Unit 2 financial market

B.COM (HONS.) (CBCS): SEMESTER V
PAPER: BCH 5.4(A): FINANCIAL MARKETS, INSTITUTIONS AND
FINANCIAL SERVICES.
UNIT 2
BY- AAIMAN SIDDIQUI
JUNIOR RESEARCH FELLOW
DEPARTMENT OF COMMERCE
KHWAJA MOINUDDIN CHISHTI LANGUAGE UNIVERSITY.
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AaimanSiddiqui(JRF)Dept.OfCommerceKMCL
Unv.Lucknow.

UNIT II: FINANCIAL MARKETS
 Money market- functions, organizations and instruments
 Role of central bank in money market
 Indian money market: An overview
 Capital market- functions, organizations and instrument
 Indian debt market
 Indian equity market- primary and secondary markets
 Role of stock exchange in India.
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Money Market
Meaning of Money market
Money market basically refers to a section of the financial market
where financial instruments with high liquidity and short-term
maturities are traded. Money market has become a component of the
financial market for buying and selling of securities of short-term
maturities, of one year or less, such as treasury bills and commercial
papers. Money market consists of negotiable instruments such as
treasury bills, commercial papers. and certificates of deposit. It is
used by many participants, including companies, to raise funds by
selling commercial papers in the market. Money market is
considered a safe place to invest due to the high liquidity of
securities.
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The money market is an unregulated and informal market and not
structured like the capital markets, where things are organised in a
formal way. Money market gives lesser return to investors who invest
in it but provides a variety of products. The money market is an
unregulated and informal market and not structured like the capital
markets, where things are organised in a formal way. Money market
gives lesser return to investors who invest in it but provides a variety
of products. Money market instruments are short-term financing
instruments aiming to increase the financial liquidity of businesses.
The main characteristic of these kinds of securities is that they can be
converted to cash with ease, thereby preserving the cash requirements
of an investor.
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Features of Money Market
 It is market purely for short-term funds or financial assets called
near money.
 It deals with financial assets having a maturity period up to one
year only.
 It deals with only those assets which can be converted into cash
readily without loss and with minimum transaction cost.
 Generally transactions take place through phone i.e., oral
communication. Relevant documents and written
communications can be exchanged subsequently. There is no
formal place like stock exchange as in the case of a capital
market.
 Transactions have to be conducted without the help of brokers.
 The components of a money market are the Central Bank,
Commercial Banks, Non-banking financial companies, discount
houses and acceptance house. Commercial banks generally play
a dominant in this market.
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Objectives of Money market
 To provide a parking place to employ short-term surplus funds.
 To provide room for overcoming short-term deficits.
 To enable the Central Bank to influence and regulate liquidity in
the economy through its intervention in this market.
 To provide a reasonable access to users of Short-term funds to
meet their requirements quickly, adequately and at reasonable
costs.
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Instruments of Money Market
Commercial Paper: CP is a short-term unsecured promissory note
issued by well-established corporate with the requisite credit rating.
It is issued by well-established joint stock companies to raise
working capital. Though CP has been in existence in the US for
more than 100 years, it made its appearance in other countries only
after 1980. In India, CP made its appearance from January 1990,
when the RBI issued detailed guidelines for the issue of CPs. The
guidelines undergo a lot of changes now and then. Though there is
no secondary market for CP, its importance is growing in the Indian
money market.
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Treasury Bills (TBs):TB is a money market instrument issued by
the central bank on behalf of the government to borrow for the
government’s short-term financial needs. By its content, it looks like
a short-term promissory note. But, it is regarded as a bill of exchange
as it is issued at a discount to its face value. In a promissory note,
face value represents the amount borrowed and the repayment will
be face value plus the applicable interest.
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Certificate of Deposit (CD):CD is a negotiable certificate issued
by a bank on the receipt of a large deposit. It is like a fixed deposit
receipt issued by the bank on the receipt of a deposit. The ordinary
FD receipt is neither negotiable nor transferable. It is only
assignable. FD is not subject to restrictions like minimum amount,
tenure etc. CD is a negotiable certificate payable to bearer. CDs
appeared in the USA in 1961. In India, the RBI permitted banks to
issue CDs from June, 1989. CDs’ are meant for large deposits so
that administrative expenses of the bank and the depositor are
reduced. CD is a short- term security while the ordinary FD can be
of either short-term or long-term security.
