Chapter: 10

What Are Financial Markets ?

A business is a part of an economic system which consists of two main sectors - households and business firms.
Households save funds which are being invested by business. A financial market act as a link between the savers and the investors by mobilising funds between savers and investors. There are two major alternative through which allocation of funds can be done: via banks or via financial markets.

Financial System

  • Business Firms
  • Commercial Banks
  • Households
  • Financial Markets

Money Market

The money market is a market for short term funds whose maturity is up to one year.

Classification of Money Market On the Basis of

Duration

  • Money Market
  • Capital Market

Investment

  • Debt Market
  • Equity Market

Capital Market

The term capital market refers to facilities and institutional arrangements through which long-term funds (debt and equity) are raised and invested. The Capital Market can be categorised into two parts:

Primary Market

The primary market is also known as the new issues market as it deals with new securities being issued for the first time. Through capital market, a company can
raise capital in the form of equity shares, preference shares, debentures, loans and deposits.

Secondary Market

The secondary market is also known as the stock market or stock exchange. It is a market where existing securities are being purchased and sold.

Stock Exchange

A stock exchange provides a platform for buying and selling of existing securities and facilitates the exchange of a security into money and vice versa.

Functions of Stock Exchange

  • Providing Liquidity and Marketability to Existing Securities
  • Pricing of Securities
  • Safety of Transaction
  • Contributes to Economic Growth
  • Spreading of Equity Cult
  • Providing Scope for Speculation

Depositories And Dematerialisation

The process of holding securities in an electronic form is called dematerialization.
A depository is also like a bank and keeps securities in electronic form on behalf of the investor. In India, there are two depositories.

National Stock Exchange Of India (NSE)

It was incorporated in 1992 and whereas it was recognized as a stock exchange in April 1993. It started operations in 1994, with trading on the wholesale debt market segment.

Bombay Stock Exchange

BSE Ltd (formerly known as Bombay Stock Exchange Ltd) was Asia’s first Stock Exchange which was established in 1875. It was granted permanent recognition under the Securities Contract (Regulation) Act, 1956. BSE has a global reach with customers around the world. The exchange has about 5000 companies listed from all over the country and outside, and has the largest market capitalisation in India.