1. Financial Markets: It is a market for the creation and exchange of financial assets.
2. Classification of Financial Markets:
• Money Market: It is a market for short-term funds which deals in monetary assets with a
period of maturity upto one year.
• Capital Market: It refers to institutional arrangement through which medium and long-term funds are raised and invested.
3. Functions of Financial Markets:
• Mobilisation of savings and channelising them into the most productive uses.
• Facilitate price discovery.
• Provide liquidity to financial assets.
Reduce the cost of transactions.
4. Instruments of Money Market:
• Treasury Bill (T-bills): It is basically an instrument of short-term borrowing by the
Government of India maturing in less than one year. They are also known as Zero coupon
• Commercial Paper: It is a short-term unsecured promissory notes, negotiable and
transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It has a maturity period of 15 days to one year.
• Call Money: It is a short-term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. It is a method by which banks borrow from each other to able to maintain the cash reserve ratio.
• Certificate of Deposit (CD): It is a unsecured, negotiable short-term instruments in bearer form, issued by commercial banks and development financial institutions. It can be issued to individuals, corporations and companies.
• Commercial Bill (Trade Bill): It is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms. The bill can be discounted with a bank it the seller (drawer) needs funds before the bill maturity.
5. Type of Capital Market:
• Primary Market: It is also known as the new issues market. It deals with new securities being issued for the first time. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits.
• Secondary Market: It is also known as stock market or stock exchange or second-hand
market. It is a market for the purchase and sale of existing securities.
6. Methods of Floatation:
• Public issue through prospectus.
• Offer for sale.
• Private placement.
• Rights issue (for existing companies).
7. Stock Exchange: The stock exchange is a market in which existing securities are bought and sold.
The Securities Contract (Regulation) Act, 1956 defines "A Stock Exchange as an association, organisation, body of individuals, whether incorporated or not, established for the purpose of assisting, regulation and controlling of business in buying, selling and dealing in securities."
8. Function of Stock Exchange:
• Providing liquidity and marketability to existing securities.
• Pricing of securities.
• Safety of transactions.
• Contributes to economic growth.
• Spreading of equity cult.
• Providing scope for speculation.
9. Trading Procedure: The procedure for purchase and sale of securities in a stock exchange involves the following steps:
• Selection of broker.
• Opening of demat account.
• Placing the order.
• Executing the order.
10. Functions of SEBI:
A. Protective Functions:
(i) SEBI prohibits fraudulent and unfair trade practices in the securities market such as:
(a) Price Rigging: Marking manipulations with the sole objective of inflating or depressing the market price of securities.
(b) Misleading Statement:
(i) SEBI prohibits misleading statements which are likely to induce the sale or purchase of securities.
(ii) SEBI prohibits insider trading. An insider is a person connected with the company who is reasonably expected to have access to price sensitive information in respect of securities to the company is called insider trading.
(iii) SEBI undertake steps to educate investors through investors, camps.
(iv) SEBI promotes fair practice and code of conduct in securities market.
B. Development Functions:
(i) SEBI promotes training of intermediaries of the securities market such as brokers, subbrokers etc.
(ii) SEBI conduct research and publish useful information.
(iii) SEBI undertakes measures to develop the capital markets by adapting a flexible approach.
C. Regulatory Functions:
(i) SEBI registers and regulates the working of mutual funds.
(ii) SEBI regulates takeover bids by companies.
(iii) SEBI conducts inquires and audit of the stock exchange.
(iv) SEBI registers and regulates the working of stock brokers, sub-brokers, brokers to an
issue, share transfer agent and such other intermediaries in the stock market.
(v) SEBI regulates portfolio exchanges, underwriters and merchant bankers and the
business in stock exchanges and any other securities market.
(vi) SEBI levies fee or other charges for carrying out the purposes of the Act.
Identifying the Concepts
Concepts Key Words/Phrases
• Primary Market New issue market.
• Secondary Market Market for existing securities.
• Commercial Paper Bridge financing.
• Dematerialisation Holding securities in electronic form.
• Depository Institution holding securities in electronic form.
• Money Market Market for short-term funds.
• Capital Market Market for long-term funds.
• Treasury Bill Zero coupon bonds.
• Depository Participants Contact points with investors.