NCERT Textbook - Financial Market Commerce Notes | EduRev

Business Studies (BST) Class 12

Created by: Nipuns Institute

Commerce : NCERT Textbook - Financial Market Commerce Notes | EduRev

 Page 1


CHAPTER
10
F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKETS ARKETS ARKETS ARKETS ARKETS
I I I I IDEA DEA DEA DEA DEA     SEEKS SEEKS SEEKS SEEKS SEEKS     TO TO TO TO TO C C C C CAPITALISE APITALISE APITALISE APITALISE APITALISE     ON ON ON ON ON
M M M M MARKET ARKET ARKET ARKET ARKET M M M M MOMENTUM OMENTUM OMENTUM OMENTUM OMENTUM
With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
raise funds to fuel their expansion
plan. Idea Cellular, the fifth largest
operator in the country and the
flagship telecom venture of AV Birla
Group, 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 (IPO),
which is expected to be ready by
January end.
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. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” 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. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com
LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES
After studying this chapter, you
should be able to:
Ø explain the meaning of
Financial Market;
Ø explain the meaning of Money
Market and describe its major
Instruments;
Ø explain the nature and types of
Capital Market;
Ø distinguish between Money
Market and Capital Market;
Ø explain the meaning and
functions of Stock Exchange;
Ø describe the functioning of NSEI
and OTCEI; and
Ø describe the role of SEBI in
investor protection.
2015-16(21/01/2015)
Page 2


CHAPTER
10
F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKETS ARKETS ARKETS ARKETS ARKETS
I I I I IDEA DEA DEA DEA DEA     SEEKS SEEKS SEEKS SEEKS SEEKS     TO TO TO TO TO C C C C CAPITALISE APITALISE APITALISE APITALISE APITALISE     ON ON ON ON ON
M M M M MARKET ARKET ARKET ARKET ARKET M M M M MOMENTUM OMENTUM OMENTUM OMENTUM OMENTUM
With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
raise funds to fuel their expansion
plan. Idea Cellular, the fifth largest
operator in the country and the
flagship telecom venture of AV Birla
Group, 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 (IPO),
which is expected to be ready by
January end.
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. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” 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. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com
LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES
After studying this chapter, you
should be able to:
Ø explain the meaning of
Financial Market;
Ø explain the meaning of Money
Market and describe its major
Instruments;
Ø explain the nature and types of
Capital Market;
Ø distinguish between Money
Market and Capital Market;
Ø explain the meaning and
functions of Stock Exchange;
Ø describe the functioning of NSEI
and OTCEI; and
Ø describe the role of SEBI in
investor protection.
2015-16(21/01/2015)
BUSINESS STUDIES
268
I I I I INTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION
You all know that a business needs
finance from the time an entrepreneur
makes the decision to start it. It needs
finance both for working capital
requirements such as payments for
raw materials and salaries to its
employees, and fixed capital
expenditure such as the purchase of
machinery or building or to expand its
production capacity. The above
example gives a fair picture of how
companies need to raise funds from the
capital markets. Idea Cellular decided
to enter the Indian capital market for
its needs of expansion. In this chapter
you will study concepts like private
placement, Initial public Offer (IPO) and
capital markets which you come across
in the example of Idea Cellular.
Business can raise these funds from
various sources and in different ways
through financial markets. This
chapter provides a brief description of
the mechanism through which finances
are mobilised by a business organisation
for both short term and long term
requirements. It also explains the
institutional structure and the regulatory
measures for different financial markets.
C C C C CONCEPT ONCEPT ONCEPT ONCEPT ONCEPT     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
A business is a part of an economic
system that consists of two main
sectors – households which save funds
and business firms which invest these
funds. A financial market helps to link
the savers and the investors by
mobilizing funds between them. In
doing so it performs what is known as
an allocative function. It allocates or
directs funds available for investment
into their most productive investment
opportunity. When the allocative
function is performed well, two
consequences follow:
• The rate of return offered to
households would be higher
• Scarce resources are allocated to
those firms which have the highest
productivity for the economy.
