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INDEX
S.NO TOPICS PAGE NO
1 FINANCIAL MARKET 3
2 TYPES OF FINANCIAL MARKETS 3
3 BOND MARKETS 16
4 MUTUAL FUNDS 18
5 TYPES OF MUTUAL FUNDS 20
6 SHARES AND STOCK MARKET 22

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7 FACTORS THAT AFFECTS THE STOCK MARKET 24
8 RISKS ASSOCIATED WITH FINANCIAL MARKETS 26
9 WALL STREET & MAIN STREET 27
10 TERMS USED IN FINANCIAL MARKETS 28
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FINANCIAL MARKET helpful to the investors in giving them

Definition: proper price.
A Financial Market is a market in which (3) Provides Liquidity to Financial
people trade financial securities and Assets:
derivatives such as futures and options at This is a market where the buyers and the
low transaction costs. Securities include sellers of all the securities are available all
stocks and bonds, and precious metals. the times. This is the reason that it provides
A place where individuals are involved in liquidity to securities. It means that the
any kind of financial transaction refers to investors can invest their money,
financial market. Financial market is a whenever they desire, in securities
platform where buyers and sellers are through the medium of financial market.
involved in sale and purchase of financial They can also convert their investment into
products like shares, mutual funds, money whenever they so desire.
bonds and so on. (4) Reduces the Cost of Transactions:
Main Functions of Financial Market Various types of information are needed
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(1) Mobilisation of Savings and their while buying and selling securities. Much
Channelization into more Productive time and money are spent in obtaining the
Uses: same. The financial market makes available
Financial market gives impetus to the every type of information without
savings of the people. This market takes spending any money. In this way, the
the uselessly lying finance in the form of financial market reduces the cost of
cash to places where it is really needed. The transactions.
investors can invest in any of these
instruments according to their wish. TYPES OF FINANCIAL MARKETS
(2) Facilitates Price Discovery:  Capital markets
The price of any goods or services is  Commodity markets
determined by the forces of demand and  Money markets
supply. Like goods and services, the  Derivatives markets
investors also try to discover the price of  Futures markets
their securities. The financial market is  Foreign exchange markets
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 Cryptocurrency market Securities Market

 Spot market A securities market is a market where
 Interbank lending market securities are traded either on physical or
electronic exchanges. Securities markets are
CAPITAL MARKET generally divided between stock markets
A capital market is a financial market in and bond markets. A stock market
which long-term debt (over a year) or involves the trade of equity securities, which
equity-backed securities are bought and are ownership interests of a company
sold. Capital markets channel the wealth of commonly known as shares.
savers to those who can put it to long-term Bond markets, which provide financing
productive use, such as companies or through the issuance of bonds, and enable
governments making long-term investments. the subsequent trading thereof.
Capital markets help channelize surplus It is also classified into two interdependent
funds from savers to institutions which then segments, i.e.
invest them into productive use. Generally, They are
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this market trades mostly in long-term

securities.
1. Primary Market
2. Secondary Market
BASIS FOR COMPARISON PRIMARY SECONDARY
MARKET MARKET
Meaning The market place for new shares is The place where formerly
called primary market. issued securities are traded is
or known as Secondary Market.
The securities are formerly issued or
in a market. Issued securities is then
listed on a recognized stock
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exchange for trading.
Another name New Issue Market (NIM) After Market
Type of Purchasing Direct Indirect
Financing It supplies funds to budding It does not provide funding to

enterprises and also to existing companies.
companies for expansion and
diversification.
How many times a security Only once Multiple times
can be sold?
Buying and Selling between Company and Investors Investors
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Who will gain the amount Company Investors

on the sale of shares?
Intermediary Underwriters Brokers
Price Fixed price Fluctuates, depends on the

