Chapter 10 - Financial Markets

Chapter
10-
Financial
Market
Financial Market
A Financial Market is a platform where

money is being collected from the surplus
unit and lend to deficit unit.
Securities
Securities are fungible and tradable financial instruments used to raise capital in public and
private markets.
Securities
Equity Debt
An equity security represents ownership

A debt security represents borrowed
held by a shareholders in an entity (a
money that must be repaid.
company, partnership, or trust).
Gets principal and interest, irrespective of
Gets dividends from profit
company making profit or loss
Classification
Money Capital
Market Market
On the basis of
Settlements
Future Spot Primary Secondary

Market Market Market Market
Money Market Money
Market
Short Term upto 1 year

Regulated by RBI
The money market is a good place for individuals, banks, Funds Operational Cost
other companies, and governments to park cash for a
Only in Bonds
short period of time, usually one year or less
Public Participation is very less
Less risk due to lesser maturity
Instruments
T-Bills, Commercial Papers, etc.
Instruments Of Money Market
Issued by Issued by Financial

Issued by Firms
Government Institutions
T-Bills C-Paper CoD
CMB Promissiory- Call Money

Notes
WMA Notice & Repo
Issued By Government
A. Treasury Bills C.Ways And Means Advances
• It is used by the central government to fulfil its • A temporary loan facilities to the central and
short term liquidity requirements. state governments.
• This loan facility is called Ways and Means
• It is issued at a discounted value .
Advances (WMA)
• Only the central government is allowed to issue • Introduced in 1997 to meet mismatches in the
bills. receipts and payments of the government.
• Maturity- • Maturity
 14 days to 364 days.  90 days.
 Interest is charged at the existing repo rate.
B. Cash Management Bill
• They are like T Bills only. • If the WMA exceeds 90 days, it would be
treated as an Overdraft
• Issued to meet the temporary mismatch in the cash
flow of the central government
• They are issued for period less than 91 days.
• Started in 2010.
Issued By Firms
A. Commercial Papers B. Promissory note
• It is unsecured promissory note issued by • A promissory note is a debt instrument that
high net worth companies. contains a written promise by one party
• Issued at discount to face value. (the issuer) to pay another party (the
payee) a definite sum of money, either on
• Issued in multiple of Rs. 5 lakh demand or at a specified future date.
• subject to minimum of Rs. 25 lakhs.
• Maturity
• 15 days to 1 year
• It acts as a source of working capital for
the large firms.
Issued By Financial Institutions
Certificate of Deposits Call Money and Notice Money
• It is a bond issued by bank to depositors of • It is a facility which the bank uses to borrow
funds. on day to day basis.
• Issued in multiples of 1 lakh and minimum • Tenure is 1 day and maximum is 14 days
value of 1 lakhs. • Interest that is charged on this is called
• Time period is between minimum 7 days to Call Rate.
an year • It helps in optimal utilization of idle cash by
• They are issued in dematerialized format the banks.
and is negotiable and tradable in money
market
• Issued to individuals, corporations,
companies trusts and NRI also.
Capital Market Capital
Market
More than 1 year

Regulated by SEBI
A capital market is a financial market in which long-term Funds Capital Assets
debt or equity-backed securities are bought and sold, in
Both Bonds and Equity
contrast to a money market where short-term debt is
bought and sold. Public Participation is high
High Risk
Instruments
Bonds, Mutual Funds, etc.
Capital Market
Primary Market Secondary Market
Existing securities are

1st time sale of securities
traded
One investor sells to
Company sells to investor another investor
Market determines the
Company fixes the price
price
Funds for long term It provides liquidity equity

Instruments Of Capital Market
Issued by Government Equity Instruments
Preference
Dated Shares
Securities
or Sweat Equity
Sovereign
Securities
Equity Shares
Government Securities
Dated Securities/Sovereign Bonds
• Also called Gilt Edged Securities as repayment is backed by Government.
• Gives low interest rate.
• Tenure-
• 5 years to 30 years.
• Can be issued by both the centre and the state governments.
• Ratings-
• By Global Credit Rating Agency
• “AAA”- the best given to US Treasury Bonds
• “BAA”- moderate risk of default, India's rating.
Equity Instruments
• Also called common shares.
• Empowers owner the right to vote in shareholders' meeting.
Ordinary • Owners of ordinary shares may or may not receive dividends.
Shares • During liquidation they have rights of last claim
• These investors will get money before Ordinary share holder

Preferential
during the liquidation process.
Shares
• Preferred shares come with guaranteed dividends.
• These shares are form of reward.

Sweat Equity • Rewarded to employee in the form of Equity for there value
addition to the firm.

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Chapter 10 - Financial Markets

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Chapter

A Financial Market is a platform where

An equity security represents ownership

Future Spot Primary Secondary

Short Term upto 1 year

Issued by Issued by Financial

T-Bills C-Paper CoD

CMB Promissiory- Call Money

More than 1 year

Existing securities are

Funds for long term It provides liquidity equity

Issued by Government Equity Instruments

• These investors will get money before Ordinary share holder

• These shares are form of reward.

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