1 Financial Market 25411k

Financial Markets and Institutions

Outline of the Presentation Functions of the Financial Markets Understand the Role of the Direct and Indirect Finance Types of Financial Markets Financial Market Analysis

MBA/MS219/U1/L1-L3

1

4 major components of Financial System Financial Institutions

Financial Markets

Financial Instruments

Financial Services

MBA/MS219/U1/L1-L3

2

Organizational Structure of Indian Financial System Financial System Financial Institutions

Financial Markets

Financial Instruments

Financial Services

Primary Regulator y

NonIntermediari es

Intermediarie s

Organized

Other s

Unorganize d

Primary

Capital Banking

Non Banking MBA/MS219/U1/L1-L3

Secondar y

Short Term Secondar y

Long Term Medium Term

Equity Debt Derivatives Market

Money 3

Financial Institutions Meaning: business organizations that act as

mobilisers and depositors of savings, and as purveyors of credit or finance Mobilise and transfer the savings or funds from surplus unit to deficit unit Bifurcated into Regulatory and Intermediaries The regulators are assigned with the job of governing all the divisions of the Indian financial system. Eg: RBI, SEBI, CBDT, Central Board of Excise and Customs

MBA/MS219/U1/L1-L3

4

Also classified as intermediaries and non-

intermediaries

(All banking institutions are

intermediaries)

Non banking institutions which act as

intermediary- UTI, LIC and GIC (called NBFI) Non intermediary institutions: IDBI, IFC and NABARD came into existence because of governmental efforts (called as NBSFO)

MBA/MS219/U1/L1-L3

5

Financial Market A financial market is a mechanism that

allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.

MBA/MS219/U1/L1-L3

6

Cont…… Financial

Markets and Financial intermediaries have the basic functions of getting people with surplus funds to those who have a shortage of funds.

Well functioning of the financial markets

and financial intermediaries are crucial to economic health.

MBA/MS219/U1/L1-L3

7

Function of the Financial Markets Funds

Financial Intermediaries

Funds

Funds Lender-Savers Households Business firms Governments Foreigners

Funds MBA/MS219/U1/L1-L3

Financial Markets

Borrower Spenders Funds Business Firms Governments Households Foreigners

8

Overview of Financial Markets Financial Market: a market in which financial assets (securities) such as stocks and bonds can be purchased or sold Financial markets provide for financial

intermediation--financial savings (Surplus Units) to investment (Deficit Units) Financial markets provide payments system Financial markets provide means to manage risk

MBA/MS219/U1/L1-L3

9

MBA/MS219/U1/L1-L3

10

Financial System & Economic Development Economic Development Saving & Investment or Capital Formation Surplus Spending Economic Units

Deficit Spending Economic Units

Income minus (Consumption + Own Investment)

Income minus (Consumption + Own Investment

Surplus or Saving

Deficit or Negative Saving

Financial System MBA/MS219/U1/L1-L3

11

Functions of the Financial Markets Person A is having a powerful idea and Person B is

having surplus funds. The Role or function of the financial markets (bonds and Stock markets) is get people like A and B together. This requires flow of funds from savers to borrowers. This flow can occur in two ways; Direct Finance and Indirect finance route.

MBA/MS219/U1/L1-L3

12

Direct and Indirect Finance Direct Finance: Borrowers borrow funds directly from

the lenders in the financial markets by selling them securities (financial instruments), which are claims on the borrower’s future income or assets. Securities are assets for the person who buys them but liabilities to the person or firms that sells or issue them.

MBA/MS219/U1/L1-L3

13

Direct and Indirect Finance 

Indirect Finance: Borrowers borrow funds through financial intermediaries(banks, insurance companies, pension funds) in the form of loans and deposits.

Banks issue a liability(saving deposits,

time deposits etc) use these funds to acquire an asset by a loan to Honda motors or by buying Honda motors bonds in the financial markets.

MBA/MS219/U1/L1-L3

14

Function of the Financial Markets INDIRECT FINANCE Funds

Financial Intermediaries

Funds

Funds Lender-Savers Households Business firms Governments Foreigners

Funds

Financial Markets

DIRECT FINANCE

MBA/MS219/U1/L1-L3

Borrower Spenders Funds Business Firms Governments Households Foreigners

15

Why this channeling of Funds so important for the economy? Financial markets are essential to promote economic

efficiency. Financial markets are essential to increase production Financial markets are helpful to fulfill you dreams. Financial markets enhance entrepreneurial development and national welfare

MBA/MS219/U1/L1-L3

16

Functions of Financial Intermediaries Financial intermediaries also do the function of

connecting people for investments. Financial intermediaries are important as it; Reduces transaction costs Enables risk sharing Removes information costs and moral hazards.