demand and supply force
Organizational difference Not rooted to any specific spot or It has physical existence.
geographical location.
The public issue is of two types, they are:  Further Public Offer (FPO): Public
 Initial Public Offer (IPO): Public issue issue made by a listed company, for one
made by an unlisted company for the very more time is also known as a Follow-On
first time, which after making issue lists its Offer. An FPO is a stock issue of additional
shares on the securities exchange is known shares made by a company that is already
as the Initial Public Offer.
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publicly listed and has gone through the IPO exchange of India. Its headquarters is
process. located in Mumbai, Maharashtra.
Chairman of BSE – S Ravi; Ashish kumar
TWO IMPORTANT STOCK EXCHANGES IN Chauhan (MD & CEO).
INDIA
Bombay Stock Exchange (BSE) National Stock Exchange (NSE)
The Bombay Stock Exchange (BSE) is an The National Stock Exchange of India
Indian stock exchange established in 1875, Limited (NSE) is the leading stock
the BSE (formerly known as Bombay Stock exchange of India. The NSE was
Exchange Ltd.). It is the Asia’s first stock established in 1992 as the first
exchange. It claims to be the world's demutualized electronic exchange in the
fastest stock exchange, with a median country.
trade speed of 6 microseconds. The BSE is NSE was the first exchange in the country to
the world's 10th largest stock exchange with provide a modern, fully automated
an overall market capitalization of more screen-based electronic trading system
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than $2.3 trillion on as of April 2018. which offered easy trading facility to the
Over the past 141 years, BSE has facilitated investors spread across the length and
the growth of the Indian corporate sector by breadth of the country. Vikram Limaye is
providing it an efficient capital-raising Managing Director & Chief Executive Officer
platform. BSE's popular equity index - the (MD & CEO) of NSE. Its headquarters is
S&P BSE SENSEX - is India's most widely located in Mumbai, Maharashtra.
tracked stock market benchmark index. It is National Stock Exchange has a total market
traded internationally on the EUREX as well capitalization of more than US$2.27 trillion,
as leading exchanges of the BRCS nations making it the world’s 11th-largest stock
(Brazil, Russia, China and South Africa). exchange as of April 2018.NSE's flagship
The BSE is also a Partner Exchange of the index, the NIFTY 50, the 50-stock index is
United Nations Sustainable Stock Exchange used extensively by investors in India and
initiative, joining in September 2012. BSE around the world as a barometer of the
established India INX on 30 December Indian capital markets. Nifty 50 index was
2016. India INX is the first international launched in 1996 by the NSE.
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COMMODITY MARKET secure an agreement with B to sell the bales

A Commodity Market is a market that at a certain price after an year irrespective
trades in primary economic sector rather of the price that is trending. This is called
than manufactured products. Soft hedging the risk. “A” hedges the risk by
commodities are agricultural products such securing the price and “B” speculates by pre-
as wheat, coffee, cocoa, fruit and sugar. booking the price expecting that prices
Hard commodities are mined, such as gold would go up in the near future which would
and oil. The term “commodity market” benefit him.
denotes the place where commodities or Futures contract: Futures contract is an
products are bought or sold. agreement between two parties who
A commodity market has its own set of rules agree to buy or sell a particular asset at
and regulations like any other market, but it a specified date and at a pre-determined
is clearly not a share market as physical price. The payment and delivery of the asset
form of goods are traded here. It can be said is made on the future date termed as
that the weather plays a huge role in this delivery date. The buyer in the futures
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market as most agricultural products are contract is known to hold a long position.
dealt in the commodity market. The seller in the futures contracts is said to
Types of Contracts: be having short position.
 Forward contracts On reading the meanings of future and
 Futures contract forward contract, you may find that the
 OTC meaning is the same. But there are some
Forward contract: Forward contract is an points of difference:
agreement between two parties to sell or  Forward contracts are traded over the
buy a certain commodity at a fixed price counter, while futures contracts are traded
in the future. This contract hedges the risk on the exchanges.
for the buyer against price fluctuations and  Forward contracts can be privately
the seller can get a guaranteed price for his negotiated. Futures contract have a
product at a specified date. standardized way of execution and the
For example, if A has the machinery that transaction is guaranteed by the clearing
produces 10 bales of cotton, then he can
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house which leads to lesser defaults on the Types of commodities traded in the
agreement. commodity market:
 Forward contracts are mostly used by There are basically two types of
hedgers (they try to eliminate the price commodities, the hard commodity and the
risk). Futures contracts are used by soft commodity. It is further divided into
speculators. (who predict the way the asset four categories namely;
price moves).  Energy- Natural Gas and Crude Oil.
 Agriculture – Cereals, Pulses, Potato,
Major commodity Exchanges in India: Oil and Oil Seeds, Rubber, Fibres, Sugar,
The place where all the transaction or And Spices.
contracts regarding commodities take place  Metals – Aluminium, Lead, Zinc, Nickel,
is called the exchanges. In India the these Copper
are  Bullions – Gold, Silver
Multi Commodity Exchange of India Ltd,
Mumbai (MCX) –Non-agricultural products Caution:
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like gold, silver, aluminium, copper, nickel, Trading in the commodity market requires a
lead, zinc and energy products like crude oil sound working knowledge of the
and natural gas are traded on this exchange. transactions and the trader should make
MCX is the main exchange where all an informed decision while trading. It is
commodity trading takes place. always better to enlist the services of a
National Commodity and Derivative brokerage firm whilst dealing in
Exchange, Mumbai (NCDEX) - in commodities.
Agricultural products like pulses, cereals,
sugar etc are traded on this exchange. MONEY MARKET
OTC: The Money market in India correlation for
Another type of contract authorized by the short-term funds with maturity ranging
clearing house called the Over The Counter from overnight to one year in India
(OTC) contract where transaction is done including financial instruments that are
privately by the contracting parties without deemed to be close substitutes of money.
the need of involving the exchanges.
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The money market is where financial Financing Industry:

