Professional Documents
Culture Documents
2013-2014
A Project Report on
In Partial Fulfillment of
Bachelor of Commerce Financial Market (BFM)
Submitted by:
RUNGTA UTSAV ASHOK
ROLL NO-37
INDEX
PARTICULARS
PAGE.NO
EXECUTIVE SUMMARY
MONEY MARKETS
INDIAN MONEY MARKETS
GROWTH OF INDIAN MONEY MARKETS
MONEY MARKET INSTRUMENTS
CAPITAL MARKETS
PRIMARY MARKETS
SECONDARY MAREKTS
MONEY MARKETS V/S CAPITAL MARKETS
CONCLUSION
BIBLIOGRAPHY
EXECUTIVE SUMMARY
MONEY MARKETS
Money market is a market for short term loans and financial assets. It is a
market for lending and borrowing of short term funds. The Money market
refers to an activity rather than a place. This market supplies funds for
financing current business operations, working capital requirements of
industries and short term requirements of government
CAPITAL MARKETS
According to S.K. Cooper and other Financial markets are the markets in
which financial instruments are traded.
The financial market is said to the brain of entire economic system. The
savings are channelled to investments through financial market. The
financial instruments like stock, bond, insurance policy, government
securities and debentures are traded in the financial market.
The two important types of financial market are the money market and
capital market. Concepts of these two types of financial market have been
presented below.
In economics, market does not mean a particular place. Instead, the market
is a process of buying and selling of goods by making contract through
different mediums. Hence, money market also does not denote a particular
place. The money market refers to the whole area where money is bought
and sold. To be more precise, money market is simply a process of buying
and selling of money. Unlike a stock exchange, the money market is not a
particular place but is a system. The transactions may take place between
different persons by telephone, fax without personal meeting.
The short-term funds are transacted in the money market. In general the
term of the loan is less than one year. Hence, the evidence of credit having
maturity of less than one year is the instruments of money market. The
main function of the money market is to make available working capital to
the business and loan to the government. It also makes available loans for
the speculation of goods and securities.
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The business firms use the money market to distribute wages and salaries,
repair equipments, pay energy charge, taxes and so on. The government
uses it to meet the deficit in public revenue. The finance companies use it
to provide loans to the consumers. The banks use it to meet the temporary
deficit in reserve. All these credit are only for up to one year.
The meaning of money market becomes clear from the following
definitions: According Dudley G. Luckett -The money market is a market for
short term (less than one year) loans. Its very name suggests that it
is money that is being bought and sold.
World Bank has defined the money market as, A market in which
short term securities such as treasury bills, certificates of deposits
and commercial bills are traded.
The market dealing in long term finance is known as capital market. This
market makes available funds for long-term investment. Hence, capital
market is a market for long term credit. The meaning of capital market
becomes clear from the following definitions:According to Dudley G. Luckett, A capital market is just what the name
implies: a market for capital funds. Strictly speaking, the capital market
encompasses any transactions involving long-term debt or equity
obligations.
In the words of S.K. Cooper and others, The framework for the borrowing
and lending of funds for periods longer than a year is called the capital
market.
World Bank has defined the capital market as, The market in which longterm financial instruments such as equities and bonds are raised and
traded.
MONEY MARKETS
INTRODUCTION
The money market is a wholesale debt market for low risk, highly liquid
short term instrument. Funds are available in this market for periods
ranging from a single day up to a year. Majorly, Governments, banks and
other financial institutions dominate this market. The money market is a
market for short term financial assets that are close substitutes of money.
The most important feature of a money market instrument is that it is liquid
and can be turned over quickly at low cost and provides an avenue for
equilibrating the short term funds of lenders and the requirements of
borrowers.
2. In the money markets participants borrow and lend for short periods
that is up to twelve months.
3. Transactions usually take place via oral communication or written
communication.
4. There is no formal place like stock exchange.
5. The money market comprises of the Treasury Bills market,
Commercial Bills market, Call Money market etc.
6. Money market components include central bank, commercial bank,
non banking financial companies, etc.
7. The central bank plays a pivotal role in the money market.
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The Indian money market is "a market for short-term and Long term funds
with maturity ranging from overnight to one year and includes financial
instruments that are deemed to be close substitutes of money. It is
diversified and has evolved through many stages, from the conventional
platform of treasury bills and call money to commercial paper, certificates of
deposit, repos, FRAs and IRS more recently.
