FINANCIAL MARKETS

MEANING:

Generally, Financial market is a place where a financial transaction takes place. Financial
market is pervasive in nature, since Financial transactions are themselves very pervasive.

However, Financial market can be referred to as those centers and arrangements which
facilitate buying and selling of financial assets and services.

The participants in the financial markets are the borrowers (issuers of securities), lenders
(buyers of securities) and financial intermediaries (institutions).

Financial markets should not be confused as sources of finance. They are a link between the
savers and borrowers, both individual and institutional.
Prof. Sudipta Kumar Nanda. RIMS,
Rourkela
 CLASSIFICATION OF FINANCIAL MARKETS****

ASSIGNMENT : Write a paragraph about each of the constituents of

Prof. Sudipta Kumar Nanda. RIMS,
the Financial Market.
Rourkela
(Hint : Refer Gordon & Natarajan)
CHARACTERISTICS OF FINANCIAL MARKETS:

Financial markets are characterized by a large volume of transactions and the speed with which
financial resources move from one market to another.

There are various segments of financial markets such as stock markets, bond markets –
primary and secondary segments, where savers themselves decide when and where they should
invest money.

There is scope for instant arbitrage among various markets and types of instruments.

Financial markets are highly volatile and susceptible to panic and distress selling as the
behaviour of a limited group of operators can get generalised.

Markets are dominated by financial intermediaries who take investment decisions as well as
risks on behalf of their depositors.

A failure in one segment of the financial market may affect other segment.

Due to globalization domestic markets are affected by international markets and vice-versa.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
FUNCTIONS OF FINANCIAL MARKETS :

transfer of real economic resources from lenders to borrowers.

they allow lenders to earn interest/dividend on their surplus . Thus contribute to individual
and national income.

allow productive use of savings.

allow determination of the price of traded financial assets.

provide a mechanism for selling of a financial asset by an investor so as to offer the
benefits of marketability and liquidity of such assets.

separation, distribution, diversification and reduction of risk

efficient payment mechanism

providing information about companies.

transmutation or transformation of financial claims to suit the preferences of both savers
and borrowers.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
RAISING CAPITAL :
Without financial Markets, borrowers would have difficulty finding buyers themselves.
Here the intermediaries such as BANKS come in picture. Banks take money from those
who have money to save. They can then lend this money to those who seek to borrow.
Banks popularly lend money in form of LOANS and MORTGAGES.

LENDERS :
INDIVIDUALS : Many individuals are not aware that they are lenders, but almost
everyone lends money in some way. A person lends money when he :
1. Puts money in a savings account at a bank,
2. Contributes to a pension plan,
3. Pays premiums to an insurance company,
4. Invests in government bonds,
5. Invests in company shares.

LENDERS :
COMPANIES : Companies usually tend to be borrowers of capital . But when they
have surplus cash that is not needed for a short period of time, they may seek to make
money from their cash surplus by lending it, by Investing in bonds and stocks.
Prof. Sudipta Kumar Nanda. RIMS,
Rourkela
BORROWERS :
1. Individuals – e.g. bank loans, mortgages.
2. Companies – for short term or long term cash flows or future business expansion.
3. Governments – for spending requirements, or on behalf of nationalized industries,
municipalities or other public sector bodies.
4. Public Corporations – e.g. postal services, railway companies and utility companies.

THUS FINANCIAL MARKET :

1. Acts as a backbone of financial structure of any country.
2. Acts as an interface between prospective buyers and sellers.
3. Improves overall business liquidity.
4. Helps in raising capital and improving international trade.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
 MONEY MARKET
It is a market for short-term loanable funds for
a period not exceeding 1 year
This market supplies funds for financing
current business operations, working capital
requirements of industries and short term
requirements of the government.
Each single money market instrument is of
large amount. A CD is of minimum of Rs.1
lakh.
RBI and commercial banks are the major
players
No secondary market
There is no formal place
Transactions are conducted without the help of
broker
Eg : Call Money, Certificate of Deposit,
Prof. Sudipta Kumar
Commercial Paper, Commercial Bills,etc
CAPITAL MARKET
It is a market for long-term funds exceeding a
period of 1 year
It supplies funds for financing the fixed capital
requirements of companies as well as long term
requirements of governments
Each single capital market investment of small
amount. Each share is of nominal value Rs.10.
Corporates, individuals, insurance companies,
mutual fund AMCs, etc are the players
Secondary market present i.e. Stock Market
Formal place i.e. Stock Market
Transactions are conducted with the help of
broker.
EgNanda.
: equity Shares, Preference Shares,
RIMS,
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Debentures, etc
 CAPITAL MARKET

 It is a market for long-term funds.

 It deals with long-term securities which have a maturity period of

above one year. They generally have long or indefinite maturity.

 Its focus is on financing of fixed investment in contrast to money

market which is the institutional source of working capital finance.

 The main participants in the capital market are mutual funds,

insurance organizations, foreign institutional investors, governments,
corporates and individuals.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
 CAPITAL
MARKET

GOVT. INDUSTRIAL
LONG-TERM
SECURITIES SECURITIES
LOAN MARKET
MARKET MARKET

MARKET FOR
PRIMARY SECONDARY MARKET FOR
TERM LOAN FINANCIAL
MARKET MARKET MORTGAGES
GUARANTEES

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
 CAPITAL MARKET INTERMEDIARIES

The role of intermediaries makes the market vibrant, and to function

smoothly and continuously . Intermediaries possess professional
expertise and play an promotional role in organising a perfect match
between the supply and demand for capital in the market. All
intermediaries are service providers and are an integral part of the
Capital Market or Money Market.

