Financial Markets - This deck captures the movement of Money markets and Capital Markets, its impact on different stakeholders viz. Individuals, businesses, markets and the economy

1. Financial Markets
AND THEIR ROLE IN ECONOMY

2. Why Study Financial Markets & Institutions?

3. Activities in Financial Markets have a direct impact on individual’s wealth, the behavior of businesses and the efficiency of
our economy. Hence 3 markets deserve particular attention as any movement in these markets have a direct impact on
individuals, businesses, markets and the economy
Bond / Debt Markets Where interest rates
are determined
Stock Markets A major impact on people’s wealth
and on firm’s investment decisions
Foreign Exchange
Market
Fluctuations in the exchange markets
have a direct bearing on the economy
Market Type Function of the market & its impact

4. Monetary policies affects interest rates, inflation and business cycles, all of which have an important impact on financial
markets and institutions, it’s important how monetary policy is conducted by Central Banks
Banks and other financial institutions channel funds from people who might not put them to productive use to people who
can do so and thus playing a central role in improving the efficiency of the economy
Monetary Policy
Interest Rates,
Inflation,
Business Cycles
Financial
Markets &
Institutions

5. What are Financial Markets & how are they
classified?

6. A financial market is a market in which financial assets (securities) can be purchased or sold
Financial markets facilitate transfers of funds from person or business without investment opportunities (i.e., “Lender-
Savers”, or “Surplus Unit”) to those who have them (i.e., “Borrower-Spenders”, or “Deficit Unit”)
Funds transferred directly from Ultimate Savers to
Ultimate Borrowers is called Direct Financing.
A financial "intermediary" transforms financial claims
with one set of characteristics into financial claims with
other characteristics e.g. deposits are used to make
loans.
Example: A bank giving loans to the borrower is
indirect financing

7. Financial
Markets
Based on
Maturity
Structure
Money
Markets
Capital
Markets
Based on
Trading
Structure
Primary
Markets
Secondary
Markets
Classification of Financial Markets
Financial Markets are categorized in multiple ways. The most common method adopted is on the basis of maturity and
trading. On these 2 criterias, markets are classified under 4 segments. But overall Markets are classified under 8
segments, which is shown in the ensuing slide

8. Classification of Financial Markets
Financial
Markets
Money
Markets
Capital
Markets
Organized
Exchange
OTC
Markets
Primary
Markets
Secondary
Markets
Debt
Markets
Equity
Markets
New Issuance of Bonds and Mortgages
transacted through the Debt Markets & New
Issuance of Equities through Equity Markets
Secondary sale of
Equities through Equity
Markets and Bonds/
Mortgages through Debt
Markets

9. Features of Different Types of Financial Markets
Money Markets: Flow of short term funds < a year Capital Markets : Flow of long term funds > a year
Primary Markets : Issuance of new securities/stocks
or new Treasury Securities viz. IPO
Secondary Markets : Trading of Existing Securities. Hence more
liquid. Revenue Generation for the corporate is not direct but
regular trading of stocks/securities influences Share /Stock
price which helps in firming up the price of the stock in case the
Corporate entity wishes to issue new stocks

10. Features of Different Types of Financial Markets
Organized Exchange : A visible market place for
secondary market transactions viz. Stock Exchange
OTC (Over The counter) : A decentralized market, without a
central physical location, where market participants trade with
one another through various communication modes such as
the telephone, email and proprietary electronic trading
systems.
In an OTC market, dealers act as market makers by quoting
prices at which they will buy and sell a security or currency. No
Price transparency and fewer regulations
Debt Markets: Most commonly traded security. Issuer
of the title or security (borrower) earns some initial
money and the holder (lender) receives fixed amount
of payments over a period of time. Viz. bonds or
mortgages.
They can be issued as short term < a year or Long term
> 10 years or intermediate (1 to 10 years)
Risk of default borne by lenders, lesser control of
activities of borrower, distorted incentives to borrower,
Fixed Income Flows, Upside is limited
Equity Markets: Equity instruments makes its lenders, owners
of the borrower’s enterprise to the extent of the investment,
giving them a share in the borrowers’ income . Periodic
payments released to the lender are called Dividends.
Equity Instruments have no expiry. No Maturity period, hence
also called long term securities.
Losses limited to original investment, No Limits to Upside,
Volatile income flows, Rights of management control, They are
paid only after all the debtors are paid as they are part owners
of the borrowers’ enterprise