The Indian money market consists of diverse sub-markets, each dealing in
a particular type of short-term credit. The money market fulfills the
borrowing and investment requirements of providers and users of shortterm funds, and balances the demand for and supply of short-term funds by
providing an equilibrium mechanism. It also serves as a focal point for the
Central Bank's intervention in the market.
Organized sector
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(ii)
(iii)
Unorganized sector
Cooperative sector
Indigenous Banks
Money lenders
Chits
Nidhis
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While the need for long term financing is met by the capital or financial
markets, money market is a mechanism which deals with lending and
borrowing of short term funds. Post reforms age in India has witnessed
marvelous increase of the Indian money markets. Banks and other financial
institutions have been able to meet the high opportunity of short term
financial support of important sectors like the industry, services and
agriculture. It performs under the regulation and control of the Reserve
Bank of India (RBI). The Indian money markets have also exhibit the
required maturity and flexibility over the past two decades. Decision of the
government to permit the private sector banks to operate has provided
much needed healthy competition in the money markets resulting in fair
amount of improvement in their performance.
Money markets denote inter-bank market where the banks borrow and lend
between themselves to meet the short term credit and deposit needs of the
economy. Short term normally covers the time period up to one year. The
money market operation help the banks rush over the provisional mismatch
of funds with them. In case a particular bank needs funds for a few days it
can lend from another bank by paying the strong-minded interest rate. The
lending bank also gains as it is able to earn interest on the funds lying idle
with it. In other words money market provides avenues to the players in the
market to strike balance between the surplus funds with the lenders and
the obligation of funds for the borrowers. An significant function of the
money market is to provide a central point for interventions of the RBI to
pressure the liquidity in the financial system and implement other monetary
policy measures. Quantum of liquidity in the banking system is of dominant
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Debt instruments which have maturity of less than one year at the time of
issue are called money market instruments. These instruments are highly
liquid and have negligible risk. The major money market instruments are as
follows:
1.Call Money Market
2.Bill Market
a. Treasury Bills Market
b. Commercial Bills Market
3.Commercial Papers
4.Certificate of Deposit
5.Repos
6.Market Mutual Funds
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BILL MARKET
The bill market is the most important part of the money market. The bill
market is further subdivided into:
i.
ii.
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TREASURY BILLS
Treasury bills or T-bills mature in one year or less. A Treasury bill is a
promissory note issued by the government under the discount for a specific
period started therein. The government promises to pay the specific
amount mentioned there into the bearer of the instrument on the due date.
The period does not exceed one year. It is purely a finance bil since it is not
arise out of any trade transaction. It does not require any grading since it is
a claim of the government.
Treasury bills are issued by the RBI on behalf of the government. Treasury
bills are issued for meeting temporary government deficits. The Treasury
bill rate or the rate of discount is fixed by the RBI from time to time. It is
lowest one in the entire structure of interest rates in the country because of
short term maturity ad high degree of liquidity and security.
COMMERCIAL PAPERS
A commercial paper (CP) is an unsecured money market instruments
issued in the form of a promissory note. It was introduced in 1990 with view
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CERTIFICATE OF DEPOSIT
In India certificate of deposits (CDs) were first introduced in June 1989 with
the viewed to further widen the range of money market instruments and to
give investors greater flexibility in deployment of their short-term surplus
fund. Certificate of deposit represent the time deposit with the bank,
certificate of deposit are generally issued by commercial banks.
Banks have the freedom to issue certificate of deposits depending on their
requirement. They wear a specific maturity date and specified interest rate.
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Certificate of deposit offer a slightly higher yield than treasury bills because
of the slightly higher default list for a bank, but overall the likelihood that a
large bank will go broke its pretty thin.
Certificate of deposit represent bank deposit accounts which are
transferrable from one party from another .Certificate of deposits are
interest bearing, maturity dated obligations of banks & technically they are
a part of the banks time deposits. Certificate of deposits are issued in
multiples of RS 5 lakhs, subject to a minimum size of an issue to a single
investor being RS 25 lakhs.They have a maturity period of three months to
one year, & they would be issued at discount to face value.
REPO
Ready forward as a transaction is which agree to buy and sell the same
security at an agreed price. The repo rate represents the borrowing rate for
the use of his money in the intervening period. Internationally are used
extensively in the money market operations. All dated government
securities are eligible for trading in the repo market.