There are two major alternative
mechanisms through which allocation
of funds can be done: via banks or
via financial markets. Households can
deposit their surplus funds with
banks, who in turn could lend these
funds to business firms. Alternately,
households can buy the shares and
debentures offered by a business
using financial markets. The process
by which allocation of funds is done
is called financial intermediation.
Banks and financial markets are
competing intermediaries in the
financial system, and give households
a choice of where they want to place
their savings.
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS
BANKS
 FINANCIAL MARKETS
2015-16(21/01/2015)
Page 3


CHAPTER
10
F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKETS ARKETS ARKETS ARKETS ARKETS
I I I I IDEA DEA DEA DEA DEA     SEEKS SEEKS SEEKS SEEKS SEEKS     TO TO TO TO TO C C C C CAPITALISE APITALISE APITALISE APITALISE APITALISE     ON ON ON ON ON
M M M M MARKET ARKET ARKET ARKET ARKET M M M M MOMENTUM OMENTUM OMENTUM OMENTUM OMENTUM
With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
raise funds to fuel their expansion
plan. Idea Cellular, the fifth largest
operator in the country and the
flagship telecom venture of AV Birla
Group, 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 (IPO),
which is expected to be ready by
January end.
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. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” 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. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com
LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES
After studying this chapter, you
should be able to:
Ø explain the meaning of
Financial Market;
Ø explain the meaning of Money
Market and describe its major
Instruments;
Ø explain the nature and types of
Capital Market;
Ø distinguish between Money
Market and Capital Market;
Ø explain the meaning and
functions of Stock Exchange;
Ø describe the functioning of NSEI
and OTCEI; and
Ø describe the role of SEBI in
investor protection.
2015-16(21/01/2015)
BUSINESS STUDIES
268
I I I I INTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION
You all know that a business needs
finance from the time an entrepreneur
makes the decision to start it. It needs
finance both for working capital
requirements such as payments for
raw materials and salaries to its
employees, and fixed capital
expenditure such as the purchase of
machinery or building or to expand its
production capacity. The above
example gives a fair picture of how
companies need to raise funds from the
capital markets. Idea Cellular decided
to enter the Indian capital market for
its needs of expansion. In this chapter
you will study concepts like private
placement, Initial public Offer (IPO) and
capital markets which you come across
in the example of Idea Cellular.
Business can raise these funds from
various sources and in different ways
through financial markets. This
chapter provides a brief description of
the mechanism through which finances
are mobilised by a business organisation
for both short term and long term
requirements. It also explains the
institutional structure and the regulatory
measures for different financial markets.
C C C C CONCEPT ONCEPT ONCEPT ONCEPT ONCEPT     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
A business is a part of an economic
system that consists of two main
sectors – households which save funds
and business firms which invest these
funds. A financial market helps to link
the savers and the investors by
mobilizing funds between them. In
doing so it performs what is known as
an allocative function. It allocates or
directs funds available for investment
into their most productive investment
opportunity. When the allocative
function is performed well, two
consequences follow:
• The rate of return offered to
households would be higher
• Scarce resources are allocated to
those firms which have the highest
productivity for the economy.
There are two major alternative
mechanisms through which allocation
of funds can be done: via banks or
via financial markets. Households can
deposit their surplus funds with
banks, who in turn could lend these
funds to business firms. Alternately,
households can buy the shares and
debentures offered by a business
using financial markets. The process
by which allocation of funds is done
is called financial intermediation.
Banks and financial markets are
competing intermediaries in the
financial system, and give households
a choice of where they want to place
their savings.
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS
BANKS
 FINANCIAL MARKETS
2015-16(21/01/2015)
FINANCIAL MARKET
269
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.
F F F F FUNCTIONS UNCTIONS UNCTIONS UNCTIONS UNCTIONS     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
Financial markets play an important
role in the allocation of scarce
resources in an economy by performing
the following four important functions.
facilitates the transfer of savings from
savers to investors. It gives savers the
choice of different investments and thus
helps to channelise surplus funds into
the most productive use.