11. Money Markets

12. Money market is a mechanism that deals with the lending of short term funds (less than one
year)
A segment of the financial market in which financial instrument with high liquidity and very
short maturities are traded.
Key Features
• Market purely for short-terms funds aka
near money.
• Maturity period less than one year only.
• Transactions happen only through oral
or written communication and with
relevant documents and cannot be
conducted by Brokers
• Heterogeneous markets comprising of
several sub markets like call money,
acceptance and bill markets

13.  Financing Industry
 Financing trade
 Self sufficiency of banks
 Development of Capital Markets
 Effective implementation of monetary policy
 Encourages economic growth
 Non Inflationary source of finance for Government
 Proper allocation of resources
Importance of Money Markets

14. Sub-Markets of Money Markets
Money Market consists of a number of sub-markets which collectively constitute the money market.
MoneyMarkets
Call Money
Markets
Commercial Bills /
Discount Markets
Acceptance
Markets
Treasury Bill
Markets

15. Instruments in the Money Markets
OldInstruments
Money at call
Commercial Bills
Promissory Notes
Treasury Bills
NewInstruments
Commercial
Papers
Certificate of
Deposit (CD)
REPO Instrument
Repurchase
Agreement
Bankers’
Acceptance
Mutual Fund
Additional Instruments were introduced post 1986

16. Capital Markets

17. The market where investment instruments like bonds, equities and mortgages are traded is known as the
Capital Market.
The primal role of this market is to make investment from investors who have surplus funds to the ones who
are running a deficit.
17
Capital Markets & Its Significance
• Link between savers and investors
• Stability in security prices
• Speed up economic growth and development
• Helps in capital formation
• Helps in creating liquidity
Significance

18. 18
Types of Capital Markets

19. Primary Markets

20. A market where the issuers access the prospective investors directly for funds
required by them either for expansion or for meeting the working capital needs.
This process is called disintermediation where the funds flow directly from
investors to issuers. The primary market is also called new issue market.
20
Primary Markets
Key Features
Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital
formation in the economy.
The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting private capital into public
capital; this is known as ‘going public’.

21. 21
Need, Function & Importance of Primary Markets
To raise funds for certain purpose.
To create market for new issues of securities.
To establish the magnitude of the market.
To mobilize Resource the economy.
For overall development of companies.
Household Savings
Global Investments
Sale of Government Securities
Primary Market Participants
Market Risk
It studies needs, wants and expectations of the
customers.
It finds out reactions of customers to products of the
company.
It evaluates company's sales promotion measures for
suitable adjustment and improvements.
It studies current marketing problems and opportunities
for suitable follow up.
It suggest introduction of new products, modification of
existing products.
It studies marketing competition, channel of distribution and
pricing for suitable changes if necessary.
It find methods for making the product popular and raising
its goodwill and marketing reputation.
Need
Function
Importance

22. 22
Methods of Raising Capital from the Primary Market
Public Issue
Private
Placement
Government
Securities
Offer For
Sale
Rights Issue
Preferential
Issue

23. 23
Methods of Raising Capital from the Primary Market

24. 24
Methods of Raising Capital from the Primary Market
The issuing company directly offers to the general
public/institutions a fixed number of securities at a
stated price or price band through a document called
prospectus.
This is the most common method followed by
companies to raise capital through issue of the
securities.
It consists in outright sale of securities through the
intermediary of issue houses or share brokers. First
Stage is a direct sale by the issuing company to the
issue house and brokers at an agreed price and in
the second stage is when intermediaries resell the
above securities to the ultimate investors.
The issue houses purchase the securities at a
negotiated price and resell at a higher price. The
difference in the purchase and sale price is called
turn or spread.
It involves sale of securities to a limited number of sophisticated
investors such as financial institutions, mutual funds, venture
capital funds, banks, and so on.
It refers to sale of equity or equity related instruments of an
unlisted company or sale of debentures of a listed or unlisted
company.
When a listed company proposes to issue securities to its existing
shareholders, whose names appear in the register of members on
record date, in the proportion to their existing holding, through an
offer document, such issues are called ‘Right Issue’.
This mode of raising capital is the best suited when the dilution of
controlling interest is not intended.
IPO/Public Issue
Offer of Sale
Rights Issue
Private Placement

