Financial
System
Types of Financial
Institutions
Commercial Banks
• Role: Accept deposits from individuals and businesses, provide
loans, and offer basic financial services like savings and checking
accounts, credit cards, and mortgages.
• Example: State Bank of India (SBI), HDFC Bank
Investment Banks
• Role: Assist companies in raising capital through underwriting and
issuing securities, provide advisory services for mergers and
acquisitions, and manage investment portfolios.
• Example: ICICI Securities, Kotak Mahindra Capital Company.
Types of Financial
Institutions
Insurance Companies
• Role: Provide risk management by offering insurance policies that
protect against various risks (e.g., life, health, property). They
collect premiums and invest the funds to pay out claims.
• Example: Life Insurance Corporation of India (LIC), ICICI Lombard.
Types of Financial
Institutions
Brokerage Firms
• Role: Facilitate the buying and selling of securities such as stocks,
bonds, and mutual funds for individuals and institutional
investors. They also offer financial advisory services.
• Example: Zerodha, Angel Broking.
Mutual Funds
• Role: Pool funds from multiple investors to invest in a diversified
portfolio of securities, managed by professional fund managers.
They provide individual investors access to a variety of
investments.
• Example: HDFC Mutual Fund, SBI Mutual Fund.
Types of Financial
Institutions
Pension Funds
• Role: Manage retirement savings for individuals by investing
contributions in a diversified portfolio to ensure steady income
upon retirement.
• Example: Employees' Provident Fund Organisation (EPFO),
National Pension System (NPS).
Hedge Funds
• Role: Private investment funds that engage in complex strategies
to generate high returns, often with higher risk. They are typically
accessible to accredited investors.
• Example: Avendus Capital, Edelweiss Alternative Asset Advisors
Types of Financial
Institutions
Finance Companies
• Role: Provide loans to individuals and businesses
for various purposes, such as purchasing goods,
equipment, or for business operations. They often
serve customers who may not qualify for
traditional bank loans.
• Example: Bajaj Finance, Tata Capital.
Financial Market - Meaning
• Financial markets in refer to the platforms where various financial
instruments are traded, allowing individuals, institutions, and
businesses to invest, borrow, and manage risk.
• A financial market is a market for creation and exchange of financial
assets. If you buy or sell financial assets, you will participate in
financial markets in some way or the other.
1. Capital Formation: Financial markets provide a
platform for businesses and governments to raise
capital by issuing stocks and bonds. This capital is
essential for funding investments, expansion, and
various projects that drive economic growth. In 2022,
Indian companies raised approximately $7.99 billion
through IPOs. In 2023, despite a challenging global
economic environment, the IPO proceeds remained
Role of
strong at around $7.89 billion. Financial
2. Facilitating Investment: Financial markets allow
individuals and institutions to invest their savings in
Market
various financial instruments like stocks, bonds, mutual
funds, and exchange-traded funds (ETFs), providing
them with an opportunity to earn returns on their
investments.
3. Price Determination: Financial markets enable the
determination of prices for financial assets based on supply
and demand dynamics. These prices reflect market
participants' expectations, perceptions, and evaluations of
the underlying assets.
4. Liquidity: Financial markets enhance the liquidity of financial Role of
assets, making it easier for investors to buy and sell securities
quickly without significantly impacting their prices. This
Financial
liquidity helps improve the efficiency of capital allocation. Market
5. Risk Management: Through various financial derivatives like
options and futures, financial markets provide tools for
hedging and managing risks associated with price
fluctuations, interest rates, and currency movements.
6. Resource Allocation: Financial markets allocate
capital and resources to the most efficient and
productive uses by directing investments to sectors
and companies with promising growth prospects.
7. Transparency and Information Dissemination:
Financial markets promote transparency by providing
information about companies, their financial
performance, and economic conditions. This Role of Financial
information dissemination helps investors make Market
informed decisions
8. Economic Indicator: Financial markets, particularly
stock markets, are often considered leading
indicators of economic health. Their performance
and movements can provide insights into the overall
economic sentiment and potential trend
Segments of Financial Market
• Debt Market
Nature and claim • Equity Market
• Money Market
Maturity of claim • Capital Market
• Primary Market
Seasoning of Claim • Secondary Market
• Cash Market
Timing of Delivery • Future/Forward Market
Organizational • Exchange-traded Market
• Over-the-counter Market
Structure
The debt market is a platform where various debt
instruments, such as bonds and government
securities, are bought and sold, allowing issuers to
raise capital from investors through loans or IOUs.
Investors in the debt market receive periodic
Debt interest payments and are repaid the principal
amount at maturity, making it a relatively stable and
Market predictable investment option.