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 CBLO (Collateralized Borrowing and Lending Obligation):
A CBLO is one of the money market instruments available in
electronic book entry form. It represents an obligation between
borrower and lenders as per the terms of the loans. The maturity
period ranges from one day to ninety days. As per RBI guidelines
this can also be extended up to one year. In CBLO, the borrower
has the obligation to repay the money borrowed at a
predetermined future date. The lender has an authority to receive
money lent at the predetermined future date. There is a charge on
security held by CCIL. By providing a dealing system, CCIL has
an authority to enable participants to borrow and lend funds.
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 Repos or Repurchase Agreements: Repos are also known as
repurchase agreement. It is a short term borrowing where one
party who sells the security agrees to repurchase it in future. The
securities for Repo transaction are government approved
securities like treasury Bills, and Central/State Government
securities. Repo (repurchase agreement) instruments enable
collateralized short- term borrowing through the selling of debt
instruments. For the seller the transaction is a repo as he agrees to
repurchase it at a specified date and rate. Whereas for the buyer it
is a reverse repo as he agrees to buy the security now and sells it
in future.
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Call/Notice/Term Money: Call money is an important constituent
of Indian Money Market. It is a market where money is borrowed or
lent on demand and has a maturity ranging between one day and two
weeks. It is also known as Inter-bank call money market. The main
purpose of Call/Notice market is to facilitate the commercial banks
to bridge the gaps of shortfall of funds, to meet the sudden
requirement of funds out of large outflows, and to fulfill the
stipulated requirements of RBI such as the Cash Reserve Ratio
(CRR) and the Statutory Liquidity Requirements (SLR).
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Organizations of Money market
The Indian money market is divided into three distinct pair:
1) Organised sector,
2) Unorganised sector, and
3) Cooperative sector.
However, technically the cooperative sector may be considered as a
part of the organised sector.
1) Organised Sector: This sector consists of the Reserve Bank of
India, State Bank of India and its subsidiaries, foreign exchange
banks, nationalised banks, all scheduled and non-scheduled
commercial banks and the regional rural banks. Besides, some
nonbanking companies and financial institutions like the Life
Insurance Corporation of India, the General insurance Company of
India, the Unit Trust of India, etc., also operate in the organised
money market. Chit funds and post-office savings banks also play a
significant role specially in semi-urban areas and small towns.
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2) Unorganised Sector: This pair of the money market consists of
indigenous bankers and the money-lenders called mahajans, seths,
etc., in different parts of the -country. Many of the indigenous
bankers combine banking business with trading and commission
business, whereas others deal primarily in banking activities. The
indigenous bankers deal in 'hundis' and 'promissory notes'. Nearly
fifty per cent of the internal trade depends on finance from the
unorganised sector.
3) Cooperative Sector: The cooperative sector occupies a somewhat
intermediary position between the organised and the unorganised
parts of the money market. hid sector primarily comprises
cooperative banks, rural banks and cooperative credit societies. Their
main purpose is to supplement the indigenous sources of rural credit.
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ROLE OF CENTRAL BANK IN MONEY MARKET
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RBI is the most important constituent of the money market. The
money market comes within the direct purview of the Reserve Bank
of India regulations. The Reserve Bank of India influences liquidity
and interest rates through a number of operating instruments such as
CRR, Open Market Operations, repos, change in bank rates etc. The
RBI has been taking several measures to develop money market in
India. A committee to review the working of the monetary system
under the chairmanship of Sukhamoy Chakravorty was set up in
1985. It underlined the need to develop money market instruments.
As follow up, the RBI set up a working group on the money
market under the chairmanship of N.Vaghul. The committee
submitted its report in 1987.

This committee laid the blueprint for the institution of a money
market. Based on its recommendations, The RBI initiated the
following measures:
1. The DFHI (Discount and finance house of India) was set up as a
money market institution jointly by the RBI, public sector banks,
and financial institutions in 1988 to impart liquidity to money
market instruments and help the development of a secondary
market for such instruments.
2. Money market instruments such as the 182-day T-bill, CD and
interbank participation certificate were introduced in 1988-89. CP
was introduced in January 1990.
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3. To enable price discovery, the interest rate ceiling on call money
was freed in stages from October 1988. As a first step, operations
of the DFHI in the call/notice money market were freed from the
interest rate ceiling in 1988. Interest rate ceiling on interbank term
money, rediscounting of commercial bills and interbank
participation without risk were withdrawn in May 1989. All the
money market interest rates are, by and large, determined by
market forces.
