This document provides an overview of finance and financial markets. It defines finance as the study of allocating scarce resources over time in an environment of uncertainty. The financial system allows for the transfer of funds from surplus units like savers to deficit units like businesses through markets and intermediaries. Well-functioning financial markets are important for economic growth by facilitating the flow of capital from investors to users of capital. The document describes different types of financial markets including money markets, capital markets, primary and secondary markets, spot and forward markets, and derivatives markets.

1. Submitted By:
Tarique Husen
F4E: Market

2. Contents
• What is Finance
• Financial System
• Indian Financial System
• The Capital Allocation Process
• Financial System: Flow of Funds
• How is capital transferred between savers and borrowers ?
• What is Market ?
• The Importance of Financial Markets to Economic Growth
• Types of financial markets
• References.

3. What is Finance
• Finance is the study of how people allocate scarce resources
over time.
– Decisions are made across time
– Decisions are made in an environment of uncertainty
– Decisions are made in the context of a financial system

4. Financial System
• The financial system is the set of markets and other institutions
used for financial contracting and the exchange of assets and
risks.
– Markets for stocks, bonds and other financial instruments.
– Financial intermediaries such as banks and insurance
companies.
– The regulatory bodies that govern all of these institutions.

5. Indian Financial System

6. The Capital Allocation Process
• The financial system allows for the transfer of funds from surplus
units (such as savers) that have excess resources to deficit
units, such as businesses that need resources.
• This can happen either through the market, as when an individual
uses his savings to buy shares issued by a corporation.
• Or through intermediaries, as when an individual deposits money
in his banking account, and the bank then lends this money to a
firm.

7. Financial System: Flow of Funds
Surplus Units Deficit Units
M a rk ets
Inter m ediaries

8. How is capital transferred between
savers and borrowers ?
• Direct transfers – stocks and
bonds, securities
• Investment banking house -
Underwriting
• Financial intermediaries –
banks and mutual funds

9. What Is Market?
• A market is
exchanged.
a venue where goods and services are
• A financial market is a market in which people and entities
can trade financial securities, commodities, and other items
of value at low transaction costs and at prices that reflect
supply and demand.
• Securities include stocks and bonds, and commodities
include precious metals or agricultural goods.

10. The Importance of Financial Markets
to Economic Growth
• Well-functioning financial markets facilitate the flow of
capital from investors to the users of capital.
– Markets provide savers with returns on their money
saved/invested, which provides them money in the
future.
– Markets provide users of capital with the necessary funds
to finance their investment projects.
• Well-functioning markets promote economic growth.
• Economies with well-developed markets perform better
than economies with poorly-functioning markets.

12. Types of financial markets
• Physical assets vs. Financial assets
• Money (short) vs. Capital (long)
• Primary (proceeds go to firm) vs. Secondary Mkt. for
outstanding securities
• Spot (cash) vs. Futures
• Public (exchange-traded) vs. Private (banks)
• Derivatives – Futures and options
• Foreign Exchange – Currency

13. Types of Market
• Money Market : The Money market refers to the market
where borrowers and lenders exchange short-term funds to
solve their liquidity needs.
• 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.

14. Types of Market
• Securities Market : The Securities Market, however, refers to
the markets for those financial instruments/claims/obligations
that are commonly and readily transferable by sale.
• The Securities Market has two interdependent and inseparable
segments, the new issues (primary) market and the stock
(secondary) market.

15. Types of Market
• Primary Market : The Primary market provides the channel for
sale of new securities. The issuer of securities sells the securities
in the primary market to raise funds for investment and/or to
discharge some obligation.
• Secondary Market : The Secondary market deals in securities
previously issued. The secondary market enables those who hold
securities to adjust their holdings in response to charges in their
assessment of risk and return. They also sell securities for cash
to meet their liquidity needs.

16. Types of Market
• This secondary market has further two components.
• Spot Market : the spot market where securities are traded for
immediate delivery and payment.
• Forward Market : The other is forward market where the
securities are traded for future delivery and payment.
• This forward market is further divided into Futures and Options
Market (Derivatives Markets).

17. REFERENCES
• Printed material –Author –Hull
• www.google.com
• http://www.nse-india.com
• www.rbi.org.in
• NCFM module