2. Financial Market
A financial market is a mechanism that allows people to buy and sell financial
securities , commodities and other items of value at low transaction costs and at a
prices that reflect supply and demand.
Securities include stocks, bonds, and commodities include precious metals and
agricultural goods.
4. Money Market
Money market is a mechanism that deals with lending
of short terms funds which is generally less than 1 year.
A segment of the financial market in which financial
instrument with high liquidity and very short maturities
are traded.
The main purpose of money market is to provide
investors with a safe place to invest easily accessible,
cash-equivalent assets.
5. Importance of Money Market
Financing Trade
Financing Industry
Profitable Investment
Self sufficiency of commercial bank
Help to Central Bank
Encourage to Economic growth
7. Treasury Bills ( T –Bills )
T – Bills are the most marketable money market securities.
These are issued with three month, six month and one year maturities.
T – Bills are purchased for a price that is less than their par value, when mature, the
government pays the holder the full par value.
T – Bills are so popular among money market instruments because of affordability to
the individual investors.
8. Commercial Paper
Commercial paper is a short term unsecured loan issued by large bank and
corporation typically financing day to day operation.
CP is a very safe investment because the financial situation of a company can be
easily be predicted over a few months.
Only company with high credit rating issues CP’s.
Interest rates fluctuate with market condition, but are typically lower than bank’s
rates.
9. Certificates of Deposits
A Certificates of deposits is a time deposit, financial product commonly offered to consumers by banks.
Like most time deposit, funds can’t withdrawn before maturity without paying a penalty.
CD’s have specific maturity date, interest rate and it can be issued in any denomination.
The main advantage of CD is their safety.
It normally give higher return than Bank term deposit, and are rated by approved rating agencies.
10. Repurchase agreements
Repo or Reverse Repo are transactions or short term loans in which two parties agree
to sell and purchase the same security.
These are usually very short term purchases agreement, from overnight to 30 days of
more.
The short term maturity and government backing usually mean that Repos provide
lenders with extremely low risk.
These transactions can be done only between the parties approved by RBI and in RBI
approved securities.
11. Banker’s Acceptance
A banker’s acceptance is a short term credit investment created by a non – financial firm.
BA’s are guaranteed by a bank to make payment.
Acceptance are traded at discounts from face value in the secondary market.
It acts as a negotiable time draft for financing imports, exports or other transactions in
goods.
12. Capital Market
Capital market refers to the institutional
arrangements for facilitating the borrowing and
lending of long term funds.
It’s a market place where investment instruments
like bonds, equities mortgages are traded.
The primary role of this market is to make
investments from investors who have surplus
funds to the ones who are running a deficit.
13. Importance of Capital Market
Link between savers and investors
Encouragement to savings
Encouragement to Investments
Promotes Economic Growth
Stability in Security Prices
Benefits to Investors
15. Equity Shares
Preference Shares
Bond
Debenture
Instruments of Capital Market
16. Equity Share
Equity shares are commonly referred to common stock or ordinary shares. The holders of
these shares are the real owners of the company.
They have a voting right in the meetings of holders of the company. They have a control
over the working of the company.
Equity shareholders are paid dividend after paying it to the preference shareholders. The
rate of dividend depends upon the profits of the company.
The risk factor in this instrument is high and thus yields a higher return.
17. Preference Share
Preference shares are those shares which carry certain special or priority rights. Firstly,
dividend at a fixed rate is payable on these shares before any dividend is paid on equity
shares.
At the time of winding up of the company, capital is repaid to preference shareholders prior to
the return of equity capital.
Preference shares do not carry voting rights.
Types of Preference share:
a. Redeemable Preference share
b. Irredeemable Preference share
c. Convertible Preference share
d. Non – Convertible Preference
18. Bonds
Bond is a long term debt instrument that promises to pay a fixed annual sum as
interest for specified period of time.
Interest is usually payable at fixed intervals (semi annual, annual, monthly). The
Interest rate is also know as coupon rate. Usually this rate is fixed through out the
life of the bond.
Some of the types of bonds: Zero coupon bond, Fixed rate bond, Government
bond, Convertible bond, Floating rate bond, etc.
19. Debenture
A debenture is a long term debt instrument or security issued by company.
The company is liable to pay a specified amount with interest and although the money
raised by debentures becomes a part of the company’s capital structure.
The rate of debentures are fixed and known to Investors.
Types of Debenture:
Convertible Debenture
Non Convertible Debenture
Secured Debenture
Unsecured Debenture
20. Constituents of Stock Market
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