4. The Securities Trading Corporation of India was set up in June
1994, to provide an active secondary market in government
securities.
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5. Barriers to entry were gradually eased by (a) setting up the
primary dealer system in 1995 and satellite dealer system in 1999
to inject liquidity in the market, (b) enabling market evaluation of
associated risks by withdrawing regulatory restrictions such as
bank guarantees in respect of CPs, and (c) increasing the number
of participants by allowing the entry of foreign institutional
investors.
6. Several financial innovations in instruments and methods were
introduced. T- bills of varying maturities and RBI repos were
introduced. Auctioned T-bills were introduced leading to market-
determined interest rates.
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7. The development of a market for short term funds at market-
determined rates has been fostered by a gradual switch from a
cash credit system to a loan based system.
8. Adhoc and on-tap 91-day T-bills were discontinued.
9. Liquidity Adjustment Facility (LAF) was introduced in June
2000.
10. The minimum lock in period for money market instruments was
brought down to 7 days.
11.The RBI started repos both on auction and fixed interest rate
basis for liquidity management.
12. New money market derivatives such as forward rate agreements
and interest rate swaps were introduced in 1999.
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13. Money market instruments such as CDs and CPs are freely
accessible to non- bank participants.
14. The payment system infrastructure was strengthened with the
introduction of the negotiated dealing system (NDS) in February
2002, setting up of the Clearing Corporation of India Ltd. (CCIL)
in April 2002, and the implementation of real time gross
settlement system from April 2004.
15. Collateral Borrowing and Lending Obligations was
operationalising as a money market instruments through the CCIL
in June 2003.
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A basic objective of money market reforms in the recent years has
been to facilitate the introduction of new instruments and their
appropriate pricing. The RBI has endeavoured to develop market
segments which exclusively deal in specific assets and liabilities as
well as participants. Accordingly, the call/notice money market is
now a pure inter-bank market. Standing liquidity support to banks
from the RBI and facilities for exceptional liquidity support has
been rationalized. The various segments of the money market have
integrated with the introduction and successful implementation of
the LAF. The NDS and CCIL have improved the functioning of
money markets. Thus, RBI has been attempting to develop the
Indian money market. RBI is playing a key role in the development
of Indian money market.
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Indian Money Market: An Overview
The Money market in India is a correlation for short-term funds with
maturity ranging from overnight to one year in India
including financial instruments that are deemed to be close
substitutes of money. Similar to developed economies the Indian
money market is diversified and has evolved through many stages,
from the conventional platform of treasury bills and call money
to commercial paper, certificates of deposit, repos, forward rate
agreements and most recently interest rate swaps. The Indian
money market consists of diverse sub-markets, each dealing in a
particular type of short-term credit. The money market fulfills the
borrowing and investment requirements of providers and users of
short-term funds, and balances the demand for and supply of short-
term funds by providing an equilibrium mechanism. It also serves as
a focal point for the central bank's intervention in the market.
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Features of Indian Money Market
1. Dichotomy:
The Indian Money market is divided between two sectors, namely organised sector
and unorganised sector. There is very little cooperation and contact between them.
Consequently the rate of interest in both the markets varies widely.
2. Seasonal Variations:
Considering the demand for funds, there are two seasons, the busy season and slack
season. The busy season covers the period from November to April when
agricultural products come into the market.
There is great demand for funds during this period. The slack season covers the period
between May and October. The funds begin to be repaid and there is substantial fall
in the demand for funds.
3. Inter-Call Money Market:
The core of the Indian money market is the inter-bank call money market. It is the
most sensitive sector of the money market.
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4. Predominant Place of Government Securities:
In the Indian money market, the predominant place is enjoyed by
government and semi government securities.
5. Absence of Acceptance and Discount Houses:
There is almost complete absence of acceptance and discount houses in
the Indian money market. This is due to the underdeveloped bill market
in India.
6. Isolation from Foreign Money Market:
The Indian money market is isolated from foreign markets. There is
hardly any movement of funds between Indian Money Market and
foreign markets.
7. Variety of Financial Institutions:
The Indian market is characterised by the presence of a large number of
financial institutions such as non-banking financial intermediaries,
cooperative banks, Export-Import banks. They cater to the financial
needs of different sectors.