25. 25
An issue of equity by a listed company to selected
investors at a price which may or may not be related
to the prevailing market price is referred to as
preferential allotment in the Indian capital market.
In India preferential allotment is given mainly to
promoters or friendly investors to ward off the
threat of takeover.
The companies are now allowed to issue capital to
the public through the on-line system of the stock
exchanges.
For making such on-line issues, the companies
should comply with the provisions contained in
Chapter 11A of SEBI( Disclosure and Investor
Protection) Guidelines, 2000.
SEBI guidelines allow the issuing company to accept over
subscriptions, subject to a ceiling, say 15% of the offer made to
public.
It is extensively used in international IPOs to stabilized the post-
listing price of new issued shares
It denotes ‘an option of allocating shares in excess of the
shares included in the public issue’.
Preferential Issue
E-IPO
Green Shoe Option
Methods of Raising Capital from the Primary Market

26. 26
The companies eligible to make public issue can
freely price their equity shares or any security
convertible at a later date into equity shares as per
SEBI guidelines 2000.
The issuer can fix-up issue price in consultation of
with merchant banker, subject to giving disclosures
of the parameters which have considered while
deciding the issue price.
It is a process used for marketing a public offer of equity shares of a company.
Book building is a process wherein the issue price of a security is determined by the demand and supply forces in the capital
market
The Price at which securities will be allotted is not known in advance to the investor. Only an indicative price range is known.
(Also called price band and it should not be more than 20% of the floor price).
The price which has been fixed by the company for its securities
before issue is brought to the market.
The price at which the securities are offered/allotted is known in
advance to the investor.
Demand for the securities offered is known only after the closure of
the issue.
Payment is made at the time of subscription whereas refund is
given after allotment.
Pricing of Issues
Pricing of Issues
Fixed Price Process
Book Building Process

27. Type of Offer Documents & Objectives of Listing
• Draft Prospectus
• Draft Letter of Offer
• Prospectus
Offer Document Types
• Information Memorandum
• Red-Herring Prospectus
• Abridged Prospectus
• Shelf Prospectus
Providing liquidity to securities;
Mobilize savings for economic development;
Protect interest of investors by ensuring full disclosures.
The exchange has a separate Listing Dept. to grant approval for listing of securities of companies in
accordance with the various provisions of the concerned laws, guidelines issued by SEBI and rules, bye-laws
and regulation of the exchange.
Objectives of Listing

28. Participants In the Securities Markets
Regulators: The key agencies that have a significant regulatory influence , direct or indirect, over the securities
market such as SEBI, RBI, CLB, DEA and MCA etc.
Stock Exchanges: A stock exchange is an institution where securities that have already been issued are bought
and sold. Presently there are 23 stock exchanges in India, the most important ones being BSE and NSE.
Listed Securities: Securities that are listed on various stock exchanges and hence eligible for being traded
there are called listed securities.
Depositories: A depository is an institution which dematerialize physical certificates and effects transfer of
ownership by electronic book entries. Presently there are two depositories in India, viz. NSDL and CSDL.
Brokers: Brokers are registered members of the stock exchanges though whom investors transact.
Foreign Institutional Investors: Institutional investors from abroad who are registered with SEBI to operate in
the Indian Capital market are called foreign institutional investors (FIIs).

29. Participants In the Securities Markets
Merchant Bankers: Firms that specialize in managing the issue of securities are called merchant bankers. They
have to be registered with SEBI.
Primary Dealers: Appointed by the RBI, primary dealers serve as underwriters in the primary market and as
market makers in the secondary market for governmental securities.
Mutual Funds: A mutual fund is a vehicle for collective investment. It pools and manages the funds of
investors.
Custodians: A custodian looks after the investment back office of a mutual fund. It receives and delivers
securities, collects income, distributes dividends, and segregates the assets between schemes.
Registrars: Also known as a transfer agent, a registrar is employed by a company or a mutual fund to handle all
investor-related services.
Underwriters: An underwriter agrees to subscribe to a given number of shares (or any other security) in the
event the public subscription is inadequate. The underwriter, in essence, stands guarantee for public
subscription. Some of the types of underwriting contracts are Best Effort Underwriting, Firm Commitment
Underwriting & Standby Underwriting

