Financial Markets

PRESENTED BY :DHAVAL DEDHIA (08)

UNDER THE GUIDANCE OF :N.S.SUBRAMANIAN

AGENDA

• What is Finance

• Financial System

• Indian Financial System

• The Capital Allocation Process

• Financial System: Flow of Funds

• How is capital transferred between savers and borrowers ?

• What is Market ?

• The Importance of Financial Markets to Economic Growth

• Types of financial markets

• Brief Introduction Of The Constituents of Financial Markets.

• References.

What is Finance

• Finance is the study of how people allocate scarce resources

over time.

– Decisions are made across time

– Decisions are made in an environment of uncertainty

– Decisions are made in the context of a financial system

Financial System

• The financial system is the set of markets and other institutions

used for financial contracting and the exchange of assets and

risks.

– Markets for stocks, bonds and other financial instruments.

– Financial intermediaries such as banks and insurance

companies.

– The regulatory bodies that govern all of these institutions.

Indian Financial System

The Capital Allocation Process

• The financial system allows for the transfer of funds from surplus

units (such as savers) that have excess resources to deficit units,

such as businesses that need resources.

• This can happen either through the market, as when an individual

uses his savings to buy shares issued by a corporation.

• Or through intermediaries, as when an individual deposits money

in his banking account, and the bank then lends this money to a

firm.

Financial System: Flow of Funds

Surplus Units Deficit Units

Markets

Intermediaries

How is capital transferred between savers and borrowers ?

• Direct transfers – stocks and

bonds, securities

• Investment banking house -

Underwriting

• Financial intermediaries –

banks and mutual funds

What Is Market?

• A market is a venue where goods and services are

exchanged.

• A financial market is a market in which people and

entities can trade financial securities, commodities, and

other items of value at low transaction costs and at prices

that reflect supply and demand.

• Securities include stocks and bonds, and commodities

include precious metals or agricultural goods.

The Importance of Financial Markets to Economic Growth

• Well-functioning financial markets facilitate the flow of capital from investors to the users of capital.– Markets provide savers with returns on their money

saved/invested, which provides them money in the future.

– Markets provide users of capital with the necessary funds to finance their investment projects.

• Well-functioning markets promote economic growth.

• Economies with well-developed markets perform better than economies with poorly-functioning markets.

Types of financial markets

• Physical assets vs. Financial assets

• Money (short) vs. Capital (long)

• Primary (proceeds go to firm) vs. Secondary Mkt. for

outstanding securities

• Spot (cash) vs. Futures

• Public (exchange-traded) vs. Private (banks)

• Derivatives – Futures and options

• Foreign Exchange – Currency

Types of Market

• Money Market : The Money market refers to the market

where borrowers and lenders exchange short-term funds to

solve their liquidity needs.

• Capital Market : The Capital market is a market for

financial investments that are direct or indirect claims to

capital. It is wider than the Securities Market and embraces

all forms of lending and borrowing, whether or not evidenced

by the creation of a negotiable financial instrument.

Types of Market

• Securities Market : The Securities Market, however, refers to

the markets for those financial instruments/claims/obligations

that are commonly and readily transferable by sale.

• The Securities Market has two interdependent and inseparable

segments, the new issues (primary) market and the stock

(secondary) market.

Types of Market

• Primary Market : The Primary market provides the channel

for sale of new securities. The issuer of securities sells the

securities in the primary market to raise funds for investment

and/or to discharge some obligation.

• Secondary Market : The Secondary market deals in securities

previously issued. The secondary market enables those who hold

securities to adjust their holdings in response to charges in their

assessment of risk and return. They also sell securities for cash

to meet their liquidity needs.

Types of Market

• This secondary market has further two components.

• Spot Market : the spot market where securities are traded for

immediate delivery and payment.

• Forward Market : The other is forward market where the

securities are traded for future delivery and payment.

• This forward market is further divided into Futures and Options

Market (Derivatives Markets).

REFERENCES

• Printed material –Author –Hull

• www.google.com

• http://www.nse-india.com

• www.rbi.org.in

• NCFM module