capital & money market

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Money Market & Capital Market Prepared by- Lakha Singh Nagra 2014MGB1069

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capital & money market in india

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Money Market &Capital Market

Prepared by-Lakha Singh Nagra2014MGB1069

It is the market for sale and purchase of stocks(shares), bonds, bills of exchange, commodities, foreign currency etc which works as liquid assets.

Financial market is of two types:Financial Market

FINANCIAL MARKETSMONEY MARKETCAPITAL MARKET

MONEY MARKET

Money MarketMoney market is a mechanism that deals with the lending of short term funds (less than one year)

A segment of the financial market in which financial instrument with high liquidity and very short maturities are traded.

Importance of Money MarketFinancing Industry

Financing trade

Self sufficiency of banks

Effective implementation of monetary policy

Encourages economic growth

Help to government

Functions of money market

Economic development Money market assures supply of funds; financing is done through discounting of the trade bills, commercial banks, acceptance houses and brokers.Profitable Investment the excess reserves of commercial banks invested in near money assets.Borrowings by the Government short term funds at very low interest.

Importance For Central Bank If the money market is well developed, the central bank implements the monetary policy successfully.Mobilization of Funds helps in transferring funds from one sector to another.Savings And Investment encouraging savings and investment by promoting liquidity and safety of financial assets.Self-sufficiency Of Commercial Banks commercial banks can meet their financial requirements by recalling some of their loans.MONEY MARKET INSTRUMENTSInvestment in money market is done through money market instruments.

Money market instrument meets short term requirements of the borrowers and provides liquidity to the lenders.

1.GOVERNMENT SECURITIES(G- Secs)

Issued by the Government for raising a public loan or as notified in the official Gazette.

G-sec consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds, Treasury Bills or Dated Government Securities.No default risk as the securities carry sovereign guarantee.Ample liquidity as the investor can sell the security in the secondary market2. MONEY MARKET AT CALL AND SHORT NOTICEMoney at call is a loan that is repayable on demand, and money at short notice is repayable within 14 days of serving a notice.Participants are banks & all other Indian Financial Institutions as permitted by RBI.Banks borrow call funds for a variety of reasons to maintain their CRR, to meet their heavy payments, to adjust their maturity mismatch etc.3. TREASURY BILLSShort term (up to one year) borrowing instruments of the Government of India.Enable investors to park their short term surplus funds while reducing their market risk.Issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.RBI issues T-Bills for three different maturities: 91 days, 182 days and 364 days4. CERTIFICATES OF DEPOSITSA CD is a time deposit, financial product commonly offered to consumers by banks.CDs are negotiable instrument.Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years.normally give a higher return than Bank term deposit, and are rated by approved rating agencies.

5.COMMERCIAL BILLSCommercial bill is a short term, negotiable, and self-liquidating instrument with low risk.Written instrument containing an unconditional order.Once the buyer signifies his acceptance on the bill itself it becomes a legal document.Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk.6. COMMERCIAL PAPERCommercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations .Commercial paper is usually sold at a discount from face value.Interest rates fluctuate with market conditions, but are typically lower than banks rates.

7.Repurchase Agreements Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security.They are usually used for overnight borrowingRepo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities

Some new Instruments are: Money MarketCommercial PapersCertificate of depositRepo instrumentRepurchase AgreementBanker's AcceptanceMutual Fund

The market where investment instruments like bonds and equities are traded is known as the capital market.

The primal 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 > insurance instruments, > foreign exchange instruments, > hybrid instruments

CAPITAL MARKETNature of capital market The nature of capital market is brought out by the following facts:

It Has Two SegmentsIt Deals In Long-Term SecuritiesIt Performs Trade-off FunctionIt Helps In Capital FormationIt Helps In Creating LiquidityTYPES

OF

CAPITA L

MARKET

Primary MarketSecondary MarketPrimary 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 MarketIt Is Related With New IssuesIt 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) Right Issue iv) Electronic-Initial Public OfferIt 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.Features of Secondary MarketIt Creates LiquidityIt Comes After Primary MarketIt Has A Particular PlaceIt Encourage New Investments

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