1.

Banks:

Banks participate in the capital market and money market. Within the capital market, banks take active part in bond

markets. Banks may invest in equity and mutual funds as a part of their fund management. Banks take active trading

interest in the bond market and have certain exposures to the equity market also. Banks also participate in the market as

clearing houses.

2. Primary Dealers (PDs):

PDs deal in government securities both in primary and secondary markets. Their basic responsibility is to provide two-way

quotes and act as market makers for government securities and strengthen the government securities market.

3. Financial Institutions (FIs):

FIs provide/lend long term funds for industry and agriculture. FIs raise their resources through long-term bonds from

financial system and borrowings from international financial institutions like International Finance Corporation (IFC), Asian

Development Bank (ADB) International Development Association (IDA), International Bank for Reconstruction and

Development (IBRD), etc.

4. Stock Exchanges:

A Stock exchange is duly approved by the Regulators to provide sale and purchase of securities by “open cry” or “on-

line” on behalf of investors through brokers. The stock exchanges provide clearing house facilities for netting of payments

and securities delivery. Such clearing houses guarantee all payments and deliveries. Securities traded in stock exchanges

include equities, debt, and derivatives.

Currently, in India, only dematerialized securities are allowed to be traded on the stock exchanges. Settlement in

securities account is made by depositories through participants’ accounts. It is essential that stock exchanges are

corporatised and de-mutualised so that there can be greater transparency in the trades and better governance in markets.

5. Brokers:

Only brokers approved by Capital Market Regulator can operate on stock exchange. Brokers perform the job of

intermediating between buyers and seller of securities. They help build up order book, price discovery, and are

responsible for a contract being honoured. For their services brokers earn a fee known as brokerage.

6. Investment Bankers (Merchant Bankers):

These are agencies/organisations regulated and licensed by SEBI, the Capital Markets Regulator. They arrange raising of

funds through equity and debt route and assist companies in completing various formalities like filing of the prescribed

document and other compliances with the Regulator and Regulators.

They advise the issuing company on book building, pricing of issue, arranging registrars, bankers to the issue and other

support services. They can underwrite the issue and also function as issue managers. They may also buy and sell on their

account.

As per regulatory stipulations, such own account business should be separately booked and confined to scrip’s where

insider information is not available to the investment/merchant banker. Investment/Merchant banking can be an exclusive

business. A bank can also undertake these activities.

7. Foreign Institutional Investors (FIIs):

FIIs are foreign based funds authorized by Capital Market Regulator to invest in countries’ equity and debt market through

stock exchanges. They are allowed to repatriate sale proceeds of their holdings, provided sales have been made through

an authorized stock exchange and taxes have been paid. FIIs enjoy de-facto capital account convertibility.

FII operations provide depth to equity and debt markets and result in increased turnover. In India, these activities have

brought in technological advancements and foreign funds in equity and debt market.

8. Custodians:

Custodians are organizations which are allowed to hold securities on behalf of customers and carry out operations on

their behalf. They handle both funds and securities of Qualified Institutional Borrowers (QIBs) including FIIs.

Custodians are supervised by the Capital Market Regulator. In view of their position and as they handle the payment and

settlements, banks are able to play the role of custodians effectively. Thus most banks perform the role of custodians.

9. Depositories:

Depositories hold securities in demat (electronic) form, maintain accounts of depository participants who, in turn, maintain

accounts of their customers. On instructions of stock exchange clearing house, supported by documentation, a depository

transfers securities from buyers to sellers’ accounts in electronic form.

Depositories are important for ensuring efficiency in the market. They facilitate lending against securities and ensure
avoidance of settlement risk or bad delivery.
Financial Market

Financial markets refer to the network and structural facilities for the transfer of funds between the buyers and sellers of
financial assets, services etc. It is financial marker where the funds-surpluses meet the funds-deficits. Financial market
does not refer to any physical or geographical location or place, rather denote to the network of communication and
dealings among the participants.

Classification of Financial Markets

Financial Markets are classified as under.

Organized Market and Unorganized market

Organized Market

Organized market is that part of the financial markets, which operates under a defined set of rules, regulations and legal
provisions and the statutory authorities such as the Central Government, the Central Bank the Exchange Commission
(such as SEBI in India), etc. The organized market may also be called the official or formal market.

