INDIAN FINANCIAL MARKET

Rahul Kumar
Department of Business
Adminestration
 What is financial Markets

A financial market is a market for creation and

exchange of financial assets. If you buy or sell
financial assets, you will participate in financial
markets in some way or the other.
 Functions of Financial Markets
(a) It provides facilities for interaction between the investors
and the borrowers.

(b) It provides pricing information resulting from the interaction

between buyers and sellers in the market when they trade
the financial assets.

(c) It provides security to dealings in financial assets.

(d) It ensures liquidity by providing a mechanism for an investor

to sell the financial assets.

(e) It ensures low cost of transactions and information.

 TYPES OF FINANCIAL MARKETS
Financial market

Money Market
Capital Market
Primarymarket,
Secondary market
 MONEY MARKET
The money market is a market for short-term funds, which deals in financial
assets whose period of maturity is upto one year. It should be noted that
money market does not deal in cash or money as such but simply provides a
market for credit instruments such as bills of exchange, promissory notes,
commercial paper, treasury bills, etc.

These financial instruments are close substitute of money. These instruments

help the business units, other organisations and the Government to borrow
the funds to meet their short-term requirement.

The Indian money market consists of Reserve Bank of India, Commercial

banks, Co-operative banks, and other specialised financial institutions. The
Reserve Bank of India is the leader of the money market in India. Some Non-
Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC,
UTI, etc. also operate in the Indian money market.
MONEY MARKET INSTRUMENTS
1. Call Money
2. Treasury Bill
3. Commercial Paper
4. Certificate of Deposit
5. Trade Bill
6. Repos
 Call Money
Call money is mainly used by the banks to meet their temporary requirement
of cash.

They borrow and lend money from each other normally on a daily basis.

It is repayable on demand and its maturity period varies in between one day
to a fortnight.

The rate of interest paid on call money loan is known as call rate.
TREASURY BILL
A treasury bill is a promissory note issued by the RBI to meet
the short-term requirement of funds.
Treasury bills are highly liquid instruments, that means, at
any time the holder of treasury bills can transfer of or get it
discounted from RBI.
These bills are normally issued at a price less than their face
value; and redeemed at face value. So the difference
between the issue price and the face value of the treasury
bill represents the interest on the investment.
These bills are secured instruments and are issued for a
period of not exceeding 364 days. Banks, Financial
institutions and or porations normally play major role in the
Treasury bill market.
 Commercial Paper
Commercial paper (CP) is a popular instrument for financing
working capital requirements of companies. The CP is an
unsecured instrument issued in the form of promissory note.

This instrument was introduced in 1990 to enable the corporate

borrowers to raise short-term funds. It can be issued for period
ranging from 15 days to one year.

Commercial papers are transferable by endorsement and delivery.

The highly reputed companies (Blue Chip companies) are the
major player of commercial paper market.
 Certificate of Deposit
Certificate of Deposit (CDs) are short-term
instruments issued by Commercial Banks and Special
Financial Institutions (SFIs), which are freely
transferable from one party to another.

The maturity period of CDs ranges from 91 days to one

year. These can be issued to individuals, co-operatives
and companies.
 Trade Bill
Normally the traders buy goods from the wholesalers or manufactures on
credit. The sellers get payment after the end of the credit period. But if any
seller
does not want to wait or in immediate need of money he/she can draw a bill
of
exchange in favour of the buyer. When buyer accepts the bill it becomes a
negotiable instrument and is termed as bill of exchange or trade bill.

This trade bill can now be discounted with a bank before its maturity. On
maturity the bank gets the payment from the drawee i.e., the buyer of goods.
When trade bills are accepted by Commercial Banks it is known as Commercial
Bills. So trade bill is an instrument, which enables the drawer of the bill to get
funds for short period to meet the working capital needs.
 REPOs
A holder of securities sells them with an agreement to repurchase the same after
certain period of a predetermined price which is higher than the sale price.

The party which lends securities (or borrows cash) is said to be doing the repo and
the party which lends cash (or borrows securities) is said to be doing the reverse
repo.

Repos are generally done for a period not exceeding 14 days, though there is no
restriction on the maximum period for which a repo can be done.
CAPITAL
MARKET
 CAPITAL MARKET
 The
market where investment instruments like
bonds, equities and mortgages are traded is
known as the capital market.