Debt instruments are assigned credit ratings to
assess their creditworthiness, providing investors
with valuable information about the risk of
potential defaults.
The equity market is where shares of publicly
traded companies are bought and sold, enabling
investors to become partial owners and
participate in the company's growth and profits.
Equity investors can earn returns through
Equity dividends, which represent a portion of the
company's profits, and through capital gains,
Market achieved when the stock's price appreciates.
While the equity market offers the potential for
higher returns, it also involves greater volatility,
The money market is a short-term segment of the
financial market where highly liquid and low-risk
instruments are traded, with maturities typically
ranging from overnight to one year.
Money Participants in the money market include banks,
financial institutions, corporations, and
governments, seeking to manage short-term
Market funding needs and invest excess cash.
Common instruments traded in the money market
include Treasury bills, certificates of deposit (CDs),
commercial paper, repurchase agreements
(repos), and money market mutual funds.
The capital market is a long-term segment of the
financial market where long-term debt and equity
instruments are bought and sold to raise capital for
businesses and governments.
Capital Participants in the capital market include companies
seeking to raise funds for expansion, infrastructure
projects, or refinancing, as well as investors looking
Market for opportunities to invest in long-term assets.
Common instruments traded in the capital market
include stocks, bonds, debentures, convertible
securities, and other long-term investment vehicles,
with transactions that can span several years.
Primary Market
The primary market is the initial platform where new securities, such as stocks and bonds, are
issued and sold by companies and governments to raise capital directly from investors.
In the primary market, issuers conduct initial public offerings (IPOs) or issue new debt to the
public, providing investors with an opportunity to become the first owners of these newly
created securities.
Investment banks and underwriters play a crucial role in the primary market by assisting
issuers in structuring and marketing the securities, ensuring regulatory compliance, and
facilitating the offering process.
Secondary Market
1.The secondary market is where previously issued securities, such as stocks and bonds,
are bought and sold among investors, rather than being directly issued by the companies
or governments.
2.In the secondary market, investors can trade securities with each other, providing
liquidity to investors who wish to buy or sell their existing holdings without needing to
wait for the original issuer to issue new securities.
3.The secondary market's prices are determined by supply and demand dynamics,
reflecting the market's perception of the securities' value and allowing investors to
realize capital gains or losses based on price fluctuations.
Cash Market
1.The cash market, also known as the spot market, is a segment of the financial market
where financial instruments and commodities are bought and sold for immediate
delivery and settlement.
2.In the cash market, transactions are executed at the current market price, and ownership
of the asset is transferred immediately, distinguishing it from the futures or derivatives
market, where contracts are based on future prices and settlement dates.
The derivatives market is a segment of the financial
market where financial instruments, known as
derivatives, derive their value from underlying assets,
such as stocks, bonds, commodities, or currencies.
Derivativ Derivatives provide investors with opportunities to
speculate on price movements, hedge against
es potential risks, and gain exposure to various markets
without directly owning the underlying assets.
market Types of derivatives include futures contracts, options
contracts, swaps, and forward contracts, each serving
different purposes in managing risk and speculation in
financial markets.
Exchange-traded securities are financial
instruments, such as stocks and ETFs, that
Exchang are listed and traded on formal exchanges,
providing investors with transparent
e-traded pricing and standardized trading.
Vs Over Over-the-counter (OTC) securities, on the
the other hand, are traded directly between
parties outside formal exchanges, involving
Counter negotiable terms and less transparency,
typically including bonds, certain stocks,
and various derivatives.
Financial Services -
Fund based and Non-
fund-based services
• Fund-based and non-fund based services are
terms commonly used in the banking and
financial industry to describe different types of
financial assistance or services provided to
customers.
• These services are often extended to
individuals, businesses, or other entities based
on their financial needs and requirements.
• Fund-based services refer to financial
assistance or services that involve the actual
lending or provision of funds from the bank or
financial institution to the customer.
Fund based • These services involve the direct transfer of
Services money to meet the borrower's financial
requirements.
• Fund based services given by Banks: Home
loan, car loan, Education loan, Gold loan, loan
against insurance etc.
Non-fund based services refer to services provided
by banks or financial institutions that do not involve
the actual lending of funds, but rather the issuance
of guarantees, commitments, or financial
instruments to facilitate various transactions.
Non-Fund These services do not immediately create a direct
Based financial liability for the bank, but they represent
contingent liabilities.
Services:
For Example: Letter of credit, bank guarantee, Export
guarantee etc
List of Financial Products
1.Savings Account
2.Current Account
3.Certificate of Deposit (CD)
4.Stocks
5.Bonds
6.Exchange-Traded Funds (ETFs)
7.Options
8.Futures Contracts
Above are few example, the list can be much bigger than given
