FINANCIAL MARKETS AND OPERATIONS

FINANCIAL MARKETS are places or system where people buy and sell financial products like stocks,
bonds, commodities, and currencies. These markets help businesses and governments raise money,
allow investors to buy and sell investments, and provide a way to manage risks.

Features of Financial Markets:

1. Liquidity: Financial markets allow people to easily buy and sell things like stocks and bonds,
turning them into cash when needed.

2. Price Discovery: Markets help determine the price of assets through the interaction of
supply and demand. The price of securities, commodities, and other financial instruments is
determined by market participants.

3. Transparency: Markets give everyone access to information, so people can make smart
choices when buying or selling.

4. Risk Sharing: They help spread out the financial risks. Instead of one person facing a huge
risk, many people share it.

5. Capital Formation: Businesses can raise money in financial markets to grow, and investors
can get a chance to invest in those businesses.

6. Market Segments: There are different parts of the market, like those for short-term or long-
term investments, or ones that deal with things like insurance or future contracts.

7. Regulation: There are rules to make sure the market works fairly and that everyone is
following the same guidelines.

Importance of Financial Markets:

1. Economic Growth: Financial markets help the economy grow by letting businesses get
money to expand and create jobs.

2. Efficient Use of Resources: They help make sure money goes to the best places, like
businesses or projects that need it the most.

3. Wealth Creation: People can invest in stocks, bonds, or other things to earn money and build
wealth over time.

4. Facilitate Investment and Savings: Financial markets give people different ways to invest
their money, whether they want to take risks or prefer something safer.

5. Hedging Risks: Markets allow businesses and investors to protect themselves from risks like
price changes, so they don't lose too much money.

6. Improved Liquidity: Financial markets make it easier to turn assets (like stocks or property)
into cash quickly.

7. Global Trade: They make it easier to do business between countries by providing ways to
exchange money and invest globally.

8. Monetary Policy: Governments and central banks use these markets to control things like
inflation and interest rates to keep the economy stable.
TYPES OF FINANCIAL MARKETS

There are four main types of markets in the financial world:

1. Capital Markets: These markets involve the buying and selling of long-term debt (bonds)
and equity (stocks). Capital markets are essential for raising capital for companies and
governments. They are divided into:

Primary markets (where new securities are issued)

Secondary markets (where existing securities are traded)

2.Money Markets: These are short-term financial markets where instruments with high
liquidity and short maturities (typically less than a year) are traded, such as treasury bills,
certificates of deposit, and repurchase agreements. They provide a way for governments,
financial institutions, and corporations to manage short-term funding needs.

3. Foreign Exchange Markets (Forex): This market deals with the trading of currencies. It's
the largest financial market in the world, where different currencies are bought and sold, and
exchange rates are determined.

4.Derivatives Markets: These markets involve financial instruments that derive their value
from an underlying asset, such as stocks, bonds, commodities, or interest rates. Common
derivatives include options, futures, and swaps. These markets are used for hedging risk or
for speculative purposes.

5. Commodity Markets: Trading of raw materials (oil, gold, agricultural products). Traded
via spot contracts or derivatives.

6. Real Estate Markets:Buying and selling of properties (residential, commercial). Includes

REITs for indirect property investment.

7. Private Equity & Venture Capital Markets:Investments in private companies/startups.

High risk but potential for high returns.

8. Cryptocurrency Markets: Trading of digital currencies (Bitcoin, Ethereum). Operates

24/7, highly volatile.

INSTRUMENTS OF MONEY MARKETS

Money markets are financial markets where short-term borrowing and lending occur, usually with
maturities of one year or less. They deal with highly liquid, low-risk instruments that help businesses,
governments, and financial institutions manage short-term funding needs.