2. 2. 2. 2. 2. Facilitat Facilitat Facilitat Facilitat Facilitating ing ing ing ing Price Discovery: Price Discovery: Price Discovery: Price Discovery: Price Discovery: You
all know that the forces of demand and
supply help to establish a price for a
commodity or service in the market. In
the financial market, the households are
suppliers of funds and business firms
represent the demand. The interaction
between them helps to establish a price
for the financial asset which is being
traded in that particular market.
A financial market is a market for
the creation and exchange of financial
assets. Financial markets exist
Financial System
1. 1. 1. 1. 1. Mobili Mobili Mobili Mobili Mobilis s s s sation of ation of ation of ation of ation of S S S S Savings and avings and avings and avings and avings and
C C C C Channeling them into the most hanneling them into the most hanneling them into the most hanneling them into the most hanneling them into the most
P P P P Productive roductive roductive roductive roductive U U U U Uses: ses: ses: ses: ses: A financial market
2015-16(21/01/2015)
Page 4


CHAPTER
10
F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKETS ARKETS ARKETS ARKETS ARKETS
I I I I IDEA DEA DEA DEA DEA     SEEKS SEEKS SEEKS SEEKS SEEKS     TO TO TO TO TO C C C C CAPITALISE APITALISE APITALISE APITALISE APITALISE     ON ON ON ON ON
M M M M MARKET ARKET ARKET ARKET ARKET M M M M MOMENTUM OMENTUM OMENTUM OMENTUM OMENTUM
With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
raise funds to fuel their expansion
plan. Idea Cellular, the fifth largest
operator in the country and the
flagship telecom venture of AV Birla
Group, 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 (IPO),
which is expected to be ready by
January end.
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. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” 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. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com
LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES
After studying this chapter, you
should be able to:
Ø explain the meaning of
Financial Market;
Ø explain the meaning of Money
Market and describe its major
Instruments;
Ø explain the nature and types of
Capital Market;
Ø distinguish between Money
Market and Capital Market;
Ø explain the meaning and
functions of Stock Exchange;
Ø describe the functioning of NSEI
and OTCEI; and
Ø describe the role of SEBI in
investor protection.
2015-16(21/01/2015)
BUSINESS STUDIES
268
I I I I INTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION
You all know that a business needs
finance from the time an entrepreneur
makes the decision to start it. It needs
finance both for working capital
requirements such as payments for
raw materials and salaries to its
employees, and fixed capital
expenditure such as the purchase of
machinery or building or to expand its
production capacity. The above
example gives a fair picture of how
companies need to raise funds from the
capital markets. Idea Cellular decided
to enter the Indian capital market for
its needs of expansion. In this chapter
you will study concepts like private
placement, Initial public Offer (IPO) and
capital markets which you come across
in the example of Idea Cellular.
Business can raise these funds from
various sources and in different ways
through financial markets. This
chapter provides a brief description of
the mechanism through which finances
are mobilised by a business organisation
for both short term and long term
requirements. It also explains the
institutional structure and the regulatory
measures for different financial markets.
C C C C CONCEPT ONCEPT ONCEPT ONCEPT ONCEPT     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
A business is a part of an economic
system that consists of two main
sectors – households which save funds
and business firms which invest these
funds. A financial market helps to link
the savers and the investors by
mobilizing funds between them. In
doing so it performs what is known as
an allocative function. It allocates or
directs funds available for investment
into their most productive investment
opportunity. When the allocative
function is performed well, two
consequences follow:
• The rate of return offered to
households would be higher
• Scarce resources are allocated to
those firms which have the highest
productivity for the economy.
There are two major alternative
mechanisms through which allocation
of funds can be done: via banks or
via financial markets. Households can
deposit their surplus funds with
banks, who in turn could lend these
funds to business firms. Alternately,
households can buy the shares and
debentures offered by a business
using financial markets. The process
by which allocation of funds is done
is called financial intermediation.
Banks and financial markets are
competing intermediaries in the
financial system, and give households
a choice of where they want to place
their savings.
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS
BANKS
 FINANCIAL MARKETS
2015-16(21/01/2015)
FINANCIAL MARKET
269
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.
F F F F FUNCTIONS UNCTIONS UNCTIONS UNCTIONS UNCTIONS     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
Financial markets play an important
role in the allocation of scarce
resources in an economy by performing
the following four important functions.
facilitates the transfer of savings from
savers to investors. It gives savers the
choice of different investments and thus
helps to channelise surplus funds into
the most productive use.