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STRUCTURE/CONSTITUENTS OF INDIAN MONEY MARKET
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Components, Submarkets of Indian Money Market
Various components or sub markets within Indian Money Market are
explained below.
1.Call Money Market : It an important sub market of the Indian money
market. It is also known as money at call and money at short notice. It is
also called inter bank loan market. In this market money is demanded for
extremely short period. The duration of such transactions is from few
hours to 14 days. It is basically located in the industrial and commercial
locations such as Mumbai, Delhi, Calcutta, etc. These transactions help
stock brokers and dealers to fulfill their financial requirements. The rate at
which money is made available is called as a call rate. Thus rate is fixed
by the market forces such as the demand for and supply of money.
2.Commercial Bill Market : It is a market for the short term, self
liquidating and negotiable money market instrument. Commercial bills are
used to finance the movement and storage of agriculture and industrial
goods in domestic and foreign markets. The commercial bill market in
India is still underdeveloped.
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3.Treasury Bill Market : This is a market for sale and purchase of short
term government securities. These securities are called as Treasury
Bills which are promissory notes or financial bills issued by the RBI on
behalf of the Government of India. There are two types of treasury bills.
(i) Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treasury Bills. The
maturity period of these securities range from as low as 14 days to as
high as 364 days. They have become very popular recently due to high
level of safety involved in them.
4.Market for Certificate of Deposits (CDs) : It is again an important
segment of the Indian money market. The certificate of deposits is
issued by the commercial banks. They are worth the value of Rs. 25
lakh and in multiple of Rs. 25 lakh. The minimum subscription of CD
should be worth Rs. 1 Crore. The maturity period of CD is as low as 3
months and as high as 1 year. These are the transferable investment
instrument in a money market. The government initiated a market of
CDs in order to widen the range of instruments in the money market and
to provide a higher flexibility to investors for investing their short term
money.
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5.Market for Commercial Papers (CPs) : It is the market where
the commercial papers are traded. Commercial paper (CP) is an
investment instrument which can be issued by a listed company
having working capital more than or equal to Rs. 5 cr. The CPs can
be issued in multiples of Rs. 25 lakhs. However the minimum
subscription should at least be Rs. 1 cr. The maturity period for the
CP is minimum of 3 months and maximum 6 months. This was
introduced by the government in 1990.
6.Short Term Loan Market : It is a market where the short term
loan requirements of corporate are met by the Commercial banks.
Banks provide short term loans to corporate in the form of cash
credit or in the form of overdraft. Cash credit is given to
industrialists and overdraft is given to businessmen.
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Capital Market Meaning of capital market
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We saw how companies and industries raise short-term funds
through the money market. But what if the funds that they require
are for a long term? This is where the Capital Market comes in.
Capital market is basically a market which helps a company in
raising long term funds. Capital markets perform the function of
providing a link between the savings/investors and the wealth
creators. The funds will be used for productive purposes and create
wealth in the economy in the long term. The important functions of
the capital markets is to provide ease of transactions for both the
investors and the companies. Both parties should be able to find each
other with ease and the legal aspect of things should go smoothly.
Now let us take a look at the two major types of capital markets.
There are two types of capital markets- primary and secondary.

Primary Market
The most important type of capital market is the primary market. It
is what we call the new issue market. It exclusively deals with the
issue of new securities, i.e. securities that are issued to investors for
the very first time. The main function of the primary market is
capital formation for the likes of companies, governments,
institutions etc. It helps investors invest their savings and extra
funds in companies starting new projects or enterprises looking to
expand their companies. The companies raise money in the primary
market through securities such as shares, debentures, loans and
deposits, preference shares etc.
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Secondary Market
After the primary market is the secondary capital market. This is
more commonly known as the stock market or the stock exchange.
Here the securities (shares, debentures, bonds, bills etc) are bought
and sold by the investors. The main point of difference between the
primary and the secondary market is that in the primary market only
new securities were issued, whereas in the secondary market the
trading is for already existing securities. There is no fresh issue in
the secondary market. The securities are traded in a highly
regularised and legalized market within strict rules and regulations.
This ensures that the investors can trade without the fear of being
cheated. In the last decade or so due to the advancement of
technology, the secondary capital market in India has seen a great
boom.
