What is a

‘Financial
Market’ ? Financial Markets & Instruments
Financial
Assets and
Asset Classes

Classification Dr. Nabendu Paul

and functions
of the Assistant Professor(Finance and Accounting)
Financial
Markets
T A Pai Management Institute Bengaluru
Financial Manipal Academy of Higher Education Bengaluru Campus
Instruments

January 10, 2025

 What do we cover in this discussion?

What is a
‘Financial
Market’ ?

Financial
Assets and
Asset Classes
1 What is a financial market?
Classification 2 Financial Assets and Asset Classes
and functions
of the
Financial
3 Classification and functions of the Financial Markets
Markets
4 Financial Instruments
Financial
Instruments
 What is a ‘Financial Market’ ?

What is a
It is a mechanism that allows people to buy and sell
‘Financial
Market’ ?
securities (such as stock and bonds) and items of value at
Financial
low transaction cost.
Assets and
Asset Classes Markets work by placing many interested buyers and
Classification sellers in one place, thus making easier for them to find
and functions
of the each other.
Financial
Markets A business is a part of the economic system which has
Financial
Instruments
primarily two sectors: household and business firms.
Households save the funds and business firm invests the
funds. Financial Market act as an intermediary which
makes possible the transfer of funds from the savers to the
investors.
 Financial Assets and Asset Classes

Most assets are categorised into three types:

What is a
‘Financial
Real Assets: Physical assets that draw their value from
Market’ ? substances or properties like precious metals, land, real
Financial estate, commodities (like wheat, oil, soya bean).
Assets and
Asset Classes Financial Assets: Financial assets may seem to be
Classification
intangible or non-physical (with only the stated value on a
and functions piece of paper such as a dollar bill or a listing on a
of the
Financial computer screen). A financial asset represents a claim of
Markets
ownership of an entity (of a public company) or
Financial
Instruments contractual rights to payments (say, interest income from a
bond). Financial assets derive their value from a
contractual claim on an underlying asset.
Intangible Assets: They are the valuable property that is
non-physical in nature. They include patent, trademark
and intellectual property.
 Various asset classes

Equity
What is a
‘Financial Bonds or Debentures or Fixed Income Securities
Market’ ?

Financial Cash and Cash Equivalents like certificate of deposit,

Assets and
Asset Classes
T-bills, commercial paper, repos.
Classification Real Estate
and functions
of the
Financial
Commodities: Wheat, oil, soya bean, iron, coal, gold,
Markets
silver, platinum
Financial
Instruments Derivatives: A derivative refers to financial security whose
value depends on the underlying asset or group of assets.
Alternative Investments: Hedge Funds, art work,
investment in natural resources and private capital and
infrastructure.
 Classifications of Financial Markets

What is a
‘Financial Financial Markets are classified based on various categories
Market’ ?

Financial
Assets and Maturity: Money market and Capital markets
Asset Classes
Type of Asset: Physical asset markets versus Financial
Classification
and functions asset markets
of the
Financial
Obligation: Spot versus Futures Markets
Markets Primary Markets versus Secondary Markets
Financial Public Markets and Private Markets
Instruments
Types of Capital Market:Stock market, Bond market,
commodity markets, money markets, derivatives market,
insurance markets, foreign exchange markets.
 Capital Formation Process

What is a
‘Financial
Market’ ?

Financial
Assets and
Asset Classes

Classification
and functions
of the
Financial
Markets

Financial
Instruments
 Functions of the Financial Markets

What is a Price Determination: Price discovery of various financial

‘Financial
Market’ ? instruments (both newly issued and existing stock) by the
Financial market forces, i.e., demand and supply.
Assets and
Asset Classes
Funds Mobilization: Funds are mobilized from the
Classification
and functions lenders or the investors to the businesses who need the
of the
Financial
funds or raise funds through the means of issuing financial
Markets
instruments in the financial market. Hence, the financial
Financial
Instruments market helps in the mobilization of the investors’ savings.
Liquidity: Investors can sell their securities readily and
convert them into cash in the financial market without
substantial loss of value, thereby providing liquidity.
 Functions of the Financial Markets.......Contd.

Risk Sharing: With the help of the financial market, the

What is a
risk is transferred from the person who undertakes the
‘Financial
Market’ ?
investments to those who provide the funds for making
Financial
those investments.
Assets and
Asset Classes Easy Access: Firms can take on bigger projects and need
Classification capital. Investor cannot pursue such big projects but can
and functions
of the provide capital. Hence, financial markets can provide a
Financial
Markets platform for easy access of capital for these firms thereby
Financial bringing the buyer and seller of funds easily.
Instruments
Reduction of Transaction Costs: The financial market
reduces the cost of the transactions.
Capital Formation: Financial markets provide the
channel through which the new investors’ savings flow in
the country, which aids in the country’s capital formation.
 Functions of the Financial Markets

What is a
‘Financial
Market’ ?