1. Treasury Bills (T-Bills): Short-term government securities issued by the Reserve Bank of India (RBI)
on behalf of the Government of India. These bills are issued to meet short-term funding
requirements of the government. Investors buy T-bills at a discount and receive the full face value at
maturity. Example in India: 91-day, 182-day, and 364-day Treasury Bills.
2. Certificate of Deposit (CD): A fixed deposit that banks sell to raise money for a short time (usually
up to 1 year). You deposit money with the bank and earn interest, but you cannot take it out until the
fixed time ends. Example: CDs issued by banks like HDFC, ICICI, etc.

3. Commercial Paper (CP): Short-term loans that companies take from investors to get money quickly
(usually for up to 1 year). Companies sell these papers at a discount and pay the full value when it’s
due. Example: Big companies like Reliance or Tata might use CPs to raise funds.

4. Repurchase Agreements (Repos): A deal where one party sells something (usually government
bonds) and promises to buy it back at a higher price after a short period (usually overnight).Banks
use repos to borrow money from other banks or institutions using their bonds as security.Example:
Indian banks use repos to manage their money day-to-day.

5. Call Money: A very short-term loan (usually just for 1 day) between banks. Banks borrow money
from each other to meet their immediate needs. Example: The Call Money Market is where Indian
banks lend to each other overnight.

6. Bankers' Acceptances (BA): A promise by a bank to pay for goods or services in the future. It is
commonly used in international trade, ensuring that payment will be made for goods or services.
Example: Used by companies involved in import and export.

7. Commercial Bills: Short-term loans given to businesses to help with daily expenses. Businesses sell
these bills to get cash quickly and repay later. Example: Large companies like Hindustan Unilever
may use commercial bills.

8. Money Market Mutual Funds (MMFs): A type of investment fund where your money is pooled
with others and invested in short-term money market instruments. You invest in these funds to earn
a return while keeping your money safe and liquid (easy to access). Example: Funds like HDFC Cash
Management Fund or ICICI Prudential Money Market Fund.

1. BSE (Bombay Stock Exchange):

The BSE is one of the oldest stock exchanges in India, established in 1875 in Mumbai. It's a place
where people can buy and sell shares of companies listed in India. The BSE is well-known for its
Sensex (Sensitive Index), which tracks the performance of 30 of the largest companies listed on the
exchange.

Key Features:

o Founded: 1875 (oldest stock exchange in India).

o Based in: Mumbai, India.

o Index: Sensex.

o Number of listed companies: Over 5,000 companies.

2. NSE (National Stock Exchange):

The NSE is a more modern stock exchange, founded in 1992. It is known for its electronic trading
system and is one of the largest stock exchanges in India. The NSE is famous for its Nifty 50 index,
which tracks the performance of 50 top companies in India.

Key Features:
 o Founded: 1992 (newer than BSE).

o Based in: Mumbai, India.

o Index: Nifty 50.

o Number of listed companies: Over 1,500 companies.

What is the Money Market?

The money market is a part of the financial system where short-term borrowing and lending
happen. This market deals with instruments that are easy to buy and sell quickly, and they generally
have a short time period (less than one year). It's like a place where businesses, banks, and
governments can quickly borrow or lend money to meet their immediate needs.

Features of the Money Market:

1. Short-Term: The transactions in the money market are for short periods, usually less than a
year. Ex: 30 days, 90 days

2. Highly Liquid: Money market instruments are easy to convert into cash quickly without
losing much value.

3. Low Risk: The instruments traded in the money market are safe and have very low risk
because they are issued by governments or high quality corporations

4. Big Transactions: A lot of large-scale transactions happen in the money market, mainly
between banks and financial institutions.

5. Interest Rates: The interest rates in the money market are usually lower because the risk is
low and the loans are for short periods.

Functions of the Money Market:

1. Helps Manage Cash: Businesses and banks use the money market to manage their short-
term cash needs.

2. Government Funding: The government uses the money market to raise short-term funds by
selling T-Bills (short-term government bonds).

3. Control Inflation: The central bank (like the Reserve Bank of India) uses the money market to
control inflation by changing interest rates.

