Financial Markets and their functionsFinancial Markets and their functions

Terms to know :

1

Classification of Financial Markets:2

What is Money Market?3

4

What are Financial Markets?

Instruments of money market

5 What is capital market?

Financial markets:

• Financial markets are markets in which funds are transferred from people who have surplus funds to people who have a shortage of funds.

Its allow the movement of surplus funds from savers to investors.

Financial sectors in development countries comprises of commercial banks, development financial institution, micro finance companies, investment banks, mutual funds, stock exchange and insurance companies.

Classification of Financial Markets:

Financial MarketsFinancial MarketsFinancial MarketsFinancial Markets

Financial markets basically divided into two:

CAPITALMARKET

MONEYMARKET

Money Market:

1. Money market is a financial market for short term loans.

In the money market, commercial banks are the most important lenders.

Financial institutions Financial intermediaries

MONEY MARKET

Instruments of money market:

• The main short term credit instruments traded in the money market are as follows:

I. Call loans: The call loans are generally granted maximum for

seven days. It is granted to bill brokers, discount houses and

stock exchange dealers. The commercial banks also lend their surplus funds

on call to other banks as they need them. Call loans are usually made without any security.

Instruments of money market:

II. Treasury bills: Treasury bills are short term govt. securities.

These are sold by the central bank on behalf of the government.

The period of maturity generally ranges from 3 to 12 months.

Treasury bills are usually issued for meeting the temporary deficit which a government faces.

Instruments of money market:

III. Bankers acceptance:

These are bills of exchange accepted by commercial banks on behalf of their customers.

Banker’s acceptances are used mostly in financing the commercial transactions both within and outside the country.

A bill of exchange is a peace of paperrepresenting a promise by the buyersof goods on credit, to pay the seller at a specified time.

Instruments of money market:

IV. Collateral loans:

The commercial banks usually grant short term loans against collateral securities to stock exchange dealers and brokers.

V. Sales / purchase operations (Repo):

Under a Repo transaction, the treasury bills and securities are sold by their holder to an investor with an agreement to repurchase them at a predetermined rate and date.

What is capital market?

2. Capital Market:

Capital market deals with the grant of medium and long term loans.

The capital market refer to the institutional arrangements which facilitate the lending and borrowing of medium and long term loans.

Instruments of capital market:

Capital Market

Issue of Debt instruments Issue of shares

Issue of debt instruments such as a bonds or securities having a maturity of more than one year.

Rising funds by issuing of Equities (shares) by public Limited companies.

Instruments of capital market:

BONDS

GOVERNMENT SECURITIES

Mortgages

Debt Debt instrumentsinstruments

Instruments of capital market:

A. Issue of debt instruments:

I. Bonds: Bond is a debt security that promises to make

payments periodically for specified period of time. Companies issue long term bonds for raising of

funds.

II. Mortgages: Mortgages are long term loans to individuals or

firms.

Instruments of capital market:

III. Government securities:

The long term debt instruments are issued by the govt. of a country to finance the deficit of the budget.

B. Issue of shares: The second method of raising funds is by issuing of shares by

the public limited companies. The market where the shares of public companies are traded

is called the equity market. Equity market is of two types

(a) Primary market (b) Secondary market