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Functions of Capital Market
 Helps in Capital formation
 Avenue provision of investment
 Accelerates economic growth and development
 Mobilization of savings
 Proper regulations of funds
 Service provision
 Continuous availability of funds
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Organizational structure of Capital Market

 Government Securities Market : This is also known as the Gilt-edged
market. This refers to the market for government and semi-government
securities backed by the Reserve Bank of India (RBI).
 Industrial Securities Market : This is a market for industrial securities i.e.
market for shares and debentures of the existing and new corporate firms.
Buying and selling of such instruments take place in this market. This market
is further classified into two types such as the New Issues Market (Primary)
and the Old (Existing) Issues Market (secondary). In primary market fresh
capital is raised by companies by issuing new shares, bonds, units of mutual
funds and debentures. However in the secondary market already existing i.e.
old shares and debentures are traded. This trading takes place through the
registered stock exchanges. In India we have three prominent stock exchanges.
They are the Bombay Stock Exchange (BSE), the National Stock Exchange
(NSE) and Over The Counter Exchange of India (OTCEI).
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 Development Financial Institutions (DFIs) : This is yet another
important segment of Indian capital market. This comprises
various financial institutions. These can be special purpose
institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These
financial institutions provide long term finance for those purposes
for which they are set up.
 Financial Intermediaries : The fourth important segment of the
Indian capital market is the financial intermediaries. This
comprises various merchant banking institutions, mutual funds,
leasing finance companies, venture capital companies and other
financial institutions.
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Instruments of capital market

Indian Debt Market
Debt market deals with those securities which yield fixed income
group . The debt market is any market situation where trading debt
instruments take place. Examples of debt instruments include
mortgages, promissory notes, bonds, and Certificates of Deposit.
A debt market establishes a structured environment where these
types of debt can be traded with ease between interested parties.
 It issues fixed income financial instruments of various types and
facilitates trading thereafter .
 Reduction in the borrowing cost of the Gov. and enable
mobilization of resources at a reasonable cost .
 Provide greater funding avenues to public sector and private
sectors projects and reduce the pressure on institutional financing.
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 Enhanced mobilization of resources by unlocking illiquid retail
investment like gold .
 Assist in the development of a reliable yield curve .
 The debt market often goes by other names, based on the types of
debt instruments that are traded .
 In the event that the market deals mainly with the trading of
corporate bond issues, the debt market may be known as a bond
market .
 If mortgages and notes are the main focus of the trading, the debt
market may be known as a credit market .
 When fixed rates are connected with the debt instruments, the
market may be known as a fixed income market .
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Features of Debt Market
 It is competitive in nature , as number of participants is large
 Strong and safe market , as government securities are traded
 Substantially low transaction cost relative to equity & money
market
 Volume of transaction is huge , relative to equity market
 Heterogeneous in nature , as a result of different types of
participants.
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Participants Involved –
Prominently Government , Primary dealers , Mutual Fund Firms ,
Provident Fund Houses , Foreign Institutional Investors ,
Commercial Banks , Insurance Companies and charitable Institutions
are the participants of debt market
Regulatory Bodies –
As debt market trade both government and corporate debt
instruments , we have following two regulators
RBI : It regulates and also facilitates the government bonds and
other securities on behalf of governments
SEBI : It regulates corporate bonds , both PSU (Public sector
undertaking) and private sector .
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Link with money market –
 For a strong debt market the prerequisite is a strong money market
 If debt is long term requirement , then money market serves as
short –term requirement
 For liquidity purpose also money market is needed along with debt
market
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Types of debt Instruments –
1) Government securities
2) Corporate bonds
3) Certificates of deposits
4) Commercial papers
Government Securities –
 It is the Reserve Bank of India that issues Government Securities
or G-Secs on behalf of the Government of India.
 These securities have a maturity period of 1 to 30 years. G-Secs
offer fixed interest rate, where interests are payable semi-annually.
 For shorter term, there are Treasury Bills or T-Bills, which are
issued by the RBI for 91 days, 182 days and 364 days
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Corporate Bonds –
 These bonds come from PSUs and private corporations and are offered
for an extensive range of tenures up to 15 years.
 Comparing to Government Securities , corporate bonds carry higher
risks, which depend upon the corporation, the industry where the
corporation is currently operating, the current market conditions, and
the rating of the corporation.
Certificate of Deposit –
 Certificate of Deposits (CDs), which usually offer higher returns than
Bank term deposits, are issued in Demat form
 Banks can offer CDs which have maturity between 7 days and 1 year.
