All about Financial Market & its functions – RBI Grade B Phase 2

Financial Market

The financial market describing, the market place where trading of securities including equities, bonds, currencies and derivatives occurs.

And the buyer and sellers participate in the trade such as equities, bonds, currencies and derivatives.

The capital market aid raising of capital on a long-term basis, generally over 1 year.

a) Primary market

A primary market is called as “new issue market”. Here the securities such as shares and bonds are being created and traded for the first time without using any intermediary (i.e. stock brokers & etc)

When a private company decides to become a publicly – traded entity, it issues and sells its stocks for the first time then it is called Intial public offering (IPO)

For example: company A wants to sell their stocks for getting capital from public then the stocks issued first time to the public directly by the issuing company is called Inital Public offering (IPO)

b) secondary market

A secondary market is called after market. Here the investors purchases previously issued securities such a stocks, bonds, futures and options from other investors, rather from issuing companies themselves.

For example:

Company A sells their stock to person Z and the person Z sells his share to person Y. The selling of the share by Z to another person B (i.e.) in secondary market

Bull and Bear Market

Bull market is a favourable market associated with rising prices and investor optimism.

Bear market is an unfavourable market associated with falling prices and investor pessimism.

A chicken market interprets no significant movement of the stock market index. The term chicken is used for an investor who is afraid to take risks.

Money market

The Money Market enables economic units to manage their liquidity position through lending and borrowing short-term loans, generally under 1 year. It facilitates the interaction between individuals and institution with temporary surpluses of founds and their counterparts who are experiencing a temporary shortage of funds.

One can borrow money within a quite short period of time via a standard instrument, the so called ‘call money’. From the next day, after which the loan becomes “on call” and it is callable at any time. . There are a large number of participants in the money market:

(i) Commercial banks

(ii) Mutual funds

(iii) Investment institutions

(iv) Financial institutions; and

(v) Reserve Bank of India.

Mutual Funds

Mutual funds means a fund established in the form of a trust to raise money through sale of units to the public one or more schemes for investing in securities,including money market instruments.

A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.

As an investor, one can buy mutual fund ‘units’, which basically represent his/her share of holdings in a particular scheme. These units can be purchased or redeemed as needed at the fund’s current net asset value (NAV) . These NAVs keep fluctuating, according to the fund’s holdings. So, each investor participates proportionally in the gain or loss of the fund.

All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor.

The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.

For Bank and Financial institutions

The Banks and financial institution are also participated in money market use “Interbank market” to borrow fund within a longer period of time (i.e.) from overnight to several weeks and upto one year

RETAIL INVESTORS AND SMALLER TRADING PARTIES DO NOT PARTICIPATE ON THE INTER BANK MARKET

The one of the interbank interest in London is known as LIBOR (London Interbank offered Rate)

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