instruments with high liquidity and very The money market contributes to the growth
short maturities are traded. It is used by of industries in two ways: They help
participants as a means for borrowing and industries secure short-term loans to
lending in the short term. meet their working capital requirements
Money Market’s Instruments are through the system of finance bills,
Call/Notice/Term money market, Repurchase commercial papers, etc.
Agreement (Repo & Reverse Repo) market, Industries generally need long-term loans,
Treasury bill market, Commercial Bill which are provided in the capital market.
market, Commercial paper market, However, the capital market depends upon
Certificate of Deposit market, Cash the nature of and the conditions in the
Management Bill (CMB). money market. The short-term interest rates
of the money market influence the long-term
FUNCTIONS OF MONEY MARKET interest rates of the capital market. Thus,
Money markets serve five functions—to money market indirectly helps the
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finance trade, finance industry, invest industries through its link with and
profitably, enhance commercial banks' self- influence on long-term capital market.
sufficiency, and lubricate central bank
policies. Profitable investment:
The Money Market enables the commercial
Financing Trade: banks to use their excess reserves in
The money market plays crucial role in profitable investment. The main objective of
financing domestic and international the commercial banks is to earn income
trade. Commercial finance is made available from its reserves as well as maintain
to the traders through bills of exchange, liquidity to meet the uncertain cash
which are discounted by the bill market. The demand of the depositors. In the money
acceptance houses and discount markets market, the excess reserves of the
help in financing foreign trade. commercial banks are invested in near-
money assets (e.g., short-term bills of
exchange), which are easily converted into
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cash. Thus, commercial banks earn profits CALL /NOTICE / TERM MONEY
without sacrificing liquidity. The call/notice/term money market
facilitates lending and borrowing of funds
Self-sufficiency of commercial bank: between banks and entities like Primary
Developed money markets help the Dealers. An institution which has surplus
commercial banks to become self-sufficient. funds may lend them on an
In the situation of emergency, when the uncollateralized basis to an institution
commercial banks have scarcity of funds, which is short of funds. Money market
they need not approach the central bank and transactions are categorized as follows:
borrow at a higher interest rate. On the  Call Money - Borrowing/Lending for 1
other hand, they can meet their day
requirements by recalling their old  Notice Money - Borrowing/Lending for
short-run loans from the money market. 2-14 days
 Term Money - Borrowing/Lending for
Help to central bank: more than 14 days
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Though the central bank can function and The interest rates on such funds depend on
influence the banking system in the absence the surplus funds available with lenders
of a money market, the existence of a and the demand for the same which remains
developed money market smooths the volatile. This market is governed by the
functioning and increases the efficiency Reserve Bank of India which issues
of the central bank. Sensitive and guidelines for the various participants in the
integrated money markets help the central call/notice money market.
bank secure quick and widespread influence Participants
on the sub-markets, thus facilitating Scheduled commercial banks (excluding
effective policy implementation. RRBs), co-operative banks (other than Land
Development Banks) and Primary Dealers
(PDs), are permitted to participate in
call/notice money market both as borrowers
and lenders.
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Prudential Limits
Prudential Limits for Transactions in Call/Notice Money Market
Sr. Participant Borrowing Lending

No.
On a daily average basis in a reporting On a daily average basis in a
fortnight, borrowing outstanding reporting fortnight, lending
should not exceed 100 per cent of outstanding should not exceed 25
Scheduled capital funds (i.e., sum of Tier I and per cent of their capital funds.
1 Commercial Tier II capital) of latest audited However, banks are allowed to
Banks balance sheet. lend a maximum of 50 per cent of
However, banks are allowed to borrow their capital funds on any day,
a maximum of 125 per cent of their during a fortnight.
capital funds on any day, during a
fortnight.
Outstanding borrowings of State Co-
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operative Banks/District Central Co-

operative Banks/ Urban Co-operative
2 Co-operative Banks in call/notice money market, on
Banks a daily basis should not exceed 2.0 per
cent of their aggregate deposits as at No limit.
end March of the previous financial
year.
PDs are allowed to borrow, on daily PDs are allowed to lend in
average basis in a reporting call/notice money market, on
3 PDs fortnight, up to 225 per cent of their daily average basis in a reporting
net owned funds (NOF) as at end- fortnight, up to 25 per cent of
March of the previous financial year. their NOF.
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The prudential limits in respect of both Commodity money:

outstanding borrowing and lending Commodity money is closely related to (and
transactions in call/notice money market for originates from) a barter system, where
scheduled commercial banks, co-operative goods and services are directly exchanged
banks and PDs are as follows: - for other goods and services. Commodity
 The limits so arrived at may be conveyed money facilitates this process, because it
to the Clearing Corporation of India Ltd. acts as a generally accepted medium of
(CCIL) for setting of limits in NDS-CALL exchange. Examples of commodity money
System, under advice to Financial Markets include gold coins, beads, shells, spices, etc.
Regulation Department (FMRD), Reserve Fiat Money:
Bank of India. Fiat money gets its value from a government
 Non-bank institutions (other than order (i.e. fiat). That means, the government
PDs) are not permitted in the call/notice declares fiat money to be legal tender, which
money market. requires all people and firms within the
 Eligible participants are free to decide country to accept it as a means of payment.
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on interest rates in call/notice money Examples of fiat money include coins and
market. bills.
 With the implementation of the core Fiduciary Money:
banking solution, the Negotiated Dealing Fiduciary money depends for its value on the
System (NDS) has been discontinued for confidence that it will be generally accepted
reporting of OTC Call/Notice/Term Money as a medium of exchange. Unlike fiat money,
transactions. it is not declared legal tender by the
government, which means people are not
TYPES OF MONEY required by law to accept it as a means of
Money can be described as a generally payment.
accepted medium of exchange for goods and Instead, the issuer of fiduciary money
services. They are divided into four types, promises to exchange it back for a
they are commodity money, fiat money, commodity or fiat money if requested by the
fiduciary money, and commercial bank bearer. Examples of fiduciary money include
money. cheques, bank notes, or drafts.
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Commercial Bank Money:  Federal agency short-term securities

Commercial bank money can be described as – In the U.S., short-term securities issued by
claims against financial institutions that can government sponsored enterprises such as
be used to purchase goods or services. It the Farm Credit System, the Federal Home
represents the portion of a currency that is Loan Banks and the Federal National
made of debt generated by commercial Mortgage Association. Money markets is
banks. At this point just note that in heavily used function.
essence, commercial bank money is debt  Federal funds – In the U.S., interest-
generated by commercial banks that can be bearing deposits held by banks and other
exchanged for “real” money or to buy goods depository institutions at the Federal
and services. Reserve; these are immediately available
funds that institutions borrow or lend,
MONEY MARKET INSTRUMENTS usually on an overnight basis. They are lent
 Certificate of deposit – Time deposit, for the federal funds rate.
commonly offered to consumers by banks,  Municipal notes – In the U.S., short-
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thrift institutions, and credit unions. term notes issued by municipalities in

 Repurchase agreements – Short-term anticipation of tax receipts or other revenues
loans—normally for less than one week and  Treasury bills – Short-term debt
frequently for one day—arranged by selling obligations of a national government that are
securities to an investor with an agreement issued to mature in three to twelve months
to repurchase them at a fixed price on a  Money funds – Pooled short-maturity,
fixed date. high-quality investments that buy money
 Commercial paper – Short term market securities on behalf of retail or
instruments promissory notes issued by institutional investors
company at discount to face value and  Foreign exchange swaps – Exchanging
redeemed at face value a set of currencies in spot date and the
 Eurodollar deposit – Deposits made in reversal of the exchange of currencies at a
U.S. dollars at a bank or bank branch located predetermined time in the future
outside the United States.  Short-lived mortgage and asset-
backed securities.
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DERIVATIVE MARKETS For example: The cash market price of ABC

The general practice is to use derivatives as Ltd is trading at Rs.100 per share but is
a risk management tool that allows an quoting at Rs. 102 in the future market. An
investor to transfer the risks attached arbitrageur would buy 100 shares at Rs. 100
with the underlying asset to the party in the cash market & simultaneously, sell
who is willing to take it. There can be a 100 shares at Rs. 102 in Future markets,
number of risks such as market risks, credit thereby making a profit of Rs. 2 per share.
risk and liquidity risk. Hedgers:
A derivative is a type of a financial In simple terms, hedging means buying
instrument, whose value is derived from insurance in order to minimize the risk. An
underlying assets. These underlying assets investor/trader who wants to protect himself
can be equities, interest rates, currencies from unfavourable price movements is called
and commodities. a Hedger. The main objective of a hedger is
to limit his exposure risk and they do so
TYPES OF DERIVATIVE MARKETS by creating an exact opposite position in
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On the basis of their trading rationale, the derivatives market.