4. Safe Investment: People use the money market to invest safely and earn a small return on
their money.

5. Short-Term Borrowing & Lending: It helps businesses and governments borrow money for
short periods to cover immediate needs.
6. Investment Option: Investors use the money market to park extra money temporarily and
earn a small return with low risk.

Composition of the Money Market:

The money market is made up of different parts or segments where different instruments are used:

1. Interbank Market: Where banks lend and borrow money from each other.
 2. Treasury Bills Market: Where the government sells T-Bills to raise funds.

3. Corporate Debt Market: Where companies sell commercial papers to raise short-term
money.

4. Central Bank Operations: The central bank (like the RBI) takes part in the money market to
manage money supply and interest rates.

Who Are the Main Players in the Money Market?

1. Reserve Bank of India (RBI): The central bank that manages the money market in India by
controlling money supply and interest rates.

2. Commercial Banks: Banks like ICICI and HDFC are involved in lending and borrowing in the
money market.

3. Companies: Large companies like Reliance and Tata use the money market to raise funds for
their short-term needs.

FINANCIAL HOUSES

Financial Houses refer to institutions or organizations that play a significant role in the financial
market by providing various services related to investment, banking, and financial management.
These include banks, non-banking financial companies (NBFCs), investment firms, and insurance
companies.

Here are the main types of financial houses:

1. Commercial Banks:

 These are the traditional banks that offer services like savings and checking accounts, loans,
and mortgages.

 Example: State Bank of India (SBI), HDFC Bank, ICICI Bank.

2. Investment Banks:

 These banks help companies and governments raise capital, offer advisory services, and
manage investments. They also handle large transactions like mergers and acquisitions
(M&A).

 Example: Goldman Sachs, Morgan Stanley, JPMorgan Chase.

3. Non-Banking Financial Companies (NBFCs):

 These are financial institutions that provide loans, hire purchase, and investment services
but do not have a full banking license. They play an important role in offering credit to
businesses and consumers.

 Example: Bajaj Finance, HDFC Ltd., Muthoot Finance.

4. Insurance Companies:

 These financial houses offer protection to individuals and businesses against risks like
accidents, death, or property damage, in exchange for premium payments.

 Example: Life Insurance Corporation (LIC), ICICI Prudential, HDFC Life Insurance.
5. Asset Management Companies (AMCs):

 AMCs manage mutual funds and investment portfolios for investors. They invest in a variety
of assets like stocks, bonds, and real estate.

 Example: SBI Mutual Fund, HDFC Asset Management Company.

6. Stockbrokers and Brokerage Firms:

 These firms help individuals and institutions buy and sell stocks, bonds, and other securities
in the stock market.

 Example: Zerodha, ICICI Direct, Sharekhan.

7. Pension Funds:

 These organizations manage retirement savings for individuals. They invest in various
financial instruments to generate income for the pension holders.

 Example: EPFO (Employees’ Provident Fund Organization), NPS (National Pension System).

8. Venture Capital Firms:

 These financial houses provide funding to start-ups and small businesses with high growth
potential in exchange for equity or ownership.

 Example: Sequoia Capital, Accel Partners.

Call Money Market: The call money market is a part of the money market where
banks and financial institutions lend and borrow short-term funds, typically for one day
(overnight). It helps these institutions manage their short-term liquidity needs.

financial houses involved in the Discount Market, Acceptance Market, and Call Money
Market:

1. Discount Market

The Discount Market involves the buying and selling of short-term debt instruments like
Treasury Bills (T-Bills) and commercial paper at a discount to their face value.

 Key Financial Houses Involved:

o Commercial Banks: These banks buy and sell short-term government securities and
commercial paper.
o Development Banks: Such as the Industrial Development Bank of India (IDBI) or
Export-Import Bank of India (EXIM), which facilitate short-term financing through
instruments like commercial paper.
o Treasury Departments: Government agencies that issue T-Bills to raise short-term
capital.

