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Functions of Financial Market Following are its main functions:

i. Mobilisation of savings and their Channelisation into more Productive Uses: Financial market gives impetus to the savings of the people. This market takes the uselessly lying finance in the form of cash to places where it is really needed. Many financial instruments are made available for transferring finance from one side to the other side. The investors can invest in any of these instruments according to their wish.

ii. Facilitates Price Discovery: The price of any good or service is determined by the forces of demand and supply. Like goods and services, the investors also try to discover the price of their securities. The financial market is helpful to the investors in giving them proper price.

iii. Provides Liquidity to Financial Assets: This is a market where the buyers and the sellers of all the securities are available all the times. This is the reason that it provides liquidity to securities. It means that the investors can invest their money, whenever they desire, in securities through the medium of financial market. They can also convert their investment into money whenever they so desire.

iv. Reduces the cost of Transactions: Various types of information is needed while buying and selling securities. Much time and money is spent in obtaining it. The financial market makes available every type of information without spending any money. In this way, the financial market reduces the cost of transactions.

Offer through prospectus and offer for sale.

Methods of floatation in the primary market:

(i) Offer through Prospectus is a method of floating new issues by inviting subscriptions from the public through issue of prospectus.

(ii) Offer for Sale is a method in which the securities are not issued directly to the public but through intermediaries like issuing house or stock brokers.

(iii) Private Placement refers to the allotment of securities by a company to institutional investors and some selected individuals.

(iv) Rights Issue is the privilege given to existing shareholders to subscribe to new issue of shares in proportion to the number of shares they already hold.

(v) e-IPO refers to issuing securities through the online system of stock exchange.

Detailed Answer:

There are various methods of floating new issues in the primary market:

(i) Offer through Prospectus: Offer through prospectus is the most popular method of raising funds by public companies in the primary market. This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in the newspapers and in the magazines. The issues may be underwritten and also are required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.

(ii) Offer for Sale: Under this method, securities are not issued directly to the public but are offered for sale through the intermediaries like issuing houses or stock brokers. In this case, a company sells securities unblock at an agreed price to brokers who, in turn, resell them to the investing public.

(iii) Private Placement: Private Placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore, cannot afford a public issue and choose to use private placement.

(iv) Rights Issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the 'Right' to buy new shares in proportion to the number of shares they already possess.

(v) e-IPOs: A company proposing to issue capital to the public through the online system of the stock exchange has to enter into an agreement with the stock exchange. This is called an Initial Public Offer (IPO). SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company. The issuer company should also appoint a registrar to the issue having electronic connectivity with the exchange. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities. The lead manager co-ordinates all the activities amongst intermediaries connected with the issue.

(i) I advise the directors to approach a 'consultant' as new issue of shares is not possible through stock exchange. 

(ii) In stock exchange, buying and selling of previously issued securities is done. 

(iii) New public issue of shares is the activity of the primary market. So, directors should approach a consultant. 

(iv) Different methods for new public issue of shares are: 

(a) Offer through prospectus; 

(b) Offer for Sale; 

(c) Private Placement; 

(d) Rights Issue; 

(e) e-lPOs. 

The seller draws a bill and the buyer accepts it, on acceptance, the bill becomes a marketable instrument called a Trade bill.

Primary market is a market in which new securities are issued for the first time to the investors.

The methods of floating new issues in the primary market are:

(i) Offer Through Prospectus: It is the method of floating new issues by inviting subscriptions from the public through issue of prospectus.

(ii) Offer for Sale: It is the method in which the securities are not issued directly to the public but through intermediaries like issuing houses or stock brokers.

(iii) Private Placement: It refers to the allotment of securities by a company to institutional investors and some selected individuals.

(iv) Rights Issue: It is the privilege given to existing shareholders to subscribe to new issue of shares in proportion to the number of shares they already hold.

(v) e-IPO: It refers to issuing securities through the online system of stock exchange.