30. Participants In the Securities Markets
Bankers to an issue: The bankers to an issue collect money on behalf of the company from the applicants.
Debenture Trustees: When debentures are issued by a company, a debenture trustee has to be appointed to
ensure that the borrowing firm fulfills its contractual obligations.
Venture Capital Funds: A venture capital fund is a pool of capital which is essentially invested in equity shares
or equity-linked instruments of unlisted companies.
Credit Rating Agencies: A credit rating agency assigns ratings primarily to debt securities. In India there are
two main credit rating agencies; Credit Rating Investment Services of India Limited (CRISIL) and Investment
Information and Credit Rating Agency (ICRA)

31. Secondary Markets

32. A market where securities are traded after being initially offered to
the public in the primary market and/or listed in the stock
exchange.
Majority of the trading is done in the secondary market. This
market comprises of Equity market and Debt Market.
Secondary market provides liquidity to the securities on the
exchange(s) and this activity commences subsequent to the
original issue.
32
Secondary Market

33. Help in determining fair prices based on demand and supply forces and all available information
Provides easy marketability and liquidity for investors
Facilitation in capital allocations in primary market through price signaling
Enabling investors to adjust portfolios of securities
33
Features of Secondary Market
Participants in the Secondary Markets
• Equity Shares
• Debentures
• Government Securities
• Bonds
Products in Secondary Markets
• Stock Exchange
• Clearing Corporation
• Depositories/ DP
• Trading Member (Stock Broker)/ Clearing Member
• Registrar to an Issue and Share Transfer Agent

34. Types of Traders
Liquidity Traders – Transact on a regular basis and profit from small price changes
Information Traders – transact only when updated information is available
34
Secondary Market Characteristics
Dealer Markets
A market in which buyers enter competitive bids and sellers
enter competitive offers at the same time.
The price a stock is traded represents the highest price that
a buyer is willing to pay and the lowest price that a seller is
willing to sell at. Matching bids and offers are then paired
together and the orders are executed.
Call Auction is the mechanism used for transacting. Though
most of the trading is done online, auction markets can be
operated through open outcry (physically calling out prices)
Auction Markets
A financial market mechanism wherein multiple dealers post
prices at which they will buy or sell a specific security of
instrument.
In a dealer market, a dealer – who is designated as a “market
maker” – provides liquidity and transparency by electronically
displaying the prices at which it is willing to make a market in
a security, indicating both the “bid” and “offer” i.e. buy and
sell price and typically make money from the bid ask price
Common in markets with large value orders viz. G-Sec’s, forex
More Information Traders in this market

35. Clearing & Settlement System Risks in the Secondary Market
Secondary Market Characteristics
• Principal Risk
• Replacement Risk
• Liquidity Risk
• Systemic Risk
Clearing & Settlement Mechanisms are critical for the smooth functioning of the secondary markets. Clearing is agreeing to
transaction terms and Settlement is exchange of securities for money
Clearing
Systems
Gross
Settlement
Net
Settlement
Bilateral
Netting
Multilateral
Netting
Choice of
Netting
Period
TypeofClearingSystems

36. Clearing & Settlement System Risks in the Secondary Market
Some Risk Management Mechanisms in the Clearing & Settlement
Delivery Against Payment
Third Party Guarantees / Clearing House
Size of Reserve fund of guarantor matters
Reducing Settlement Period
Gross Settlement

37. Securities and Exchange Board of India
SEBI is the regulator of securities market in India. It was established on 12 April 1988.
SEBI is required to regulate and promote the securities market by:
 Providing fair dealings in the issues of securities and ensuring a market place where funds can be raised at a
relatively low cost.
 Providing a degree of protection to the investors and safeguard their rights and interests so that there is a
steady flow of savings into the market.
 Regulating and developing a code of conduct and fair prices by intermediaries in the capital market like
brokers and merchant banks with a view to make them competitive and professional.

38. Thank You