Repos can be for any period. While earlier there was a minimum period of
3 days, this has since been withdrawn. The RBI has been using repo
instrument effectively for its liquidity management; both for absorbing
liquidity & for repurchase agreement. Those who deals in government
securities reps as a form of overnight borrowing. A dealer or other holder of
government securities (usually T-bills) sells the securities to a lender &
agrees to purchase them at an agreed price. They are usually very short
term from overnight to 30 days or more. This short term maturity &
government backing means repos provide lenders with extremely low risk.
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Repos are popular because they can virtually eliminate credit problems.
Unfortunately, a number of significant losses over the years from fraudulent
dealers suggest that lenders in this market have not always checked their
collateralization closely enough.
When RBI conducts repos the short term interest rates in the money
market do not go below the RBI repo rate. If the interest rate is lower in
other markets such as foreign exchange market, Treasury bills market
holder of funds may go for repos with RBI.
Thus repos transactions ensure stability in the short term interest rates in
the money market; it will conduct a Reverse Repo transaction with the
primary dealers against government securities.
Reverse Repo- the reverse repo is the complete opposite of a repo. In this
case, a dealer buys government securities from an investor 7 then sells
them back at a later date for a higher price.
The following table summarizes the terminology:
Repo
Reverse repo
Seller
Buyer
Cash receiver
Cash provider
Near leg
Sells securities
Buys securities
Far leg
Buys securities
Sells securities
Participant
funds collect funds from investors & invest in different various securities in
their behalf. The returns from these investments are passed on to investors
either periodically, or at the end of a specified time period. The mutual fund
charges for its services referred to as management fees.
INTRODUCTION OF MONEY MARKET MUTUAL FUNDS
IN April 1992 the government announced the setting up of the MMMF with
the purpose of bringing money market instruments within the reach of
individuals. The money market mutual funds would be set up by scheduled
commercial banks & public financial institutions. The shares/units of money
market mutual funds would be issued to individuals only. In this respect,
they will differ from UTI & other mutual funds that have been mobilizing the
savings of the middle classes.
Money market fund is a mutual fund that invests solely in money
instruments. Money market instrument are forms of debt that mature in less
than one year are very liquid. Treasury bills make up bulk of the money
market instruments. Securities in the money market are relatively risk free.
Money market funds are generally the safest and the most secure of
mutual fund investments. The goal of a money fund is not preserve
principal, while yielding a modest return. Money market mutual fund is akin
to a high yield bank account but it is now entirely risk free.
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CAPITAL MARKETS
INTRODUCTION
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become one on the most dynamic, modern, and efficient securities markets
in Asia. Today, Indian market confirms to best international practices and
standards both in terms of structure and in terms of operating efficiency
.Indian securities markets are mainly governed by a) The Companys
Act1956, b) the Securities Contracts (Regulation) Act 1956 (SCRA Act),
and c) the Securities and Exchange Board of India (SEBI) Act, 1992. A brief
background of these above regulations is given below:
a) The Companies Act 1956 deals with issue, allotment and transfer of
securities and various aspects relating to company management. It
provides norms for disclosures in the public issues, regulations for
underwriting, and the issues pertaining to use of premium and discount on
various issues.
b) SCRA provides regulations for direct and indirect control of stock
exchanges with an aim to prevent undesirable transactions in securities. It
provides regulatory jurisdiction to Central Government over stock
exchanges, contracts in securities and listing of securities on stock
exchanges.
c) The SEBI Act empowers SEBI to protect the interest of investors in the
securities market, to promote the development of securities market and to
regulate the security market.
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PRIMARY MARKET
MEANING OF NEW ISSUE
A reference to a security that has been registered issued and is being sold
on a market to the public for the first time. Primary are sometimes referred
to as primary shares or new offerings. The term does not necessarily refer
to newly issued stocks, although initial public offerings are the most
commonly known Primary. Securities that can be newly issued include both
debt and equity.
Many investors buy Primary because they often experience tremendous
demand and, as a result, rapid price increases. Other investors don't
believe that Primary warrant the hype that they receive and choose to
watch from the side-lines. An investor who purchases a new issue should
be aware of all the risks associated with investing in a product that has only
been available to the public for a short time; Primary often prove to be
rather volatile and unpredictable.
