Financial Market

2. Financial Markets
Session 1
Grade XII
Business Studies

3. Learning Objectives
• To understand the concept of a financial market
• To analyse the functions of financial market
• To understand the meaning of money market
• To know about the various money market instruments

4. IDEA SEEKS TO CAPITALISE ON MARKET MOMENTUM
• Idea Cellular, has decided to enter the capital market to raise between Rs.
1,700 and Rs. 2,000 crore.
• The company has appointed J.M. Morgan Stanley, Merrill Lynch among
other as book-runners for the proposed Initial Public Offer.
• Since, under SEBI norms, the minimum float size is 10 per cent, the
company will divest between 10 and 12 per cent.
• The last private placement made by the promoters is at a market
capitalisation of Rs. 15,000 crore.
• AV Birla Group recently divested 35 per cent stake in the company to a
clutch of private equity firms.
• However, this is a fresh issue of shares, where the proceeds will be
utilised by Ideal Cellular for capital expenditure.

5. CONCEPT OF FINANCIAL MARKET

6. CONCEPT OF FINANCIAL MARKET
•A financial market is a market for the creation and
exchange of financial assets. Financial markets exist
wherever a financial transaction occurs.
•Financial transactions could be in the form of
creation of financial assets such as the initial issue of
shares and debentures by a firm or the purchase and
sale of existing financial assets like equity shares,
debentures and bonds.

7. FUNCTIONS OF FINANCIAL MARKET
1.Mobilization of savings and channelising them into the most
productive uses:
• Facilitates transfer of savings from the savers to the investors.
• Financial markets help people to invest their savings in various
financial instruments and earn income and capital appreciation.
2. Facilitate Price Discovery:
• Price of anything depends upon the demand and supply factors.
• Demand and supply of financial assets and securities in financial
markets help in deciding the prices of various financial securities.

8. FUNCTIONS OF FINANCIAL MARKET
3. Provide liquidity to financial assets:
• Financial markets provide liquidity to financial instruments by
providing a ready market for the sale and purchase of financial assets.
• 4. Reduce the cost of transactions:
• By providing valuable information to buyers and sellers of financial
assets, it helps to saves time, effort and money that would have been
spent by them to find each other.
• Also investors can buy/sell securities through brokers who charge a
nominal commission for their services.

9. A trader from Wall Street

11. Money Market
• The money market is a market for short term funds which deals
in monetary assets whose period of maturity is upto one year.
• These assets are close substitutes for money.
• It is a market where low risk, unsecured and short term debt
instruments that are highly liquid are issued and actively traded
everyday.
• It has no physical location, but is an activity conducted over the
telephone and through the internet.
• The major participants are RBI, CBs, NBFCs, State Governments, Large
Corporate Houses and Mutual Funds.

12. Treasury Bills
They are issued by the RBI on behalf of the Government to meet its
short-term requirement of funds in the form of promissory notes.
They are issued at a price which is lower than their face value and are
repaid at par. The difference between the price at which the treasury
bills are issued and their redemption value is the interest receivable
on them and is called discount.
They are available for a minimum amount of Rs.25000 and in
multiples thereof.
They are also known as Zero Coupon Bonds.
They are negotiable instruments i.e. they are freely transferable.

13. Treasury Bills
• Treasury bills (T-bills) offer short-term investment opportunities,
generally up to one year. They are thus useful in managing short-term
liquidity. At present, the Government of India issues four types
of treasury bills, namely, 14-day, 91-day, 182-day and 364-day.

14. How do we invest in Government Bonds using NSE
goBid?
1. Register: Provide basic details (PAN, e-mail, mobile number,
demat account, broker details).
2. Place bid- Select T-Bill/Government bond available for
subscription. Make online payment.
3. Get the bonds directly in your demat account. The interest
from these bonds will be credited directly to your bank account.
NSE has also launched NSEgoBid mobile app to make
Government bond purchases even easier

15. Commercial Paper
It is a short term unsecured promissory note issued by large credit
worthy companies to raise short term funds at lower rates of interest
than market rates.
They are negotiable instruments transferable by endorsement and
delivery with a fixed maturity period of 15 days to one year.
It is issued by large and creditworthy companies to raise short-term
funds at lower rates of interest than market rates.

16. Bridge Financing
• Funds raised through commercial paper are used to meet the
floatation costs. This is known as Bridge Financing.
Floatation costs are costs associated with floating of an issue are
brokerage, commission, printing of applications and advertising etc.

17. Call Money
• It is short term finance repayable on demand, with a maturity
period of one day to 15 days, used for interbank transactions.
• Call Money is a method by which banks borrow from each other to
be able to maintain the cash reserve ratio as per RBI.
• The interest rate paid on call money loans is known as the call rate.
• It is a highly volatile rate that varies from day-to-day and sometimes
even from hour-to-hour,
• There is an inverse relationship between call rates and other short-
term money market instruments such as certificates of deposit and
commercial paper

18. Certificate of Deposit
❖They are unsecured, negotiable, short-term instruments in
bearer form, issued by commercial banks and development
financial institutions.
❖They can be issued to individuals, corporations and
companies during periods of tight liquidity when the
deposit growth of banks is slow but the demand for credit
is high.
❖They help to mobilise a large amount of money for short
periods.

19. Commercial Bill
• It is a bill of exchange.
• It is a short-term, negotiable, self-liquidating instrument used to finance
the credit sales of firms.
• When goods are sold on credit, the buyer becomes liable to pay on a due
date.
• The seller could wait till the date or make use of a bill of exchange.
• The seller (drawer) of the goods gives it to the buyer (drawee).
• Then it becomes a marketable instrument called a trade bill.
• They can be discounted with a bank if the seller needs funds before the
bill matures.
• It is called a commercial bill.

21. Review
• Explain the various money Market Instruments.
• “Money Market is essentially a Market for short term funds.” Discuss.
• What are the functions of a Financial Market?

22. Recapitulation
✓A financial market is a market for the creation and exchange of financial
assets.
✓It helps in mobilisation and channelising the savings into most productive
uses.
✓Financial markets also helps in price discovery and provide liquidity to
financial assets.
✓Financial markets are classified into money market and capital market.
✓Money Market is a market for short-term funds. It deals in monetary
assets whose period of maturity is less than one year.
✓The instruments of money market includes treasury bills, commercial
paper, call money, Certificate of deposit and commercial bills.