MBA/MS219/U1/L1-L3

17

Classification of Financial Markets Financial Market

Money Market

Primary

Call Money Commercial Bills

Capital Market

Secondar y

Primary

Stock Market

Treasury Bills

Secondar y

Debt Market

Mutual Funds

Short Term Loan Market MBA/MS219/U1/L1-L3

18

Types of Financial Markets The financial markets can be divided into different subtypes: Capital markets which consist of: Stock markets, which provide financing through the

issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the

issuance of bonds, and enable the subsequent trading thereof.

MBA/MS219/U1/L1-L3

19

Cont….. Commodity markets, which facilitate the trading of

commodities. Money markets, which provide short term debt

financing and investment. Derivatives markets, which provide instruments for

the management of financial risk. Futures markets, which provide standardized forward

contracts for trading products at some future date.

MBA/MS219/U1/L1-L3

20

Cont….. Insurance markets, which facilitate the

redistribution of various risks. Foreign exchange markets, which facilitate the

trading of foreign exchange.

MBA/MS219/U1/L1-L3

21

Primary and Secondary Markets

The capital markets consist of primary markets and secondary markets. A primary market is a financial market in which new issues of a security such as bond or stocks are sold to initial buyers by the corporations or Government. Secondary markets deals with securities that previously issued. These securities are resold in these markets.

MBA/MS219/U1/L1-L3

22

Functioning of the Secondary Markets Secondary markets make the financial instruments more liquid. They determine the price of the securities those are issuing firms sale in the primary markets. So, condition in the secondary market enhances the credibility of the corporations. Hence, we will focus more on the functioning of the secondary markets. MBA/MS219/U1/L1-L3

23

Primary vs. Secondary Markets   PRIMARY

New Issue of

Securities

SECONDARY

Trading Previously

Issued Securities No New Funds for

Exchange of Funds

Issuer

for Financial Claim Funds for Borrower;

an IOU for Lender MBA/MS219/U1/L1-L3

Provides Liquidity for

Seller 24

Money vs. Capital Capital Money Markets Long-Term, >1Yr Short-Term, < 1 Year 

Means of liquidity

adjustment High Quality Issuers Debt Only: low default & low market risk Primary Market Focus Liquidity Market-Low Returns MBA/MS219/U1/L1-L3

Principal fn: link b/w

long-term investors & long term borrower Range of Issuer Quality Debt and Equity: both risks are substantial Secondary Market Focus Financing Investment-Higher Returns 25

Players in Money Market Central Bank (Presiding Deity of Money

Market)-not only watchdog but also promotional & development banker Commercial Banks Co-operative Banks Discount & Acceptance Houses Bills Market, Bullion Market etc.

MBA/MS219/U1/L1-L3

26

Organized vs. Over-theCounter Markets OTC Organized Visible

Marketplace  Trade Securities Listed New York Stock

Exchange MBA/MS219/U1/L1-L3

Wired Network of

Dealers No Central,

Physical Location All Securities

Traded off the Exchanges 27

Indian Money Market Unorganized •indigenous bankers & money lenders •They advance loan against collateral security •Outside the control of the central bank •Rate of interest differ from the organized sector

MBA/MS219/U1/L1-L3

Organized •Consist of RBI, SBI & its subsidiaries, commercial banks, finance corp, bill market & bullion market •Mumbai, Kolkata & Delhi are principal centres

28

Banking System-Dominant force in the Indian Money Market Reserve Bank of India (RBI)

Non Scheduled Banks

Scheduled Banks

State Cooperative Banks

Central Cooperative Banks & Primary Credit Societies

Commercial Banks

Foreign Banks

Indian Banks

Pub-Sector Banks SBI & its associates

Non-Scheduled Commercial Banks

Nationalized Banks

MBA/MS219/U1/L1-L3

Pvt Sector Banks Regional Rural Banks 29

Securities Traded in Financial Markets Money Market Securities Debt securities Only

Capital market securities Debt and equity securities

Derivative Securities Financial contracts whose value is derived from the

values of underlying assets Used for hedging (risk reduction) and speculation (risk seeking) MBA/MS219/U1/L1-L3

30

Financial Market Analysis Financial Market Analysis deals with the performance

of a particular financial market (s). The performance of a financial market depends upon the performance of the total number of securities that are traded in that market. On a given day when the market closes with the prices of most of its securities on the higher side, then it could be said to have performed well. This is reflected in a market indicator called Index which tracks the performance of some of the more popular and steady securities that are traded in that particular financial market MBA/MS219/U1/L1-L3

31

Market indexes of the Footsie – London financial market world Dow Jones – New York financial market Hang Seng – Hong Kong financial

market BSE Sensex – Mumbai financial market Nikkei – Tokyo financial market Nifty – Indian national financial market MBA/MS219/U1/L1-L3

32