A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. The primary function of a financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sectors (borrowers). A financial market consists of investors or buyers, sellers, dealers and brokers and does not refer to a physical location. The participants in the market are linked by formal trading rules and communication networks for originating and trading financial securities. The three basic functions of financial markets are:
Price discovery process which results from the interaction of buyers and sellers in the market when they trade assets •
Provision of liquidity by providing a mechanism for an investor to sell financial assets •
Low cost of transactions and information
The types of Markets
Money Markets : Money markets are markets 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. This market is dominated mostly by government, banks and financial institutions. There are four kinds of money markets namely : Call money market, Commercial Bills market, Acceptance market, Treasury Bills market.
Capital Markets : The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. CALL MONEY MARKET
This component of the money market in India deals with the (borrowed and lent) overnight/one day call money and notice money for period(s) up to 14days. It primarily serves the purpose of balancing the short term liquidity positions of the bank. The call/notice money market is a market for short term funds repayable on demand and with maturity period varying between one day to a fortnight. When money is borrowed or lent for a day, it is known as call (overnight) money. When money is borrowed or lent for more than a day and up to 14 days, it is known as notice money. No collateral security is required to cover these transactions. It is basically an over-the-counter (OTC) market without the intermediation of brokers.
As a means of securing financing for credit needs, the call money market provides a range of options. Chief among them is the ability to create and manage what is referred to as a call money loan. The call money loan essentially works in the same manner as a day to day loan. Call money loans provide funds that can be used to conduct transactions between banks, or with other money market dealers. Generally, these types of loans are paid off in a short period of time, allowing the broker to move on to secure new loans and continue to process orders on behalf of their clients. The loans may be secured or unsecured, depending on the terms and conditions of the loan, along with the duration and the credit rating of the debtor.
Importance of call money market :
It helps the banks to manage short term deficit or surplus of money. As a part of their operations,...
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