participants in the Derivatives Market can For example: An investor has a portfolio of
be classified into 3 categories. These are Rs. 5,00,000 and he does not want to
as follows: liquidate his portfolio ahead of key events,
Arbitrageurs: such as budget, policy announcements or
In this category, the price difference even elections. Hence, to protect his
between two different markets is exploited. portfolio from volatility, he can short index
A trader simultaneously buys an asset at a futures to make his portfolio beta neutral or
cheaper rate from one market and sells it he can buy Put option by paying a fixed cost
at a higher price in another market, known as premiums
making it a low rich trade. However, it Speculator:
should be noted that such opportunities are Speculators are risk takers, who are willing
very brief in the derivatives market. Since an to take high risk in the anticipation of
arbitrageur rushes to grab this opportunity, making higher gains in a short span of time.
it eventually narrows down the price gap. They tend to buy stocks with the expectation
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that the price will rise and hope to eventually day from 5 p.m. EST on Sunday until 4 p.m.
sell stocks at a higher level. While this EST on Friday because currencies are in high
category opens up the possibility of making demand. It sets the exchange rates for
large profits, it also exposes a trader to currencies with floating rates.
losing the principal amount. Foreign exchange trading is a contract
For example: between two parties. There are three
If a speculator feels that the price of ABC types of trades. The spot market is for
company is likely to fall in a few days due to the currency price at the time of the trade.
some upcoming market developments, he The forward market is an agreement to
would short sell the ABC company’s share in exchange currencies at an agreed-upon price
a derivatives market. If the stock price falls on a future date.
as expected, then he would make a good A swap trade involves both. Dealers buy a
profit depending on his holding. However, if currency at today's price on the spot market
stock prices go up against the expectation, and sell the same amount in the forward
then his loss would be equivalent. market. This way, they have just limited
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their risk in the future. No matter how much

FOREIGN EXCHANGE MARKET the currency falls, they will not lose more
The Foreign Exchange Market (Forex, FX, or than the forward price. Meanwhile, they can
currency market) is a global decentralized or invest the currency they bought on the spot
over-the-counter (OTC) market for the market.
trading of currencies. This market
determines the foreign exchange rate. It INTERBANK MARKET
includes all aspects of buying, selling and The interbank market is a network of banks
exchanging currencies at current or that trade currencies with each other. Each
determined prices. In terms of trading has a currency trading desk called a dealing
volume, it is by far the largest market in the desk. They are in contact with each other
world, followed by the Credit market. continuously. That process makes sure
The main participants in this market are the exchange rates are uniform around the
larger international banks. It has no world.
physical location and operates 24 hours a
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The minimum trade is one million of the which SWIFT gradually expanded to provide
currency being traded. Most trades are much services to the following:
larger, between 10 million and 100 million in 1. Banks
value. As a result, exchange rates are 2. Brokerage Institutes and Trading Houses
dictated by the interbank market. 3. Securities Dealers
The interbank market includes the three 4. Asset Management Companies
trades mentioned above. Banks also engage 5. Clearing Houses
in the SWIFT market. It allows them to 6. Depositories
transfer foreign exchange to each other. 7. Exchanges
SWIFT stands for Society for World-Wide 8. Corporate Business Houses
Interbank Financial 9. Treasury Market Participants and Service
Telecommunications. Providers
Banks trade to create profit for themselves 10. Foreign Exchange and Money Brokers
and their clients. When they trade for For example: Bank's SWIFT code is
themselves, it's called proprietary trading. “CSTAAU2B”. You’ll need to give this code to
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Their customers include governments, anyone sending money to you from

sovereign wealth funds, large corporations, overseas. The code is made up of letters and
hedge funds, and wealthy individuals. numbers as follows:
 CSTA – Bank code (4 digits)
SWIFT (Society for Worldwide  AU – Location Code (2 digits)
Interbank Financial Telecommunication)  2B – Country Code (2 digits)
Code
A SWIFT code is an international bank BOND MARKETS
code that identifies particular banks Definition:
worldwide. It's also known as a Bank The bond market also called the debt
Identifier Code (BIC).Bank uses SWIFT market or credit market – is a financial
codes to send money to overseas banks. A market in which the participants are
SWIFT code consists of 8 or 11 characters. provided with the issuance and trading
The robustness of the message format of debt securities.
design allowed huge scalability through
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The bond market primarily includes face value on the agreed maturity date
government-issued securities and with periodic interest payments. This
corporate debt securities, facilitating the characteristic makes government bonds
transfer of capital from savers to the issuers attractive for conservative investors.
or organizations requiring capital for
government projects, business expansions Municipal Bonds:
and ongoing operations. Local governments and their agencies,
Its primary goal is to provide long-term states, cities, special-purpose districts, public
funding for public and private utility districts, school districts, publicly
expenditures. The bond market is part of owned airports and seaports, and other
the credit market, with bank loans forming government-owned entities issue municipal
the other main component. The global credit bonds to fund their projects.
market in aggregate is about 3 times the Mortgage-Backed Securities Bonds:
size of the global equity market. Pooled mortgages on real estate properties
Types of Bond Markets provide mortgage bonds. Mortgage bonds
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The general bond market can be classified are locked in by the pledge of particular
into assets. They pay monthly, quarterly or semi-
annual interest. If a third category of
Corporate Bonds: bonds is backed by a number of
Corporations provide corporate bonds to mortgages, they are known as mortgage-
raise money for different reasons, such backed securities or MBS. These bonds are
as financing ongoing operations or typically reserved for sophisticated or
expanding businesses. The term "corporate institutional investors and not individuals.
bond" is usually used for longer-term debt
instruments that provide a maturity of at Asset-Backed Securities Bonds:
least one year. A third category of bonds is issued by
banks or other financial sector
Government and Agency Bonds: participants and are referred to as asset-
National governments issue government backed securities or ABS. These bonds are
bonds and entice buyers by providing the created by packaging up the cash flows
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generated by a number of similar assets and