Following is the brief description of money market instruments:

i. Treasury Bill: Treasury Bill means that short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short-term financial needs. Usually their maturity period is 14 days, 91 days, 182 days and 364 days. Treasury bills are of highly liquid nature because the RBI is ever-ready to buy them on discount. They are issued at less than the face value while the payment is made at the face value.

ii. Commercial Paper (CP): Commercial Papers are those unsecured Promissory Notes which are issued by well-reputed companies. The minimum face value of a commercial paper is five lakh rupees. It is used to meet the demand of a shortterm seasonal need and the requirement of working capital. They are issued for a period of 15 days to 12 months.

iii. Call Money or Call Loans: Call loan means that loan document for which the payment can be made at a short notice either by the borrower or the lender. Under this, the maturity period of the loan is between 1 and 15 days. The lowest amount of this instrument is rupees 10 crore. They are generally used by the banks for the following reasons:

a. To control the Statutory Liquidity Ratio (SLR).

b. To invest cash, more than what is needed, for short term.

iv. Certificate of Deposit (CD): Certificate of deposit is a negotiable instrument which can be transferred after a certain period by an endorsement. It is issued by the Scheduled Commercial Banks and the Indian Financial Institutions like IDBI, IFCI, ICICI, SIDBI and EXIM Bank. They are issued for a period ranging between 91 days and one year. They are issued on discount. An investor can transfer the certificates of deposits after a lapse of 45 days by an endorsement to any person.

v. Commercial Bill: It is a negotiable instrument which can be easily transferred. It is used to finance the credit sales. The seller (drawer) draws the bill and the buyer (drawee) accepts it. The buyer honours the bill on the due date. If the seller needs money before the due date, he can get the bill discounted from the bank. It is a short-term instrument, generally, issued for a period of 90 days.

The main functions performed by Stock Exchange are as follows:

i. Providing Liquidity and Marketability to Existing Securities: Stock Exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increase their marketability and enhance the liquidity in investment of money.

ii. Pricing of Securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

iii. Safety of Transactions: Stock Exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and any member found violating them, his membership is cancelled.

iv. Contributes to Economic Growth: Stock Exchange provides liquidity to securities. This gives the investor a double benefit—first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time. These advantages provided by the share market encourage the people to invest their money in securities. In this way, people’s money gets invested in industries and economic development becomes possible.

1. In the Secondary market, already existing securities are traded.

2. Companies sell fresh shares for the first time to the public in the Primary market.

3. In the Capital market, the instruments traded have a maturity period of more than one year.

4. The financial market can be classified as capital market and Money market.

Treasury bills.

Commercial Paper

The market which is utilized to build fresh capital is called as ‘new issue market.’

Following are the methods of raising capital in the primary market:

i. Public Issue: Under this method, the company issues a prospectus and invites the general public to purchase shares or debentures.

ii. Offer for Sale: Under this method, firstly the new securities are offered to an intermediary (generally firms of stock brokers) at a fixed price. They further resell the same to the general public at a higher price. The advantage of doing this is that the issuing company feels free from the tedious work of making a public issue.

iii. Private Placement: Under this method, the company sells securities to the big financial institutions or brokers instead of selling them to the general public. They, in turn, sell these securities to the selected clients at a higher price. This method is preferred as it is a cheaper method of raising funds as compared to a public issue.

iv. Right Issue: This method is used by those companies who have already issued their shares. When an existing company issues new shares, first of all it invites its existing shareholders. This issue is called the right issue. In this case, the shareholder has the right either to accept the offer for himself or assign a part or all of his rights in favour of another.

• Capital Market is the market that provides loans for long-term periods. It is controlled by SEBI.
• It uses shares, debenture bonds, Mutual funds.
• The corporate sector issues these securities in the market and attracts saving from investors by offering them a variety of schemes. These savings become capital and get invested in the business.
• It is helpful to develop the corporate and industrial sectors.
• Thus, the capital market is useful for the corporate sector.

Permanent Account Number (PAN).

(i) Delivery of shares in D'mat form directly to investors D'mat Account by the broker.

(ii) The Securities and Exchange Board of India (SEBI)

(iii) (a) Honesty

(b) Commitment or any other.