2. 2. 2. 2. 2. Facilitat Facilitat Facilitat Facilitat Facilitating ing ing ing ing Price Discovery: Price Discovery: Price Discovery: Price Discovery: Price Discovery: You
all know that the forces of demand and
supply help to establish a price for a
commodity or service in the market. In
the financial market, the households are
suppliers of funds and business firms
represent the demand. The interaction
between them helps to establish a price
for the financial asset which is being
traded in that particular market.
A financial market is a market for
the creation and exchange of financial
assets. Financial markets exist
Financial System
1. 1. 1. 1. 1. Mobili Mobili Mobili Mobili Mobilis s s s sation of ation of ation of ation of ation of S S S S Savings and avings and avings and avings and avings and
C C C C Channeling them into the most hanneling them into the most hanneling them into the most hanneling them into the most hanneling them into the most
P P P P Productive roductive roductive roductive roductive U U U U Uses: ses: ses: ses: ses: A financial market
2015-16(21/01/2015)
BUSINESS STUDIES
270
3. 3. 3. 3. 3. Provid Provid Provid Provid Providing ing ing ing ing Liquidity to Financial Liquidity to Financial Liquidity to Financial Liquidity to Financial Liquidity to Financial
Assets: Assets: Assets: Assets: Assets: Financial markets facilitate easy
purchase and sale of financial assets.
In doing so they provide liquidity to
financial assets, so that they can be
easily converted into cash whenever
required. Holders of assets can readily
sell their financial assets through the
mechanism of the financial market.
4.Reduc 4.Reduc 4.Reduc 4.Reduc 4.Reducing ing ing ing ing the Cost of Transactions: the Cost of Transactions: the Cost of Transactions: the Cost of Transactions: the Cost of Transactions:
Financial markets provide valuable
information about securities being
traded in the market. It helps to save
time, effort and money that both
buyers and sellers of a financial asset
would have to otherwise spend to try
and find each other. The financial
market is thus, a common platform
where buyers and sellers can meet for
fulfillment of their individual needs.
Financial markets are classified on
the basis of the maturity of financial
instruments traded in them.
Instruments with a maturity of less
than one year are traded in the money
market. Instruments with longer
maturity are traded in the capital
market.
M M M M MONEY ONEY ONEY ONEY ONEY M M M M MARKET ARKET ARKET ARKET ARKET
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. It enables the
raising of short-term funds for meeting
the temporary shortages of cash and
obligations and the temporary
deployment of excess funds for earning
returns. The major participants in the
market are the Reserve Bank of India
Classification of Financial Markets Classification of Financial Markets Classification of Financial Markets Classification of Financial Markets Classification of Financial Markets
FINANCIAL MARKET
MONEY MARKET CAPITAL MARKET
 Primary market Secondary Market
Debt Equity Debt Equity
2015-16(21/01/2015)
Page 5


CHAPTER
10
F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKETS ARKETS ARKETS ARKETS ARKETS
I I I I IDEA DEA DEA DEA DEA     SEEKS SEEKS SEEKS SEEKS SEEKS     TO TO TO TO TO C C C C CAPITALISE APITALISE APITALISE APITALISE APITALISE     ON ON ON ON ON
M M M M MARKET ARKET ARKET ARKET ARKET M M M M MOMENTUM OMENTUM OMENTUM OMENTUM OMENTUM
With the explosive growth of their
subscriber base, telecom companies
are all looking at capital markets to
raise funds to fuel their expansion
plan. Idea Cellular, the fifth largest
operator in the country and the
flagship telecom venture of AV Birla
Group, 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 (IPO),
which is expected to be ready by
January end.
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. The proposed float
is expected to be at 10 to 20 per cent
premium of the private placement
price,” 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. After the proposed
issues, the promoters stake will come
down to around 58 per cent.
Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com Source: www.hindustantimes.com
LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES LEARNING OBJECTIVES
After studying this chapter, you
should be able to:
Ø explain the meaning of
Financial Market;
Ø explain the meaning of Money
Market and describe its major
Instruments;
Ø explain the nature and types of
Capital Market;
Ø distinguish between Money
Market and Capital Market;
Ø explain the meaning and
functions of Stock Exchange;
Ø describe the functioning of NSEI
and OTCEI; and
Ø describe the role of SEBI in
investor protection.
2015-16(21/01/2015)
BUSINESS STUDIES
268
I I I I INTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION
You all know that a business needs
finance from the time an entrepreneur
makes the decision to start it. It needs
finance both for working capital
requirements such as payments for
raw materials and salaries to its
employees, and fixed capital
expenditure such as the purchase of
machinery or building or to expand its
production capacity. The above
example gives a fair picture of how
companies need to raise funds from the
capital markets. Idea Cellular decided
to enter the Indian capital market for
its needs of expansion. In this chapter
you will study concepts like private
placement, Initial public Offer (IPO) and
capital markets which you come across
in the example of Idea Cellular.
Business can raise these funds from
various sources and in different ways
through financial markets. This
chapter provides a brief description of
the mechanism through which finances
are mobilised by a business organisation
for both short term and long term
requirements. It also explains the
institutional structure and the regulatory
measures for different financial markets.
C C C C CONCEPT ONCEPT ONCEPT ONCEPT ONCEPT     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
A business is a part of an economic
system that consists of two main
sectors – households which save funds
and business firms which invest these
funds. A financial market helps to link
the savers and the investors by
mobilizing funds between them. In
doing so it performs what is known as
an allocative function. It allocates or
directs funds available for investment
into their most productive investment
opportunity. When the allocative
function is performed well, two
consequences follow:
• The rate of return offered to
households would be higher
• Scarce resources are allocated to
those firms which have the highest
productivity for the economy.
There are two major alternative
mechanisms through which allocation
of funds can be done: via banks or
via financial markets. Households can
deposit their surplus funds with
banks, who in turn could lend these
funds to business firms. Alternately,
households can buy the shares and
debentures offered by a business
using financial markets. The process
by which allocation of funds is done
is called financial intermediation.
Banks and financial markets are
competing intermediaries in the
financial system, and give households
a choice of where they want to place
their savings.
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS
BANKS
 FINANCIAL MARKETS
2015-16(21/01/2015)
FINANCIAL MARKET
269
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.
F F F F FUNCTIONS UNCTIONS UNCTIONS UNCTIONS UNCTIONS     OF OF OF OF OF F F F F FINANCIAL INANCIAL INANCIAL INANCIAL INANCIAL M M M M MARKET ARKET ARKET ARKET ARKET
Financial markets play an important
role in the allocation of scarce
resources in an economy by performing
the following four important functions.
facilitates the transfer of savings from
savers to investors. It gives savers the
choice of different investments and thus
helps to channelise surplus funds into
the most productive use.
2. 2. 2. 2. 2. Facilitat Facilitat Facilitat Facilitat Facilitating ing ing ing ing Price Discovery: Price Discovery: Price Discovery: Price Discovery: Price Discovery: You
all know that the forces of demand and
supply help to establish a price for a
commodity or service in the market. In
the financial market, the households are
suppliers of funds and business firms
represent the demand. The interaction
between them helps to establish a price
for the financial asset which is being
traded in that particular market.
A financial market is a market for
the creation and exchange of financial
assets. Financial markets exist
Financial System
1. 1. 1. 1. 1. Mobili Mobili Mobili Mobili Mobilis s s s sation of ation of ation of ation of ation of S S S S Savings and avings and avings and avings and avings and
C C C C Channeling them into the most hanneling them into the most hanneling them into the most hanneling them into the most hanneling them into the most
P P P P Productive roductive roductive roductive roductive U U U U Uses: ses: ses: ses: ses: A financial market
2015-16(21/01/2015)
BUSINESS STUDIES
270
3. 3. 3. 3. 3. Provid Provid Provid Provid Providing ing ing ing ing Liquidity to Financial Liquidity to Financial Liquidity to Financial Liquidity to Financial Liquidity to Financial
Assets: Assets: Assets: Assets: Assets: Financial markets facilitate easy
purchase and sale of financial assets.