 Theprimal role of this market is to make

investment from investors who have surplus
funds to the ones who are running a deficit.
 The capital market offers both long term and
overnight funds.
 The different types of financial instruments
that are traded in the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.
 Nature of capital market
The nature of capital market is brought out by the
following facts:
 It Has Two Segments
 It Deals In Long-Term Securities
 It Performs Trade-off Function
 It Creates Dispersion In Business Ownership
 It Helps In Capital Formation
 It Helps In Creating Liquidity
 Types of capital market
There are two types of capital market:
 Primary market,
 Secondary market
 Primary Market
 It is that market in which shares,
debentures and other securities are sold for
the first time for collecting long-term
capital.
 This market is concerned with new issues.
Therefore, the primary market is also called
NEW ISSUE MARKET.
In this market, the flow of funds is from savers
to borrowers (industries), hence, it helps directly
in the capital formation of the country.
The money collected from this market is
generally used by the companies to modernize
the plant, machinery and buildings, for
extending business, and for setting up new
business unit.
 Features of Primary Market
 It Is Related With New Issues
 It Has No Particular Place
 It Has Various Methods Of Float Capital: Following
are the methods of raising capital in the primary
market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
 It comes before Secondary Market
 Secondary Market
 The secondary market is that market in
which the buying and selling of the
previously issued securities is done.
 The transactions of the secondary market
are generally done through the medium of
stock exchange.
 The chief purpose of the secondary market
is to create liquidity in securities.
 If an individual has bought some
security and he now wants to sell it, he
can do so through the medium of stock
exchange
. to sell or purchase through
the medium of stock exchange requires
the services of the broker presently,
their are 24 stock exchange in India.
 Features of Secondary Market

• It Creates Liquidity
• It Comes After Primary Market
• It Has A Particular Place
• It Encourage New Investments
 FUNCTIONS OF A STOCK
EXCHANGE
1. Provides ready and continuous market:

2. Provides information about prices and sales:

3. Provides safety to dealings and investment:

4. Helps in mobilisation of savings and capital

formation:

5. Barometer of economic and business conditions:

6. Better Allocation of funds:

 DISTINCTION BETWEEN PRIMARY MARKET AND
SECONDARY MARKET
1. Function : While the main function of primary market is to raise long-term
funds through fresh issue of securities, the main function of secondary
market is to provide continuous and ready market for the existing long-
term securities.

2. Participants: While the major players in the primary market are financial
institutions, mutual funds, underwriters and individual investors, the
major players in secondary market are all of these and the stockbrokers
who are members of the stock exchange.

3. Listing Requirement: While only those securities can be dealt within the
secondary market, which have been approved for the purpose (listed),
there is no such requirement in case of primary market.

4. Determination of prices: In case of primary market, the prices are

determined by the management with due compliance with SEBI
requirement for new issue of securities. But in case of secondary market,
the price of the securities is determined by forces of demand and supply
of the market and keeps on fluctuating.
 ADVANTAGES OF STOCK
EXCHANGES
(a) To the Companies
(i) The companies whose securities have been listed on a stock exchange enjoy a better
goodwill and credit-standing than other companies because they are supposed to be
financially sound.

(ii) The market for their securities is enlarged as the investors all over the world become
aware of such securities and have an opportunity to invest

(iii) As a result of enhanced goodwill and higher demand, the value of their securities
increases and their bargaining power in collective ventures, mergers, etc. is enhanced.

(iv) The companies have the convenience to decide upon the size, price and timing
of the issue.
 (b) To the Investors:

(i) The investors enjoy the ready availability of facility and convenience of buying
and selling the securities at will and at an opportune time.

(ii) Because of the assured safety in dealings at the stock exchange the investors
are free from any anxiety about the delivery and payment problems.

(iii) Availability of regular information on prices of securities traded at the stock

exchanges helps them in deciding on the timing of their purchase and sale.

(iv) It becomes easier for them to raise loans from banks against their holdings in
securities traded at the stock exchange because banks prefer them as collateral
on account of their liquidity and convenient valuation.
 (c) To the Society
(i) The availability of lucrative avenues of investment and the liquidity thereof induces
people to save and invest in long-term securities. This leads to increased capital
formation in the country.

(ii) The facility for convenient purchase and sale of securities at the stock exchange
provides support to new issue market. This helps in promotion and expansion of
industrial activity, which in turn contributes, to increase in the rate of industrial
growth.

(iii) The Stock exchanges facilitate realisation of financial resources to more profitable
and growing industrial units where investors can easily increase their investment
substantially.

(iv) The volume of activity at the stock exchanges and the movement of share prices
reflect the changing economic health.
 The Bombay Stock Exchange
(BSE)
•Established in 1875 one of the oldest organised exchanges in
the world

•The BSE switched form the open outcry system to the screen
based system in 1995 responded by NSC.

•Jobbers trades on his own accounts, two way quote or a bid-ask

quote
•Bid price reflects the price at which the bobber is willing to buy
•Ask price represents the price at which the jobber is willing to sell.
 The National stock exchange
(NSE)
•Inaugurated in 1994 for seeks to established a national wide trading facility for
equities, debt, and hybrids.