offering them to investors.
RELATIONSHIP BETWEEN LENDERS AND BORROWERS

Lenders Financial Financial Markets Borrowers
Intermediaries
Individual Banks Interbank Individuals
Companies Insurance Companies Stock Exchange Companies
Pension Funds Money Market Central Government
Mutual Funds Bond Market Municipalities
Foreign Exchange Public Corporations
MUTUAL FUNDS investment trusts that trade on an exchange.

A mutual fund is a professionally Mutual funds are also classified by their
managed investment fund that pools R.A.C.E
principal investments as money market

money from many investors to purchase funds, bond or fixed income funds, stock or
securities. These investors may be retail or equity funds, hybrid funds or other. Funds
institutional in nature. may also be categorized as index funds,
The primary advantages of mutual funds which are passively managed funds that
are that they provide economies of scale, a match the performance of an index, or
higher level of diversification, they provide actively managed funds. Hedge funds are
liquidity, and they are managed by not mutual funds; hedge funds cannot be
professional investors. On the negative sold to the general public and are subject to
side, investors in a mutual fund must pay different government regulations.
various fees and expenses. Advantages and disadvantages to
Primary structures of mutual funds include investors
open-end funds, unit investment trusts, Mutual funds have advantages and
and closed-end funds. Exchange-traded disadvantages compared to investing directly
funds (ETFs) are open-end funds or unit in individual securities:
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Advantages Disadvantages
Increased diversification: A fund  Fees
diversifies holding many securities. This  Less control over timing of recognition
diversification decreases risk. of gains
 Daily liquidity: Shareholders of open-  Less predictable income
end funds and unit investment trusts may  No opportunity to customize
sell their holdings back to the fund at regular
intervals at a price equal to the net asset Fund structures of Mutual Funds
value of the fund's holdings. Most funds There are three primary structures of mutual
allow investors to redeem in this way at the funds: Open-End Funds, Unit Investment
close of every trading day. Trusts, and Closed-End Funds. Exchange-
 Professional investment traded funds (ETFs) are open-end funds or
management: Open-and closed-end funds unit investment trusts that trade on an
hire portfolio managers to supervise the exchange.
fund's investments. Ability to participate in
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investments that may be available only to Open-End Funds

larger investors. For example, individual Open-end mutual funds must be willing to
investors often find it difficult to invest buy back ("redeem") their shares from their
directly in foreign markets. investors at the Net Asset Value (NAV)
 Service and convenience: Funds often computed that day based upon the prices of
provide services such as check writing. the securities owned by the fund. In the
 Government oversight: Mutual funds United States, open-end funds must be
are regulated by a governmental body. willing to buy back shares at the end of
 Transparency and ease of every business day. In other jurisdictions,
comparison: All mutual funds are required open-funds may only be required to buy
to report the same information to investors, back shares at longer intervals. For example,
which makes them easier to compare to UCITS funds in Europe are only required to
each other. accept redemptions twice each month
(though most UCITS accept redemptions
daily).
19
Most open-end funds also sell shares to the Unlike other types of mutual funds, unit
public every business day; these shares are investment trusts do not have a professional
priced at NAV. Most mutual funds are open- investment manager. Their portfolio of
end funds. securities is established at the creation of
the UIT.
Closed-end funds
Closed-end funds generally issue shares to Exchange-traded funds:
the public only once, when they are Exchange-traded funds (ETFs) are
created through an initial public offering. structured as open-end investment
Their shares are then listed for trading on a companies or UITs. ETFs combine
stock exchange. Investors who want to sell characteristics of both closed-end funds and
their shares must sell their shares to another open-end funds. ETFs are traded throughout
investor in the market; they cannot sell the day on a stock exchange. An arbitrage
their shares back to the fund. The price mechanism is used to keep the trading price
that investors receive for their shares may close to net asset value of the ETF holdings.
R.A.C.E
be significantly different from NAV; it may be

at a "premium" to NAV (i.e., higher than TYPES OF MUTUAL FUND
NAV) or, more commonly, at a "discount" to Equity Funds
NAV (i.e., lower than NAV). Primarily investing in stocks, they also go by
the name stock funds. These funds are
Unit investment trusts: invested in equity or shares of the
Unit investment trusts (UITs) are issued companies. They invest the money
to the public only once when they are amassed from investors from diverse
created. UITs generally have a limited life backgrounds into shares of different
span, established at creation. Investors can companies. The returns or losses are
redeem shares directly with the fund at any determined by how these shares perform
time (similar to an open-end fund) or wait to (price-hikes or price-drops) in the stock
redeem them upon the trust's termination. market. As equity funds come with a quick
Less commonly, they can sell their shares in growth, the risk of losing money is
the open market. comparatively higher.
20
Debt Funds the gap between equity funds and debt

