Maharashtra Board Class 12 Secretarial Practice Chapter 11 Financial Market PDF Download

Financial Market

11.1 Financial Market - Meaning

A Financial Market is a market where Financial assets i.e. Financial instruments are exchanged or bought and sold. Financial market helps in mobilisation of savings and convert it into investments. Thus financial market acts as an intermediary between investors and borrowers.

Financial instruments are documents in the form of legal agreement between two parties having a monetary value. It represents a financial asset to one party and a financial liability to another party e.g. securities like shares, bonds, debentures, derivatives, commercial papers etc. are financial instruments.

Derivatives - Is a financial instrument which derives its value from an underlying asset. The underlying assets can be shares/stock, bonds, currencies, commodities etc.

Financial Markets attracts funds from investors and channelises them to corporations. The term Financial Market represents the market which raises finance for long term via the Capital Market and short term via the Money Market.

Teacher's Note

Financial Market helps people put their extra money to good use. Think of it like a place where your parents can invest their savings to earn more money for the family.

Exam Trick

Remember: Financial Market = Bridge between money and business. Just like a bridge connects two places, financial market connects people who have money with people who need money.

Points to Remember

A financial market is where financial instruments are bought and sold.

It helps transfer money from savers to borrowers.

There are two main types: Money Market and Capital Market.

Financial instruments include shares, bonds, and debentures.

11.2 Functions of Financial Market

1. Transfer of Resources: Financial Market facilitate the transfer of real economic resources from lenders to ultimate users.

2. Productive usage: Financial Market allows productive use of the funds. In the hands of the investors their excess funds would have remained idle. Borrowers use these Funds for productive purposes.

3. Enhancing Income: Financial Market allows lenders to earn interest or dividend on their surplus funds, thus leading to the enhancement of the individual and the national income.

4. Capital Formation: Financial Market provides a channel through which savings flow to industrial and commercial organisations in the form of capital. This leads to capital formation.

5. Price determination: The financial instruments traded in a financial market get their prices from the mechanism of demand and supply. The investors are the suppliers of the funds and the corporates are the users. The interaction between the two and other market factors will help to determine the prices.

6. Sale Mechanism: Financial Market provides a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.

7. Mobilizing Funds: Idle funds in the hands of the investors can be productively used by corporates. Investors that have savings must be linked with corporates that require investment. So financial market enables the investors to invest their saving according to their choices and risk assessment. This will utilize idle funds and the economy will boom.

8. Liquidity: Financial market provides a mechanism for liquidating the financial instruments. This means at any given time, the investor can sell their financial instruments and convert them into cash. This is an important factor for investors who do not want to invest for a long period.

9. Easy access: Both investors and industries need each other. The financial market provides a platform where both the buyers and sellers can find each other easily.

10. Industrial development: Financial market helps in transforming savings into capital. Corporates use the funds of investors to undertake productive or commercial activities thereby leading to economic development.

Teacher's Note

Financial Market helps the economy grow strong. When investors give their money to companies, those companies can build factories and shops, creating jobs for many people.

Exam Trick

Remember the 10 functions with: Transfer, Productive, Enhancement, Capital, Price, Sale, Mobilize, Liquidity, Easy, and Industrial. Just remember the first letter of each: T-P-E-C-P-S-M-L-E-I.

Points to Remember

Financial Market transfers resources from savers to users.

It helps people earn money through interest and dividends.

It creates capital for the economy to grow.

It helps determine fair prices for financial instruments.

It provides liquidity so investors can get their cash back anytime.

11.3 Types of Financial Market

Financial market is mainly classified as money market and capital market.

Money Market types:

1. Call Money Market

2. Certificate of Deposit Market

3. Treasury Bill Market

4. Commercial Bill Market

5. Commercial Paper Market

Capital Market types:

Government Securities Market OR Gilt edged market

Industrial Securities Market - which includes:

Primary Market

Secondary Market

11.3.1 Money Market

Meaning: Money market is a market for lending and borrowing of funds for short term. It is a market wherein lending and borrowing of funds take place for a short period of time which varies from one day to a year. Also the financial instruments traded in this market can be converted into cash easily without any loss of time and value. It is an important part of the financial system that helps in fulfilling the short term and very short term requirements of the companies, banks, financial institutions, government agencies etc. It is a market for financial assets which are close substitutes for money. The instrument like commercial paper, liquid and treasury bills etc. are traded in the money market.

Features of Money Market:

1) The funds borrowed and lent in money market are for short term. The maximum period for which the funds are traded in the market is one year.

2) It is a wholesale market for short term debt as the transaction volume is large.

3) Trading may take place over the telephone, after which written confirmation is done by way of e-mails.

4) Participants of money market include RBI, commercial banks, mutual funds, financial institutions, primary dealers and corporates.

5) There is an impersonal relationship between the participants of the money market.

6) Money market has no geographical area i.e. there is no fixed place for carrying out transactions.

7) The instruments of money market can be converted easily into cash or have very short maturity periods. Moreover, the returns on investment is also low.

8) Major segments of money market are:

a) Call money market

b) Certificate of Deposits market

c) Treasury Bill market

d) Commercial Bill market

e) Commercial papers market

Some Important Participants in Money Market:

1) Reserve Bank of India: It is the most important participant in the money market. Through the money market, RBI regulates money supply and implements its monetary policy. It issues government securities on behalf of the government and also underwrites them. It acts as an intermediary and regulator of the market.

2) Central and State Government: Central Government is a borrower in the Money Market, through the issue of Treasury Bills (T-Bills). The T-Bills are issued through the Reserve Bank of India (RBI). The T-Bills represent zero risk instruments. Due to its risk free nature banks, corporates, etc. buy the T-Bills and lend to the government as a part of its short-term borrowing programme. The state governments issue bonds called as State Development Loans.

3) Public Sector Undertakings (PSU): Many listed government companies can issue commercial paper in order to obtain its working capital.

Teacher's Note

Money Market is like a quick loan shop. When a school needs money for just 3 months, it goes to Money Market, not for long time loans. Banks borrow and lend to each other here every day.

Exam Trick

Remember: Money Market = Short term = 1 day to 1 year. Capital Market = Long term = More than 1 year. Think "MM" = Short, "CM" = Long.

Points to Remember

Money Market is for short-term borrowing and lending.

Time period is one day to one year maximum.

RBI is the most important participant.

It has no fixed place - trading happens on telephone and email.

Risk is very low because the period is short.

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