In doing so they provide liquidity to
financial assets, so that they can be
easily converted into cash whenever
required. Holders of assets can readily
sell their financial assets through the
mechanism of the financial market.
4.Reduc 4.Reduc 4.Reduc 4.Reduc 4.Reducing ing ing ing ing the Cost of Transactions: the Cost of Transactions: the Cost of Transactions: the Cost of Transactions: the Cost of Transactions:
Financial markets provide valuable
information about securities being
traded in the market. It helps to save
time, effort and money that both
buyers and sellers of a financial asset
would have to otherwise spend to try
and find each other. The financial
market is thus, a common platform
where buyers and sellers can meet for
fulfillment of their individual needs.
Financial markets are classified on
the basis of the maturity of financial
instruments traded in them.
Instruments with a maturity of less
than one year are traded in the money
market. Instruments with longer
maturity are traded in the capital
market.
M M M M MONEY ONEY ONEY ONEY ONEY M M M M MARKET ARKET ARKET ARKET ARKET
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. It enables the
raising of short-term funds for meeting
the temporary shortages of cash and
obligations and the temporary
deployment of excess funds for earning
returns. The major participants in the
market are the Reserve Bank of India
Classification of Financial Markets Classification of Financial Markets Classification of Financial Markets Classification of Financial Markets Classification of Financial Markets
FINANCIAL MARKET
MONEY MARKET CAPITAL MARKET
 Primary market Secondary Market
Debt Equity Debt Equity
2015-16(21/01/2015)
FINANCIAL MARKET
271
(RBI), Commercial Banks, Non-
Banking Finance Companies, State
Governments, Large Corporate Houses
and Mutual Funds.
M M M M MONEY ONEY ONEY ONEY ONEY M M M M MARKET ARKET ARKET ARKET ARKET I I I I INSTRUMENTS NSTRUMENTS NSTRUMENTS NSTRUMENTS NSTRUMENTS
1 1 1 1 1. . . . . Treasury Bill: Treasury Bill: Treasury Bill: Treasury Bill: Treasury Bill: A Treasury bill 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 Bonds
issued by the Reserve Bank of India on
behalf of the Central Government to
meet its short-term requirement of
funds. Treasury bills are issued in the
form of a promissory note. They are
highly liquid and have assured yield
and negligible risk of default. They are
issued at a price which is lower than
their face value and 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. Treasury bills are available
for a minimum amount of Rs 25,000
and in multiples thereof.
Example: Suppose an investor
purchases a 91 days Treasury bill with
a face value of Rs. 1,00,000 for
Rs. 96,000. By holding the bill until the
maturity date, the investor receives
Rs. 1,00,000. The difference of
Rs. 4,000 between the proceeds
received at maturity and the amount
paid to purchase the bill represents the
interest received by him.
2. Commercial Paper: 2. Commercial Paper: 2. Commercial Paper: 2. Commercial Paper: 2. Commercial Paper: Commercial
paper is a short-term unsecured
promissory note, 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 usually has a maturity period of 15
days to one year. The issuance of
commercial paper is an alternative to
bank borrowing for large companies
that are generally considered to be
financially strong. It is sold at a discount
and redeemed at par. The original
purpose of commercial paper was to
provide short-terms funds for seasonal
and working capital needs. For example
companies use this instrument for
purposes such as bridge financing.
Example: Suppose a company needs
long-term finance to buy some
machinery. In order to raise the long
term funds in the capital market the
company will have to incur floatation
costs (costs associated with floating of
an issue are brokerage, commission,
printing of applications and advertising
etc.). Funds raised through commercial
paper are used to meet the floatation
costs. This is known as Bridge Financing.
3. 3. 3. 3. 3. Call Money: Call Money: Call Money: Call Money: Call Money: Call money is short
term finance repayable on demand, with
a maturity period of one day to fifteen
days, used for inter-bank transactions.
Commercial banks have to maintain a
minimum cash balance known as cash
reserve ratio. The Reserve Bank of India
changes the cash reserve ratio from time
to time which in turn affects the amount
of funds available to be given as loans
by commercial banks. Call money is a
method by which banks borrow from
each other to be able to maintain the
2015-16(21/01/2015)
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