Debt funds invest in fixed-income funds. The ratio can be variable or fixed. In
securities like bonds, securities and short, it takes the best of two mutual funds
treasury bills – Fixed Maturity Plans (FMPs), by distributing, say, 60% of assets in stocks
Gilt Fund, Liquid Funds, Short Term Plans, and the rest in bonds or vice versa. This is
Long Term Bonds and Monthly Income Plans suitable for investors willing to take more
among others – with fixed interest rate and risks for ‘debt plus returns’ benefit rather
maturity date. Go for it, only if you are a than sticking to lower but steady income
passive investor looking for a small but schemes.
regular income (interest and capital
appreciation) with minimal risks. Types Based on Structure
Mutual funds can be categorized based on
Money Market Funds different attributes (like risk profile, asset
Just as some investors trade stocks in the class etc.). Structural classification – open-
stock market, some trade money in the ended funds, close-ended funds, and interval
R.A.C.E
money market, also known as capital market funds – is broad in nature and the difference
or cash market. It is usually run by the depends on how flexible the purchase and
government, banks or corporations by sales of individual mutual fund units is.
issuing money market securities like bonds,
T-bills, dated securities and certificate of Open-Ended Funds:
deposits among others. The fund manager These funds don’t have any constraints in
invests your money and disburses regular a time period or number of units – an
dividends to you in return. If you opt for a investor can trade funds at their convenience
short-term plan (13 months max), the risk is and exit when they like at the current NAV
relatively less. (Net Asset Value). This is why its unit capital
changes constantly with new entries and
Hybrid Funds exits. An open-ended fund may also decide
As the name implies, Hybrid Funds (also go to stop taking in new investors if they do not
by the name Balanced Funds) is an optimum want to (or cannot manage large funds).
mix of bonds and stocks, thereby bridging
21
Closed-Ended Funds: individuals to increase profit of the

Here, the unit capital to invest is fixed organization.
beforehand, and hence they cannot sell a Shareholder
more than a pre-agreed number of An individual owning one or more than one
units. Some funds also come with an NFO share of an organization is called a
period, wherein there is a deadline to buy shareholder. In simpler words, an individual
units. It has a specific maturity tenure and purchasing one or more than one share from
fund managers are open to any fund size, any private or public organization is called a
however large. SEBI mandates investors to shareholder.
be given either repurchase option or listing A shareholder can sell his shares anytime
on stock exchanges to exit the scheme. depending on the current value of the share.
He/she can purchase any new share issued
Interval Funds: by any other or same organization.
This has traits of both open-ended and A shareholder has the right to declared
closed-ended funds. Interval funds can be dividend.
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purchased or exited only at specific Dividend

intervals (decided by the fund house) and An organization pays the shareholders for
are closed the rest of the time. No investing in their company’s shares. The
transactions will be permitted for at least 2 income earned by an individual by investing
years. This is suitable for those who want to in an organization’s share (private or public)
save a lump sum for an immediate goal (3- is called as dividend.
12 months). The profit earned by an organization is put
into use in the following two ways:
SHARES AND STOCK MARKET It is paid to the shareholders as dividend.
SHARE MARKET The profit earned by the organization is not
An organization in order to raise money distributed amongst the shareholders but is
divides its entire capital into small units retained and reinvested in the organization.
of equal value. Each unit is called a share. This portion of the income is called retained
A share is nothing but an indivisible unit of a earnings.
company’s capital to be sold among
22
When an individual purchases shares from officials may decide to pay the extra profits
any organization, he/she is issued a to the shareholders either as cash (dividend)
certificate as a proof of his investment. Such or issue a bonus share to them.
a certificate issued by an organization to the Bonus shares are often issued by
shareholders is called a share certificate. organizations to the shareholders free of
charge as a gift in proportion to their
TYPES OF SHARES existing shares with the organization.
Equity Shares: To invest in shares, one needs to open a
Equity shares also called as ordinary shares DEMAT Account for online trading. A DEMAT
are the shares where the payment of Account is mandatory for sale and purchase
dividend is directly proportional to the of shares anytime and anywhere.
profits earned by the organization. An individual need to have his PAN Card, a
Higher the profits earned, higher the bank account, other necessary Identity
dividend, lower the profits, and lower the proofs, address proofs and so on.
dividend. In an equity share, dividends are
R.A.C.E
paid at a fluctuating/floating rate. STOCK MARKET

