place where buyers and sellers participate in
the trade of assets such as equities, bonds, currencies,
and derivatives.
[Link] Market – Two Sectors
1.1 Organised sector - Banking sector & Sub Markets.
1.2 Unorganised sector
[Link] Market -This market comprises buyers & sellers,
who trade in equity (ownership of asset) &debt
(loan). It is regulated by SEBI (established in 1992).
The institutions in the capital market are called NBFCs
(Non-banking financial companies). But it’s not
necessary that all NBFCs are capital market
institutions.
Financial Markets
Security Market- Government Securities &
Industrial Security Market & Development Financial
Institutions.
Financial services
The purpose of Financial Services is to cater for a
person with borrowing, selling or purchasing
securities, allowing payments and settlement,
lending and borrowing. These services help in the
management of funds as the money is invested
efficiently and also help to get the required funds.
These services are provided by the assets
management and liability management companies.
Functions of Financial Market
Financial Markets helps in mobilizing savings, determining and settling the prices of
various securities, providing liquidity to assets, and easing access to all types of
traders.
Mobilising Funds: Among the diverse types of functions served by Financial
Markets, one of the most crucial functions is that of mobilisation of savings.
Financial Markets also utilise this savings investing it for productive use, thereby
contributing to capital and economic growth.
Determination of Prices: Another vital function served by Financial Markets is that
of Pricing different securities. Essentially, demand and supply in Financial Markets
along with its interaction between investors determine these pricing.
Liquidity of Financial Holdings: Tradable assets must be provided with liquidity
for its smooth functioning and flow. This is another role of the Financial Market
which goes on to help in the functioning of a capitalist economy. It not only allows
investors to easily sell their securities and assets, but also allows them to easily
convert them into cash money.
Ease of Access: Financial Markets also offer efficient trading since they bring
traders to the same Market. As a result, relevant parties do not have to spend any
resource, be it capital or time, to find interest buyers or sellers. Additionally, it also
provides necessary information related to trading, which also reduces the effort that
interested parties must put in to complete their trades.
Classifications of Financial Markets
1. By Nature of Claim
1.1 Debt Market
1.2 Equity Market
2. By maturity of claim
2.1 Money Market
2.2 Capital Market
3. By Timing of Delivery
3.1 Cash Market
3.2 Futures Market
4. By organizational Structure
4.1Exchange-Traded Market
4.2 Over-the-Counter Market
Types of Financial Markets
1. Stock Markets
2. Over The Counter Markets
3. Bond Markets
4. Money Markets
5. Derivative Markets
6. Forex Market
Participants in Financial Market
Banks
Primary Dealers (PDs)
Financial Institutions (FIs)
Stock Exchanges
Brokers
Investment Bankers (Merchant Bankers)
Foreign Institutional Investors (FIIs)
Custodians
Depositories
Financial Market Infrastructures
regulated by RBL
•Real Time Gross Settlement System (RTGS)
•Securities Settlement Systems (SSS)
•Clearing Corporation of India Ltd (CCIL)
•Negotiated Dealing System- Order Matching
(NDS-OM)
Financial Instruments
Introduction
Financial instruments are contracts for monetary assets
that can be purchased, traded, created, modified, or
settled for. In terms of contracts, there is a contractual
obligation between involved parties during a financial
instrument transaction.
For example, if a company were to pay cash for a bond,
another party is obligated to deliver a financial
instrument for the transaction to be fully completed. One
company is obligated to provide cash, while the other is
obligated to provide the bond.
Basic examples of financial instruments are
cheques,bonds, securities.
There are typically three types of financial instruments:
cash instruments, derivative instruments, and foreign
exchange instruments.
Types of Financial Instruments
Types of Financial Instruments
1. Cash Instruments
1.1 Securities, 1.2 Deposits and Loans
2. Derivative Instruments
2.1 Synthetic Agreement for Foreign Exchange
(SAFE)
2.2Forward. 2.3 Future , 2.4 Options, 2.5 Interest
Rate Swap.
3. Foreign Exchange Instruments
3.1 Spot, 3.2 Outright Forwards, 3.3 Currency
Swap
Asset Classes of Financial Instruments
1. Debt-Based Financial Instruments
Debt-based financial instruments are categorized as mechanisms that
an entity can use to increase the amount of capital in a
business. Examples include bonds, debentures, mortgages, U.S
treasuries, credit cards, and line of credits (LOC).
They are a critical part of the business environment because they
enable corporations to increase profitability through growth in
capital.
2. Equity-Based Financial Instruments
Equity-based financial instruments are categorized as mechanisms
that serve as legal ownership of an entity. Examples include common
stock, convertible debentures, preferred stock, and transferable
subscription rights.
They help businesses grow capital over a longer period of time
compared to debt-based but benefit in the fact that the owner is not
responsible for paying back any sort of debt.
A business that owns an equity-based financial instrument can choose
to either invest further in the instrument or sell it whenever they
deem necessary.