The market Regulator, SEBI regulates various intermediaries in the

primary and secondary markets through its Regulations for these
intermediaries.

The Capital Market intermediaries can be divided into:

1) Primary market intermediaries
2) Secondary market intermediaries.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
PRIMARY MARKET INTERMEDIARIES:

The major intermediaries of the primary market are :

1) Merchant Bankers/Lead Managers
2) Underwriters
3) Bankers to an issue
4) Registrars to an issue
5) Share transfer agents
6) Debenture trustees
7) Brokers to an issue
8) Portfolio managers

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
1) Merchant Bankers/Lead Managers :

• They are basically the managers of a public issue, acting as the lead
managers.

• They also provide other services like portfolio management,

underwriting of capital issues, insurance, credit syndication, financial
advices, project counselling, etc.

2) Underwriters :

• Underwriting means undertaking a responsibility or giving a

guarantee that the securities offered to the public will be subscribed
for. The firms that undertake the guarantee are called “underwriters.”

• Underwriting ensures success of new issues of capital. The

underwriters, for providing thisKumar
Prof. Sudipta service charge a commission known
Nanda. RIMS,
as underwriting commission. Rourkela
3) Bankers to an issue :

• Banker to an issue is an important intermediary who accepts

applications and application fees, refunds application fees after
allotment and participates in the payments of dividends by
companies.

4) Registrars to an issue :

• The functions of a registrar are :

i) Collecting applications from investors
ii) Keeping a record of applications.
iii) Keeping record of money received from investors or paid to sellers of
shares.
iv) Assisting the companies in the determination of basis of allotment of
shares.
v) Helping in dispatch of allotment letter, refund orders, share
Prof. Sudipta Kumar Nanda. RIMS,
certificates, etc. Rourkela
5) Share transfer agents :

• The share transfer agents maintain the record of holders of securities.

• They also deal with all activities connected with the

transfer/redemption of securities.

6) Debenture trustees :

• A debenture trustee is the trustee of a trust deed for securing any

issue of debentures of a corporate.

• Trust deed means a deed executed by the company in favour of

trustees named therein for the benefit of the debentureholders.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela
7) Brokers to an issue :
• They procure subscriptions to issue from prospective investors
spread over larger area.
• Members of a stock exchange are prohibited from acting as brokers
to an issue by SEBI regulation unless the stock exchange of which
they are members give its approval and company complies with the
listing requirements and undertakes to have its securities listed on a
recognised stock exchange.
8) Portfolio managers :
• The SEBI regulation defines Portfolio Manager as any person who
pursuant to a contact or arrangement with a client, advises or directs
or undertakes on behalf of the client, the management or
administration of a portfolio of securities or the funds of the client.
• The main functions areProf.
portfolio construction,
Sudipta Kumar Nanda. RIMS, formulation of
investment strategy, evaluationRourkela
and regular monitoring of portfolio.
 SECONDARY MARKET INTERMEDIARIES

1) Jobbers
2) Brokers
3) Sub-brokers
4) Tarawaniwalas
5) Authorised Clerks

1) Jobbers

• Jobbers are security merchants dealing in shares and debentures as

independent operators. They sell and buy securities on their own
behalf.
• They cannot deal on behalf of public and are thus barred from taking
commission. They directly deal with brokers.
• They quote two prices : one at which they are prepared to purchase
and one at which they are prepared to sell a particular security.
• For example a jobber may quote the equity shares of ABC ltd. at
Rs.100-Rs.110. That means a jobber is ready to purchase at Rs.100 and
sell at Rs.110. The difference between the two prices is the Jobber’s Turn
or Jobber’s profit.

• A jobber is a professional speculator and specialises in a limited

number of securities.

2) Broker :

• Brokers are commission agents, who act as intermediaries between

buyers and seller of securities. Brokers charge commission from both
parties.
• Brokers are also experts in estimating trends of prices and can
effectively advise their clients.
• A broker has to make an application for registration as a member of
Stock Exchange to SEBI.
• They have to follow certain code of conduct.
3) Sub-broker :

• A sub-broker is an agent of the stock-broker or a person who helps the

investors to deal with the stock broker.
• He is not a member of a stock exchange. Thus he cannot directly trade.
• He is called a remisier in BSE.
• His commision is paid out of the commission received by the broker.
Thus he is also called “half-commission men.”
• Generally, their commission cannot exceed 40% of the total
commission.

4) Tarawaniwalas :
• The members of BSE have divided themselves into brokers and Tarawaniwalas
•They act as both brokers and jobbers.
• A tarawaniwala makes transactions on his own behalf as a jobber but may also act as a
broker on behalf of the public.
• They may sell their own securities to their clients when prices are higher and vice-
versa.
Prof. Sudipta Kumar Nanda. RIMS,
Rourkela
5) Authorised Clerks :

• He is one who is appointed by a stock broker to assist him in the

business of security trading.
• A broker cannot be present always. Thus he requires the assistance of a
clerk to carry on the trading activities on his behalf.
• A broker can employ a specified no. of authorised clerks. They are
called “member assistants” in Madras Stock Exchange.

Prof. Sudipta Kumar Nanda. RIMS,

Rourkela