6. The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for converting
private capital into public capital; this is known as "going public.
7. The financial assets sold can only be redeemed by the original holder.
KEY PLAYERS
The following are the key players in the primary market process:
1. Issuer: The corporation, municipality, government agency or investment
company offering securities for sale to investors.
2. Underwriter: An investment bank that serves as intermediary between
the issuer and the investing public.
3. Syndicate: A group of investment banks which jointly underwrite and
distribute an offering
MARKET PARTICIPANTS
There are various participants in the Primary market. These participants
play a major role in the new issue of securities. These are as follows:
Regulators: The key agencies that have a significant regulatory
influence, direct or indirect, over the securities markets such as SEBI
(Securities and Exchange Board of India), RBI (Reserve Bank of
India), DEA (Department of Economic Affairs) and MCA (Ministry of
Corporate Affairs) ,etc.
Stock Exchanges: A stock exchange is an institution where the
securities that have already been issued are bought and sold.
Presently there are 23 stock exchanges in India. The most important
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They have to be
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SECONDARY MARKET
INTRODUCTION
Secondary market is an avenue in which equity and pre-issued securities
are traded between potential investors.
The secondary market, also called aftermarket, is the financial market
where previously issued securities and financial instruments such as stock,
bonds, options, and futures are bought and sold. It is also known as Stock
Market.
The term "secondary market" is also used to refer to the market for any
used goods or assets, or an alternative use for an existing product or asset
where the customer base is the second market (for example, corn has
been traditionally used primarily for food production and feedstock, but a
"second" or "third" market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary
market, investors purchase these securities directly from issuers such as
corporations issuing shares in an IPO or private placement, or directly from
the federal government in the case of treasuries. After the initial issuance
investors can purchase the same from other investors in the secondary
market.The activities of buying and selling of securities in a secondary
market are carried out through the mechanism of STOCK EXCHANGES.
The secondary market for a variety of assets can vary from loans to stocks,
from fragmented to centralized, and from illiquid to very liquid. The major
stock exchanges are the most visible examples of liquid secondary markets
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and 2) accurate share price aids the efficient allocation of debt finance
whether debt offerings or institutional borrowing.
The term may refer to markets in things of value other than securities. For
example, the ability to buy and sell intellectual property such as patents, or
rights to musical compositions, is considered a secondary market because
it allows the owner to freely resell property entitlements issued by the
government. Similarly, secondary markets can be said to exist in some real
estate contexts as well (e.g. ownership shares of time-share vacation
homes are bought and sold outside of the official exchange set up by the
time-share issuers). These have very similar functions as secondary stock
and bond markets in allowing for speculation, providing liquidity, and
financing through securitization.1) to facilitate liquidity marketability of long
term instrument. 2) to provide instant valuation of securities caused by
changes in the environment.
In private equity, the secondary market (also often called private equity
secondaries or secondaries) refers to the buying and selling of pre-existing
investor commitments to private equity funds. Sellers of private equity
investments sell not only the investments in the fund but also their
remaining unfunded commitments to the funds.
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Depository Services Ltd (CDSL), while there are over a 700 DPs.
Proprietary trader: The firm that trades stocks, bonds, currencies, or
other financial instruments with the firm's own money so as to make a
profit for itself.
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Money market refers to the market for short-term securities with original
maturity of one year or less. These securities include T-bills, certificates of
deposits, commercial paper, and so on.
Money market instruments are relatively more liquid. The major players are
banks, FIs, mutual funds, and large corporate entities. The role of
individuals is not significant.
The term capital market, in general, refers to a market for long-term
securities, such as corporate stocks and bonds for financing long-term
assets. Capital market is a much wider term and often denotes different
segments, which function independent of each other.
The first segment is the stock (share) market, in which equity shares are
traded. Securities in the form of debt instruments (also called loan-stocks)
are traded in the second segment. In the third, derivative instruments
relating to equity and debt securities are traded. In addition, capital market
includes the money market segment, where financial assets particularly
short-term debts of less than 12 months are traded
Money market is a component of financial market where short-term borrowing can be
issued. This market includes assets that deal with short-term borrowing, lending,
buying and selling. A capital market is a component of a financial market that allows
long-term trading of debt and equity-backed securities. Long-term borrowing or
lending is done by investors or corporations that have large amounts of wealth at their
disposal.