 CDs from financial institutions have maturity between 1 and 3 years
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Commercial Papers -
 There are short term securities with maturity of 7 to 365 days.
Indian Equity Market
Equity market is a place where stocks and shares of companies are
traded. The equities that are traded in an equity market are either
over the counter or at stock exchanges. Often called as stock market
or share market, an equity market allows sellers and buyers to deal
in equity or shares in the same platform. Equity market, often called
as stock market or share market, is a place where shares of
companies or entities are traded. The market allows sellers and
buyers to deal in equity or shares in the same platform.
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In the global context, equities are traded either over the counter or at stock
exchanges. There are multiple buyers and sellers of the same equity/share.
Hence, you stand a good chance to strike a nice deal at the equity market.
If you want to begin online equity trading in India, you have to get a demat
account. Open a demat account in simple steps. Equities are mostly traded
on the stock exchanges in India. In the Indian stock market, equities are
available for trading at the National Stock Exchange (NSE) , the Bombay
Stock Exchange (BSE) and the latest entrant, Metropolitan Stock
Exchange of India (Equity share trading is roughly in two forms -
spot/cash market and futures market. These are the different types
of equity market in India. The spot market or cash market is a public
financial market in which stocks are traded for immediate delivery. The
futures market is a place where the shares' delivery is due at a later
date.MSE). Shares of stock market listed companies are bought/sold.
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Pros of Equity Market
 Great wealth creation: The biggest benefit of the equity market is
the opportunity to make huge profit. Many investors have
experienced big returns that can never be given by any other
financial investment.
 Enter and exit easily: In case of equity market, you can easily enter
and exit a stock. This should be compared to when you want to sell
a house, where you cannot sell it on your own will always.
 Lower taxes: When an equity is sold for profit after holding for
more than 1 year, the profit attracts 10% tax. In case of fixed
deposits, the tax rate is as per the individual's tax rate i.e up to
30%.
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Cons of Equity Market
• Lack of understanding: Can be costly if you do not properly do
research or invest in bad stocks, your chances of making losses are
high in a equity market live type situation. So, be careful.
 Equity market can be volatile: Equity investment return does not
move in a straight line. There are upswings and downswings in
the live equity market.
 There is risk of capital erosion: Equity share trading involves a
chance of capital erosion.
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Role of stock Exchange in India
A stock exchange or securities exchange is an open market where
trade in financial instruments like shares issued by companies,
bonds, derivatives, etc., takes place. It is an organization that
facilitates to trade in stocks and other securities for stock brokers.
The buying and selling of stocks take place through a stock
exchange, and it plays a key role to determine the economic
condition of a country. The Securities that are traded on a stock
exchange include stock issued by listed companies, unit trusts,
derivatives, pooled investment products and bonds. Stock
exchanges often function as "continuous auction" markets with
buyers and sellers conducting transactions at a central location such
as the floor of the exchange.
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 The Stock exchange acts as a continuous market for securities:
Investors can invest in any securities, but in case of any risk, they can
exit from that security and freshly reenter into whichever security they
feel as secure. In this way the stock markets provides opportunities in
ready and continuous form for securities, where investors and traders
and conduct buy and sell transactions in the stock market.
 Stock exchanges are responsible for Securities Evaluation:The stock
price is based on demand and supply in market. If a company performs
well, its stocks price automatically increases as more investors are likely
to invest and demand rises which affects stock price to rise. If a
company performs badly, its stocks price automatically decreases as
more investors are likely to sell and supply rises which affects stock
price to fall. Thus stock price indicates the performance and stability of
the company. Through these investors decide according to their risk
appetite whether to enter or exit or hold. The stock exchange acts as a
regulator for the securities price evaluation for all the listed stocks.
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 Stock exchanges Mobilizes savings: Most of the public cannot invest
the bulk amount in securities, so they invest in indirect ways such as
mutual funds and investment trusts, and these are mobilized by stock
exchanges.
 Stock Exchanges enables healthy speculation: Stock exchange
encourages businessmen and provides healthy speculation opportunities
to speculate and gain profits from fluctuations in stock prices. The stock
price is based on demand and supply. Due to the rules and regulations of
the artificial market, scarcity is prevented.