2. Acceptance Market
The Acceptance Market involves instruments like Bankers' Acceptances, which are short-
term debt instruments issued by a firm and guaranteed by a bank.

 Key Financial Houses Involved:

o Commercial Banks: These banks guarantee and accept drafts or promissory notes for
short-term financing.
o Acceptance Houses: Specialized financial institutions that facilitate the acceptance of
bills, ensuring the transfer of funds for trade transactions.
o Large Corporations: Often use bankers' acceptances to raise short-term funds for
trade or business operations.

3. Call Money Market

The Call Money Market is where short-term funds (usually overnight) are borrowed and
lent between banks and financial institutions at the prevailing call money rate.

 Key Financial Houses Involved:

o Commercial Banks: They are the primary players in the call money market,
borrowing or lending funds to meet their short-term liquidity needs.
o Central Bank (e.g., Reserve Bank of India - RBI): While it does not directly
participate in the call money market, it plays a key role in regulating liquidity and
managing interest rates in this market.
o Cooperative Banks and Non-Banking Financial Companies (NBFCs): They also
participate in borrowing/lending funds in the call money market.

CLASSIFICATION OF FINANCIAL MARKETS

1. Based on the Type of Instruments Traded:

Capital Markets:These markets deal with long-term securities, typically those with
maturities longer than one year.

o Subcategories:
 Stock Market: Where shares (equities) of companies are issued and traded.
 Bond Market: Where debt securities (bonds) are issued and traded.

Money Markets:These markets deal with short-term financial instruments, usually

with maturities of one year or less. Instruments traded include Treasury bills,
commercial papers, certificates of deposit (CDs), and repurchase agreements (repos).

Derivatives Markets:In these markets, financial contracts (derivatives) are traded,

whose value is derived from the price of underlying assets like stocks, commodities,
or interest rates.Common instruments include options, futures contracts, and swaps.

Foreign Exchange (Forex) Markets:These markets involve the exchange of one

currency for another. The forex market is crucial for international trade and
investment.
2. Based on the Maturity of Financial Instruments:

Primary Market: This is where new financial instruments (stocks, bonds, etc.) are issued for
the first time. It is the market where companies and governments raise capital by issuing new
securities.

Secondary Market:This is where previously issued securities are traded between investors.
The secondary market provides liquidity and price discovery for investors.

3. Based on the Geographic Location:

Domestic Markets: These are financial markets that operate within a specific country or
region. Example: New York Stock Exchange (NYSE) in the United States or the Tokyo
Stock Exchange (TSE) in Japan.

International or Global Markets: These are markets that involve cross-border transactions,
where securities are traded internationally. Example: The Eurozone or the global foreign
exchange (forex) market.

5. Based on the Participants Involved:

Retail Markets:These markets are typically for individual investors or smaller institutional
investors who trade smaller amounts of financial instruments.Example: The retail investor
buying stocks through a brokerage.

Institutional Markets:These markets involve large institutions such as banks, insurance

companies, pension funds, mutual funds, and hedge funds.Institutional investors generally
trade in larger volumes and often have more sophisticated strategies.

6. Based on the Type of Trading Platform:

Organized or Exchange-Traded Markets:These are regulated markets where securities are

bought and sold in a centralized, formal exchange. Trading happens under specific rules,
regulations, and transparency. Example: New York Stock Exchange (NYSE), NASDAQ,
London Stock Exchange (LSE).

Over-the-Counter (OTC) Markets: These are decentralized markets where trading occurs
directly between parties, typically via a dealer network. There’s no central exchange.

o Example: The bond market or certain derivative markets like forex trading.

7. Based on the Type of Financial Asset:

Equity Markets:These markets involve the buying and selling of stocks (equities),
representing ownership in companies.
Debt Markets:These markets involve the issuance and trading of debt instruments like
bonds, treasury bills, and promissory notes.

Commodity Markets:These markets deal with the trading of physical assets such as oil,
gold, or agricultural products. Example: The Chicago Mercantile Exchange (CME) for
agricultural commodities.