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Financial Markets and Institutions
Outline of the PresentationFunctions of the Financial MarketsUnderstand the Role of the Direct and
Indirect FinanceTypes of Financial MarketsFinancial Market Analysis
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Financial Services
Financial Instruments
Financial Markets
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Financial Institutions
4 major com onents o! Financial S"stem
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Organizational Structure of IndianFinancial System
Financial System
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FinancialInstitutions Financial
MarketsFinancialInstruments
FinancialServices
#e$ulator
"
Interme%iaries
&on-Interme%iaries
't(er s
Bankin$
&on Bankin$
'r$ani)e% Unor$ani)e%
*rimar" Secon%ar "
+a ital Mone", uit"
.e t.erivatives Market
*rimar" Secon%ar "
S(ort0erm
Me%ium 0erm
Lon$ 0erm
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Financial InstitutionsMeaning: business organizations that act asmobilisers and depositors of savings, and aspurveyors of credit or nanceMobilise and transfer the savings or fundsfrom surplus unit to de cit unit
ifurcated into !egulatory and Intermediaries "he regulators are assigned #ith the $ob ofgoverning all the divisions of the Indian
nancial system% 'g: ! I, S' I, ( )", (entraloard of '*cise and (ustoms
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+lso classi ed as intermediaries and nonintermediaries (All banking institutions areintermediaries)
-on banking institutions #hich act asintermediary ."I, /I( and 0I( (called NBFI)-on intermediary institutions: I) I, IF( and-+ +!) came into e*istence because ofgovernmental e1orts (called as NBSFO)
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Financial Market
A nancial market is a mechanism thatallows people to easily buy and sell(trade) nancial securities (such as stocksand bonds), commodities (such asprecious metals or agricultural goods),and other fungible items of alue at lowtransaction costs and at prices that
re!ect the e"cient#market hypothesis$
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Financial Markets and Financialintermediaries ha e the basic functionsof getting people with surplus funds tothose who ha e a shortage of funds$
%ell functioning of the nancial markets
and nancial intermediaries are crucialto economic health$
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+ont
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Function of the Financial Markets
Lender-SaversHouseholdsBusiness firmsGovernmentsForeigners
FinancialIntermediaries
Borrower SpendersBusiness FirmsGovernments
HouseholdsForeigners
FinancialMarkets
Funds Funds
Funds
Funds Funds
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Financial System 4 'conomic)evelopment
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'conomic)evelopment
Saving & Investment orCapital Formation
Surplus SpendingEconomic Units
Income minus(Consumption + O wn
Investment)Surplus or Saving
Decit Spending EconomicUnits
Income minus(Consumption + O wn
InvestmentDecit or Negative Saving
Financial S"stem
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Functions of the Financial Markets
Person A is having a powerful idea and Person B ishaving surplus fundsThe Role or function of the financial !arkets "#ondsand $tock !arkets% is get people like A and B togetherThis re&uires flow of funds fro! savers to #orrowersThis flow can occur in two ways' Direct Finance andIndirect finance route
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Direct and Indirect Finance
Direct Finance( Borrowers #orrow funds directly fro!the lenders in the financial !arkets #y selling the!
securities "financial instru!ents%) which are clai!s onthe #orrower*s future inco!e or assets
$ecurities are assets for the person who #uys the! #utlia#ilities to the person or fir!s that sells or issue the!