•Facilitate equal access to investors across the country

•Impart fairness, efficiency and transparency

•Shorten settlement cycle

•Meet international securities market standards

 CAPITAL MARKET RISK
 Investment in long term financial instruments
is accompanied by high capital market risks.
Since there are two types of capital markets- the
stock market and the bond market.
 So risks are present in both the market.
 Risk in the Stock Market

 Stock prices keep fluctuating over a wide

range unlike the bank deposits or government
bonds.
 The efficient market hypothesis shows the
effect of fundamental factors in changing the
price of the stock market.
 The Efficient Market Hypothesis shows that all
price movements are random whereas there are
plenty of studies that reflect the fact that there is a
specific trend in the stock market prices over a
period of time.
 Research has shown that there are certain
psychological factors that shape the stock market
prices.
 Sometimes the market behaves illogically to any
economic news.
 The stock market prices can be diverted in any
direction in response to press releases, rumors and
mass panic.

 The stock market prices are also subject to

speculation. In the short run the stock market prices
may be very volatile due to the occurrences of the fast
market changing events.
 Risk in the Bond Market
 Capital market risk in the bond market arises due to
interest rate changes. There is an inverse relationship
existing between the interest rate and the price of the
bond. Hence the bond prices are sensitive to the
monetary policy of the country as well as economic
changes.
 INDIAN CAPITAL MARKET
 The Indian Capital Market is one of the oldest capital
markets in Asia which evolved around 200 years ago.
Chronology of the Indian capital markets
>1830s: Trading of corporate shares and stocks in
Bank and cotton Presses in Bombay.
>1850s: Sharp increase in the capital market
brokers owing to the rapid development of commercial
enterprise.
 >1860-61: Outbreak of the American Civil
War and ' Share Mania ' in India.
>1894: Formation of the Hamada Shares
and Stock Brokers Association.
>1908: Formation of the Calcutta Stock
Exchange Association.
The pattern of growth in the Indian
capital markets in the post
independence regime can be analyzed
from the following graphs:
From the above graph we find that the
number of stock exchanges in India
increased at a crawling pace till 1980
but witnessed a sharp rise thereafter
till 1995.
The following diagram shows the trend
in the no. of listed companies
participating in the Indian Capital
Market. Here again we register a sharp
rise after 1980. The number of stocks
issued by the listed companies also
shows a similar trend:
 CAPITAL MARKET REPORT

 The Capital Market Report is prepared by

the capital market analysts and is of various
types.
 There are four different kinds of capital market
reports: >10-K Reports,
>10-Q Reports,
>Form 8-K Reports,
>the Proxy Statements .
 10-K Reports
 This is a kind of annual report of the company that
contains information of the company's business,
finances and management.
 This informs us about the bylaws of the company, other
legal documents and the lawsuits that the company may
have a hand in.
10-Q Reports or the Quarterly Reports
 The quarterly reports are the abridged form of the
annual reports.
 They are issued at an interval of three months.
 They consist of financial statements and list the
material events that have occurred in the company.
 Form 8 –K Report
 The companies that are publicly traded are
required to maintain the Form 8-K where they
record any material event that might have
affected the financial status of the company
Proxy Statements
 The proxy statement consists of business issues
that need to be discussed in the meeting and a
ballot for voting for the purpose of forming the
new Board of directors.
 CAPITAL MARKET INVESTMENT
 Capital market investment takes place through
the bond market and the stock market.
 The capital market is basically the financial pool in
which different companies as well as the government
can raise long term funds.
 Capital market investment that takes place through
the bond and the stock market may be elucidated in
the following heads.
Capital market investments in the stock market
 The stock market is basically the trading
ground capital market investment in the following:
i) Company’s stocks
ii) Derivatives
iii) Other securities
 The capital market investments in the stock market
take place by:
1) Small individual stock investors
2) Large hedge fund traders.
 The capital market investments can occur either in:
1) The physical market by a method known as the
open outcry.
 2) Trading can also occur in the virtual exchange where
trading is done in the computer network.
 The investors in the stock market have the liberty to
buy or sell the stock that they are holding at their
own discretion unlike the case of government
securities, bonds or real estate.
 The stock exchanges basically function as the clearing
house for such liquid transactions.
 The capital market investments in the stock market
are also done through the derivative instruments like
the stock options and the stock futures.
Capital Market Investments in the Bond Market
 The bond market is a financial market where the
participants buy and sell debt securities.
 The bond market is also differently known as the debt,
credit or fixed income market.
 There are different types of bond markets based on the
different types of bonds that are traded. They are:
• Corporate,
• Government and agency,
• Municipal,
• Bonds backed by mortgages & assets,
• Collateralized Debt Obligation.
 The bonds, except for the corporate bonds do not
have formal exchanges but are traded over-the-
counter.
 Individual investors are attracted to the bond market
and make investments through the bond funds,
closed-end-funds or the unit investment trusts.
 Another way of investing directly in the bond issue is
the Exchange-traded-funds.
 The capital market investment in the bond market is
done by:
• Institutional investors
• Governments, traders and
• Individuals.
Thank you.....