(i) Mobilization of savings and channelizing them into the most productive uses: 

(a) A financial market facilitates the transfer of savings from savers to investors. 

(b) It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use. 

(ii) Facilitating Price Discovery: 

(a) In the financial market, the households are suppliers of funds and business firms represent the demand. 

(b)Such forces of demand and supply help to establish a price for the financial asset which is being traded in that particular market. 

(iii) Providing Liquidity to Financial Assets: 

(a)Financial markets provide liquidity to financial assets by facilitating easy purchase and sale of financial assets. 

(b) Holders of assets can readily sell their financial assets through the mechanism of the financial market. 

(iv) Reducing the Cost of Transactions: 

(a) The financial markets reduce the cost of transactions by providing a common platform where buyers and sellers can purchase and sell the financial assets. 

(b)It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend of to try and find each other. 

Provide liquidity to financial assets.

• The money market is the market that provides short-term loans to businesses and governments.
• The loan period ranging from one day to one year.
• Call money and notice money provide finance for periods between 2 days to 14 days.
• Treasury Bills offer finance to the government for 91 days, 182 days, 364 days. Trade Bill or commercial bills offer finance up to 90 days.
• Commercial paper offers finance to the business organization from 7 days to 1 year. Money Market Mutual Fund offers finance for a maximum period of 1 year.
• Hence, the money market makes available short-term finance through different instruments.

Correct option: (c) Treasury Bills

Instruments of Money Market: 

(i) Commercial Paper:

• Commercial papers were first issued in the Indian money market in 1990.
• They are unsecured debt instruments.
• They are issued only by companies with strong credit ratings. They are issued at a discount rate. They are in the form of promissory notes.
• They are negotiable instruments i.e. they are freely transferable by endorsement and delivery.
• They are issued for a period of 15 days to 1 year.

(ii) Commercial Bills:

When the goods are sold on credit, the buyer becomes liable to make payment on a specific date in the future.

The seller draws a bill and the buyer accepts it. On acceptance, the bill becomes a marketable instrument called a Trade Bill.

When a Trade Bill is accepted by a commercial bank, it is known as a commercial bill.

They are in the form of negotiable instruments.

They are usually issued for a period of 90 days. But this period can vary between 30 to 90 days.

The liquidity of this bill is very high.

It is the most common method to meet the credit needs of trade and industry.

(iii) Certificate of Deposits:

• Certificate of Deposits was first introduced to the money market of India in 1989.
• They are issued by commercial banks or financial institutions at discount, at par, or at market rate.
• They are in the form of promissory notes and stamp duty is applicable on the instrument.
• The maturity periods of this instrument are from 15 days to 1 year.
• The subscribers for certificates of deposits are individuals, associations, companies, trusts, etc.
• They are freely transferable by endorsement and delivery after a lock in period of a minimum of 15 days.

(iv) Treasury Bills:

• Issue/Use of Treasury Bills was started by the Indian government in 1917.
• This instrument is issued by the government to institutions or the public to bridge the gap between receipts and expenditure.
• It is issued by the government on a discount for a fixed period not exceeding 1 year.
• These bills are in the nature of promissory notes containing a promise to pay the amount stated to the bearer of the instrument.
• The maturity period of this bill is 182 days.
• These bills enjoy a high degree of liquidity.

• The financial market is the market that brings together borrowers and lenders.
• The financial market attracts fund from investors by offering them a variety of schemes and then collected fund is diverted into the business organizations.
• People having surplus cash invested into financial market securities, the financial market provides finance than to businesses.
• Similarly, when the financial market generates income from investments in business, it shares with the investor.
• Thus, it is a valuable link between borrower and lender.

(a) Limited order and
(b) Market order

Correct option is (C) Clearing houses

(a) Commercial Paper

It is an instrument issued by large and credit worthy companies to raise short-term funds at lower rates of interest than market rates. It is an unsecured, negotiable promissory note with a fixed maturity period.

(b) 15 days to one year.

(c) It can also be used for seasonal and working capital needs.