Unorganized market

Unorganized is that part of the financial markets, which is not standardized and is outside the preview of government
control. In India, the rural money lenders and traders form the unorganized market. The basic feature of unorganized
market are high interest rates, fluctuating and varying interest rates, absence of precise rules, upfront payment of interest,
unsystematic arrangements etc.

Money Market & Capital Market

Money Market

The Money market refers to the market where borrowers and lenders exchange shortterm funds to solve their liquidity
needs. Money market instruments are generally financial claims that have low default risk, maturities under one year and
high marketability

Capital Market

The Capital market is a market for financial investments that are direct or indirect claims to capital. It is wider than the
Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a
negotiable financial instrument. The Capital Market comprises the complex of institutions and mechanisms through which
intermediate term funds and long-term funds are pooled and made available to business, government and individuals. The
Capital Market also encompasses the process by which securities already outstanding are transferred.

Participants in Financial Markets

Following are some of the Major Participants in Financial Markets

  Insurance Companies
 Finance Companies
 Banks
 Merchant Banks
 Companies/Firms
 The Individual
 Government
 Regulators

Financial Instruments

Following are the most traded financial Instrument in the Financial Markets

Equities: Equities are a type of security that represents the ownership in a company. Equities are traded (bought and
sold) in stock markets.

Mutual funds: A mutual fund allows a group of people to pool their money together and have it professionally managed,
in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency,
risk-diversification, professional management and sound regulation.

Bonds: Bonds are fixed income instruments which are issued for the purpose of raising capital. Both private entities, such
as companies, financial institutions, and the central or state government and other government institutions use this
instrument as a means of garnering funds.

Deposits: Investing in bank or post-office deposits is a very common way of securing surplus funds. These instruments
are at the low end of the risk-return spectrum.

Cash equivalents: These are relatively safe and highly liquid investment options. Treasury bills and money market funds
are cash equivalents.

Classification Or Types Of Financial Institutions

In financial market there are many types of financial institutions or intermediaries exist for the flow of funds. Some of them
involve in depositary type of transactions whereas other involve in non-depositary type of transactions. The type of
financial institutions can be divided into two types as follows:

1. Depository Institutions

The depository types of financial institutions include banks, credit unions, saving and loan associations and mutual saving
banks

* Commercial banks

Commercial banks are those financial institutions, which help in pooling the savings of surplus units and arrange their
productive uses. They basically accepts the deposits from individuals and institutions, which are repayable on demand.
These deposits from individuals and institutions are invested to satisfy the short-term financing requirement of business
and industry.

* Credit Unions

Credit unions are cooperative associations where large numbers of people are voluntarily associated for savings and
borrowing purposes. These individuals are the members of credit unions as they make share investment along with
deposits. The saving generated from these members are used to lend the members of the union only.
* Saving And Loan Associations

Saving and loan associations are the financial institutions involved in collecting funds of many small savers and lending
these funds to home buyers and other types of borrowers.

* Mutual Saving Banks

Mutual saving banks are more or less similar to saving and loan associations. They primarily accepts savings of
individuals and they are lent to the home users and consumers on a long-term basis.

2. Non-depository Institutions

Non-depository institutions are not banks in real sense. They make contractual arrangement and investment in securities
to satisfy the needs and preferences of investors. The non-depository institutions include insurance companies, pension
funds, finance companies and mutual funds.

* Insurance Companies

Insurance companies are the contractual saving institutions which collect periodic premium from insured party and in
return agree to compensate against the risk of loss of life and properties.

* Pension/Provident Funds

Pension funds are financial institutions which accept saving to provide pension and other kinds of retirement benefits to
the employees of government units and other corporations. Pension funds are basically funded by corporation and
government units for their employees, which make a periodic deposit to the pension fund and the fund provides benefits to
associated employees on the retirement. The pension funds basically invest in stocks, bonds and other type of long-term
securities including real estate.

* Finance Companies

Finance companies are the financial institutions that engage in satisfying individual credit needs, and perform merchant
banking functions. In other words, finance companies are non-bank financial institutions that tend to meet various kinds of
consumer credit needs. They involve in leasing, project financing, housing and other kind of real estate financing.

* Mutual Funds

Mutual funds are open-end investment companies. They are the associations or trusts of public members and invest in
financial instruments or assets of the business sector or corporate sector for the mutual benefit of its members. Mutual
funds are basically a large public portfolio that accepts funds from members and then use these funds to buy common
stocks, preferred stocks, bonds and other short-term debt instruments issued by government and corporation.