When it comes to business, each business at a certain point has to borrow
money in order to keep running business. There are multiple ways that a
company can borrow money, including issuing bonds, shares or taking up a
loan. There are two different components of the financial market; known as
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Money Market and Capital Market. These terms are more commonly come
across in business and economics.
Money market is a component of financial market where short-term
borrowing can be issued. This market includes assets that deal with shortterm borrowing, lending, buying and selling. The short-term ensures that
the borrowing and lending period has a lease of less than one year. The
lease can also be as short as a one hour, depending on the borrower and
the lender. According to The Global Money Markets, Trading is usually
done over the counter using instruments such as Treasury bills, commercial
paper, bankers' acceptances, deposits, certificates of deposit, bills of
exchange,
repurchase
agreements,
federal
funds,
and
short-lived
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the New York Stock Exchange. Huge financial regulators are responsible
for overseeing the capital market to ensure that companies do not defraud
their investors. Trading can be done by a number of credit instruments such
as stocks, shares, equity, debentured, bonds, and securities. Much of the
trading is actually done online using a computer. There is no actual cash
involved in trading.
Investments made in a capital market usually last longer than a year and
can even last up to 25-30 years. Some investments may depend on the life
of the company, with the investment ending if the company shuts down. A
benefit of this investment is that if need arises, the investor can swiftly cash
their investment. Capital market can be divided into two divisions: stock
markets and bond markets. In stock markets investors acquire the
ownership of the company they are investing in, while in bond markets
investors are considered as creditors. Investment done in capital markets
are usually for acquiring physical capital goods that would help increase its
income. However, generating an income may take anywhere from a couple
of months to many years or could even fall through.
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The money market and the capital market are interrelated. The main points
of difference between these two markets are as follows:-
Transactions
Period:
In
money
market
transactions
are
accomplished for one or less than one year. While capital market
transactions are for long time.
Transaction Procedures: Since fewer formalities are required in
money market therefore, transactions cost is also minimum. While,
many formalities are required in making capital market transaction
successful and therefore its transaction cost is little bit higher than the
money market.
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CONCLUSION
Capital markets are perhaps the most widely followed markets. Both the
stock and bond markets are closely followed and their daily movements are
analyzed as proxies for the general economic condition of the world
markets. As a result, the institutions operating in capital markets - stock
exchanges, commercial banks and all types of corporations, including
nonbank institutions such as insurance companies and mortgage banks are
carefully scrutinized. The institutions operating in the capital markets
access them to raise capital for long-term purposes, such as for a merger
or acquisition, to expand a line of business or enter into a new business, or
for other capital projects. Entities that are raising money for these long-term
purposes come to one or more capital markets. In the bond market,
companies may issue debt in the form of corporate bonds, while both local
and federal governments may issue debt in the form of government bonds.
Similarly, companies may decide to raise money by issuing equity on the
stock market. Government entities are typically not publicly held and,
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The buyers of securities in the capital market tend to use funds that are
targeted for longer-term investment. Capital markets are risky markets and
are not usually used to invest short-term funds. Many investors access the
capital markets to save for retirement or education, as long as the investors
have long time horizons, which usually means they are young and are risk
takers.
Money market is often accessed alongside the capital markets. While
investors are willing to take on more risk and have patience to invest in
capital markets, money markets are a good place to "park" funds that are
needed in a shorter time period - usually one year or less. The financial
instruments used in capital markets include stocks and bonds, but the
instruments used in the money markets include deposits, collateral loans,
acceptances and bills of exchange. Institutions operating in money markets
are central banks, commercial banks and acceptance houses, among
others.
Money markets provide a variety of functions for either individual, corporate
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There are both differences and similarities between capital and money
markets. From the issuer or seller's standpoint, both markets provide a
necessary business function: maintaining adequate levels of funding.
The goal for which sellers access each market varies depending on their
liquidity needs and time horizon. Similarly, investors or buyers have unique
reasons for going to each market: Capital markets offer higher-risk
investments, while money markets offer safer assets money market returns
are often low but steady, while capital markets offer higher returns. The
magnitude of capital market returns is often a direct correlation to the level
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BIBLIOGRAPHY
Reference books
i.
ii.
iii.
iv.
v.
vi.
Reference Websites
i.
www.www.nseindia.com
ii.
www.RBI.org
iii.
www.investopedia.com
iv.
www.ecotimes.indiatimes.com
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