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Direct and Indirect Finance&ndirect Finance' orrowers borrow fundsthrough nancial intermediaries(banks,insurance companies, pension funds) inthe form of loans and deposits$
anks issue a liability(sa ing deposits,time deposits etc) use these funds toac uire an asset by a loan to *ondamotors or by buying *onda motors bondsin the nancial markets$
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Function of the Financial Markets
Lender-SaversHouseholdsBusiness firmsGovernmentsForeigners
FinancialIntermediaries
Borrower SpendersBusiness FirmsGovernmentsHouseholdsForeigners
FinancialMarkets
Funds Funds
Funds
Funds Funds
IN I!"#$ FIN%N#"
I!"#$ FIN%N#"MBA/MS219/U1/L1-L3 1
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&h' this channeling of Funds so
important for the econom'(Financial !arkets are essential to pro!ote econo!icefficiencyFinancial !arkets are essential to increase production
Financial !arkets are helpful to fulfill you drea!sFinancial !arkets enhance entrepreneurialdevelop!ent and national welfare
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(lassi cation of FinancialMarkets
Financial Market
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Mone" Market +a ital Market
*rimar" Secon%ar "
*rimar" Secon%ar "
+allMone"
+ommercialBills
0reasur"Bills
S(ort0erm LoanMarket
StockMarket
.e tMarket
MutualFun%s
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$'pes of Financial Markets
The financial !arkets can #e divided into differentsu#types(
-apital !arkets which consist of($tock !arkets ) which provide financing through the
issuance of shares or co!!on stock) and ena#le thesu#se&uent trading thereof
Bond !arkets ) which provide financing through theissuance of #onds) and ena#le the su#se&uent tradingthereof
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(ont5%%
-o!!odity !arkets ) which facilitate the trading ofco!!odities
Money !arkets ) which provide short ter! de#tfinancing and invest!ent
Derivatives !arkets ) which provide instru!ents forthe !anage!ent of financial risk
Futures !arkets ) which provide standardi,ed forward
contracts for trading products at so!e future date
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(ont5%%Insurance !arkets ) which facilitate theredistri#ution of various risks
Foreign e.change !arkets ) which facilitate thetrading of foreign e.change
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6rimary and Secondary
MarketsThe capital !arkets consist of pri!ary !arkets and secondary!arkets A pri!ary !arket is a financial !arket in which new issues
of a security such as #ond or stocks are sold to initial #uyers#y the corporations or /overn!ent
$econdary !arkets deals with securities that previouslyissued These securities are resold in these !arkets
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Functioning of the Secondar'Markets$econdary !arkets !ake the financial instru!ents
!ore li&uid
They deter!ine the price of the securities those areissuing fir!s sale in the pri!ary !arkets
$o) condition in the secondary !arket enhances thecredi#ility of the corporations
0ence) we will focus !ore on the functioning of thesecondary !arkets
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6rimary vs% Secondary
MarketsP+&MA+ P+&MA+ -e# Issue ofSecurities
'*change of Fundsfor Financial (laim
Funds for orro#er7an IO. for /ender
-./O01A+ -./O01A+ "rading 6reviouslyIssued Securities
-o -e# Funds forIssuer
6rovides /i8uidity forSeller
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Money vs% (apitalMarketsMoneyMone y
Short "erm, 9 ;earMeans of li8uidity
ad$ustment
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6layers in Money Market(entral ank 26residing )eity of MoneyMarket3 not only #atchdog but alsopromotional 4 development banker(ommercial anks(o operative anks)iscount 4 +cceptance
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In%ian Mone" Market
Unor$ani)e% 'r$ani)e%
;in%i$enous ankers < mone"len%ers;0(e" a%vance loan a$ainstcollateral securit"; 'utsi%e t(e control o! t(e central
ank;#ate o! interest %i!!er !rom t(eor$ani)e% sector
;+onsist o! #BI= SBI < itssu si%iaries= commercial anks=!inance cor = ill market < ullionmarket;Mum ai= >olkata < .el(i are
rinci al centres
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anking System )ominantforce in the Indian MoneyMarket
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#eserve Bank o! In%ia 8#BI
Sc(e%ule% Banks &on Sc(e%ule% Banks
+entral +o-o erative Banks< *rimar" +re%itSocieties
&on-Sc(e%ule%+ommercialBanks
State +o-o erativeBanks
+ommercialBanks
Forei$n Banks In%ian Banks
*u -Sector Banks *vt Sector Banks
SBI < itsassociates
#e$ional
#ural Banks&ationali)e%Banks
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Money Market Securities)ebt securities Only
(apital market securities)ebt and e8uity securities
)erivative SecuritiesFinancial contracts #hose value is derived from thevalues of underlying assets.sed for hedging 2risk reduction3 and speculation2risk seeking3
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Securities 0ra%e% in FinancialMarkets
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Financial Market +nalysis
Financial Market Analysis deals with the perfor!anceof a particular financial !arket "s% The perfor!anceof a financial !arket depends upon the perfor!anceof the total nu!#er of securities that are traded in that!arket
1n a given day when the !arket closes with the pricesof !ost of its securities on the higher side) then it could
#e said to have perfor!ed well This is reflected in a !arket indicator called Inde.which tracks the perfor!ance of so!e of the !orepopular and steady securities that are traded in that
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Market inde*es of the#orldFootsie ) London financial market
ow *ones ) New +ork financial market
Hang Seng ) Hong ,ong financialmarketBS" Sense ) Mum.ai financial market
Nikkei ) $ok'o financial market Nift' ) Indian national financial market