Financial
Assets and
Asset Classes

Classification
and functions
of the
Financial
Markets

Financial
Instruments
 What is a financial instrument?

What is a
‘Financial
Market’ ? A monetary contract between two parties that can be
Financial
Assets and
traded and settled is known as a financial instrument.
Asset Classes
This contract is an asset to one party (the buyer) and a
Classification
and functions financial liability to the other party (the seller).
of the
Financial
Markets
Not all financial instruments are available for trading on
Financial
the stock exchange. For example, cheques are also a
Instruments
financial instrument but they are not allowed to be traded
on the exchange.
 Financial instruments in capital markets

Equities: Equities are the share in the ownership of the

company and are one of the most traded financial
What is a
‘Financial instruments on the exchange. Traders and Investors swarm
Market’ ?
towards equity as it provides better returns. Buying
Financial
Assets and shares/stocks give you the part-ownership in the company.
Asset Classes
Such stocks provide better liquidity and inherent volatility
Classification
and functions offers investors to book short term profits based on stock
of the
Financial price fluctuations.
Markets

Financial Bonds or Debentures or Fixed Income securities:

Instruments
These securities provides earnings to the holder in the
form of interest earned at specific intervals whereas the
principal is generally paid at the end of the contract
period. The holders of such securities are creditors to the
firm and not owners. They can be secured and unsecured.
Normally, they earn lower returns as compared to equity.
 Financial instruments in capital markets.......Contd.

Derivatives: Derivatives are instruments that derive their

What is a
‘Financial value from an underlying asset such as currencies, stocks,
Market’ ?
interest rates, etc. Most popular derivatives are options,
Financial
Assets and futures and forward contracts.
Asset Classes

Classification
Mutual Funds: Mutual Fund is a fund that is created by
and functions
of the
the contribution from several investors. The money is
Financial
Markets
invested in equities, bonds, money market instruments and
Financial
other securities available in the market. It offers investors
Instruments an opportunity to invest in diversified and professionally
managed securities at a relatively low cost. These funds
are managed by experts and professional portfolio
managers who will do meticulous research before investing
the funds.
 Financial instruments in money markets

Treasury Bills or T-Bills: Treasury Bills are one of the

What is a most popular money market instruments. They are issued
‘Financial
Market’ ? by the Government of India with short-term maturities
Financial ranging from 14 days to 364 days. These instruments are
Assets and
Asset Classes issued at a discount and repaid at par at the time of
Classification maturity. Any company, or person can purchase these
and functions
of the T-Bills. They are issued in lots of Rs. 25,000 for 14 days
Financial
Markets & 91 days and Rs. 1,00,000 for 364 days.
Financial
Instruments
Certificate of Deposit: Certificate of Deposit (CDs) are
issued by commercial banks to individuals, corporations,
trusts at a discount where the duration varies between 3
months to 1 year. The same, when issued by a financial
institution, is issued for a minimum of 1 year and a
maximum of 3 years.
 Financial instruments in money markets.....Contd.

Commercial Paper: Commercial papers (CPs) are issued

What is a by corporates to meet their short-term working capital
‘Financial
Market’ ? requirements. It serves as an alternative to borrowing from
Financial a bank and the maturity ranges from 15 days to 1 year. A
Assets and
Asset Classes company requires RBI‘s prior approval to issue a CP in the
Classification market which is to be issued at a discount to face value
and functions
of the and the market decides the discount rate. Denomination
Financial
Markets and the size of CP is of 25 lakhs (minimum size) to 100
Financial percent of the issuer’s working capital.
Instruments
Call money: Call money is a segment of the market where
scheduled commercial banks lend or borrow on short notice
(say a period of 14 days) to manage day-to-day cash
flows. The interest rates in the market are market-driven
and hence highly sensitive to demand and supply.
 Understanding Quotes: Bid and Ask prices

Quote: A quote is the last price at which an asset traded.

It is the most recent price that a buyer and seller agreed
What is a
‘Financial
upon and at which some amount of the asset was
Market’ ?
transacted.
Financial
Assets and Bid Price: The bid price refers to the highest price a
Asset Classes
buyer will pay for a security.
Classification
and functions
of the
Ask Price: The ask price refers to the lowest price a seller
Financial
Markets
will accept for a security.
Financial Bid-Ask spread: The difference between bid and ask
Instruments
prices (i.e., the bid-ask spread) is a key indicator of the
liquidity of the asset. In general, the smaller the spread,
the better the liquidity.
Transaction: A trade or transaction occurs when a buyer
in the market is willing to pay the ask price or the seller is
ready to sell at the bid price.