 Stock exchanges Mobilizes funds: Stock exchange encourages both
the companies and investors to sell or buy stocks and enables the
availability of funds. These actions strengthen the money market and
ensure short-term funds to available. Banks also provide funds in the
form of loans for dealings in the stock market.
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 Stock exchanges Protect investors: Stock exchange ensures the
protection of the funds of investors by allowing only genuine companies
to be listed in the stock exchange. The stock exchanges also control the
companies by its norms and conditions.
 Stock exchanges provide opportunity for Capital formation: Stock
exchange plays a key role in the capital formation for the listed
companies. When a company is extending or diversifying its needs to
raise more fund, exchanges make this very easy by issuing more
shares, bonds, etc through which they can issue more shares through
rights shares or bonus shares, and thus the capital gets generated which
promotes economic growth.
 Stock exchanges ensures Liquidity: Banks and some other
institutions like Life Insurance Corporation (LIC) invest their funds in the
stocks and earn a profit within a short period and are sold immediately if
there is any necessity of funds. Thus there is an opportunity to liquidate
immediately at any time if required in the stock market.
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 Stock exchanges act as an economic barometer: The country’s
economic growth is measured with the trends in the stock market. An
upward trend in the stock market denotes growth potential and
downward trend denotes the fall in the economy. Hence the stock
exchange is called as an economic barometer as it indicates conditions
prevailing in the country. Generally, a politically and economically strong
government follows an upward trend in the stock market, and unstable
government with huge borrowings follows a downward trend in the stock
market.
 Stock exchanges have a Control on companies: Every company
listed on an exchange must produce their annual reports and an audited
balance sheet to the stock exchange. It is open for all to go through, and
investors invest according to these reports, and they get to know how
the company has been performing. Thus stock exchanges have a
control on companies. Thus it stock exchanges ensure that only
genuine company’s shares are transacted in the market. Fraud
companies once identified will be blacklisted and will not be allowed to
raise their capital through exchanges.
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 Stock exchanges attracts foreign capital: Foreign institutional
investors (FII) are likely to invest in developing economy as the
rate of returns will be high in developing economies due to growth
opportunities. Thus stock exchanges help in attracting more
foreign funds which improves exchange rate of the currency, and
thus more trade is undertaken by the government.
 Stock exchanges manage Monetary and fiscal policies: The
monetary policy must be in favor of the businessmen and
producers, if it is not functioning then, suitable actions can be
taken by the government through stock market transactions.
 Stock exchanges ensure Safety of Capital and Fair Dealing:
The transactions made in the stock exchange are made available
to the public under well-defined rules and regulations abided by
laws. This ensures safety and fair dealings for the average
investors.
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 Stock exchanges ensure proper Channelization of
Capital: Stock exchanges ensure that the flow of savings is
directed into the most productive and profitable channels.
 Stock exchanges regulate company management: The
firms wanting to get their securities listed must follow certain
rules and fulfill certain conditions. Stock exchanges
safeguard the interest of the investors and regulate the
company management.
 Stock exchanges are the barometer of Business
Progress: The stock exchange functions as a barometer of
the business in our country. The boom and depression are
reflected by the market indices and varies as per the
securities. The changes are attributed after seeing the
market quotations.
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References and Sources
o https://economictimes.indiatimes.com/definition/money-market
o https://www.mbaknol.com/investment-management/features-and-
objectives-of-money-market/
o https://indianmoney.com/articles/functions-of-money-market
o https://www.economicsdiscussion.net/india/money-
market/money-market-instruments-in-india/31642
o http://egyankosh.ac.in/bitstream/123456789/13612/1/Unit-9.pdf
(Important)
o https://indianmoney.com/articles/role-of-government-and-rbi-in-
money-market
o https://www.bbalectures.com/role-of-central-bank-operation-in-
money-market/
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 https://www.civilservicegurukul.com/role-of-reserve-bank-of-
india-in-money-market/
 https://en.wikipedia.org/wiki/Money_market_in_India
 https://kalyan-city.blogspot.com/2010/09/structure-and-
components-of-indian.html
 https://www.toppr.com/guides/business-studies/financial-
markets/capital-market/
 https://eaglesinvestors.com/news/capital-markets-functions/
 https://kalyan-city.blogspot.com/2010/09/organizational-structure-
of-indian.html
 https://www.nirmalbang.com/knowledge-center/all-about-equity-
market.html
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THANKYOU
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Unit 2 financial market

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