Preference Shares: A stock market is a platform for trading of
Shares which enjoy preference over company’s shares at an agreed rate.A
payment of dividends are called stock market, equity market or share market
preference shares. Shareholders enjoy fixed is the aggregation of buyers and sellers
rate of dividends in case of preference (a loose network of economic transactions,
shares. not a physical facility or discrete entity) of
Founder Shares: stocks (also called shares), which represent
Shares held by the management or ownership claims on businesses; these may
founders of the organization are called as include securities listed on a public stock
founder shares. exchange, as well as stock that is only
Bonus Shares: traded privately.
Bonus shares are often issued to the TYPES OF STOCK MARKET
shareholders when the organization Aside from the private/public distinction,
earns surplus profits. The company there are two types of stock that companies
23
can issue: Common Stock and Preferred Top 10 Benefits of Stock Investing
Stock.  Stock ownership takes advantage of a
Common Stock: growing economy
When people talk about stocks, they are  Best way to stay ahead of inflation
usually referring to common stock. In fact,  Liquidity
the great majority of stock is issued is in this  Easy to buy and sell
form. Common shares represent a claim  Incremental Investment Strategy
on profits (dividends) and confer voting  Money making more money
rights. Investors most often get one vote  No limit to rewards
per share-owned to elect board members  Tax Benefits
who oversee the major decisions made by  Improves Emotional Intelligence
management. Over the long term, common  Cash flow
stock, by means of capital growth, has
tended to yield higher returns than FACTORS THAT AFFECTS THE STOCK
corporate bonds. MARKET
R.A.C.E
Preferred Stock: Stock prices can be affected by:

Preferred stock functions similarly to bonds, Company News and Performance, Industry
and usually doesn't come with the voting Performance, Investor Sentiment and
rights (this may vary depending on the Economic Factors
company, but in many cases preferred Company News and Performance:
shareholders do not have any voting rights). Here are some company-specific factors that
With preferred shares, investors are usually can affect the share price:
guaranteed a fixed dividend in  News releases on earnings and profits,
perpetuity. This is different from common and future estimated earnings
stock which has variable dividends that are  Announcement of dividends
declared by the board of directors and never  Introduction of a new product or a
guaranteed. In fact, many companies do not product recall
pay out dividends to common stock at all.  Securing a new large contract
 Employee layoffs
 Anticipated takeover or merger
24
 A change of management Economic factors

 Accounting errors or scandals a. Interest rates
Industry Performance: For Example: The Bank of Canada can raise
Often, the stock price of the companies in or lower interest rates to stabilize or
the same industry will move in tandem with stimulate the Canadian economy. This is
each other. This is because market known as monetary policy. If a company
conditions generally affect the companies borrows money to expand and improve its
in the same industry the same way. But business, higher interest rates will affect
sometimes, the stock price of a company will the cost of its debt. This can reduce
benefit from a piece of bad news for its company profits and the dividends it pays
competitor if the companies are competing shareholders.
for the same market. As a result, its share price may drop. And, in
Investor Sentiment: times of higher interest rates, investments
Investor sentiment or confidence can that pay interest tend to be more attractive
cause the market to go up or down, which to investors than stocks.
R.A.C.E
can cause stock prices to rise or fall. The

general direction that the stock market takes b. Economic outlook
can affect the value of a stock: If it looks like the economy is going to
Bull Market – a strong stock market where expand, stock prices may rise. Investors
stock prices are rising, and investor may buy more stocks thinking they will see
confidence is growing. It’s often tied to future profits and higher stock prices. If the
economic recovery or an economic boom, as economic outlook is uncertain, investors
well as investor optimism. may reduce their buying or start selling.
Bear Market – a weak market where stock
prices are falling, and investor confidence c. Inflation
is fading. It often happens when an economy Inflation means higher consumer prices.
is in recession and unemployment is high, This often slows sales and reduces profits.
with rising prices. Higher prices will also often lead to higher
interest rates. For example, the Bank of
Canada may raise interest rates to slow
25
down inflation. These changes will tend to RISKS ASSOCIATED WITH FINANCIAL
bring down stock prices. Commodities, MARKETS
however, may do better with inflation, so The various risks which affect your
their prices may rise. investment returns in the financial market
d. Deflation are the market risk, inflation risk, credit risk,
Falling prices tend to mean lower profits interest rate risk, investment risk, liquidity
for companies and decreased economic risk, Social/Political/Legislative risk,
activity. Stock prices may go down, and exchange rate risk, reinvestment risk,
investors may start selling their shares and concentration risk, foreign investment risk.
move to fixed-income investments like Market risk:
bonds. Interest rates may be lowered to It is the risk of investments declining in
encourage people to borrow more. The goal value due to economic developments or
is increased spending and economic activity. other events that affect the entire
The Great Depression (1929-1939) was one market. The prices or yields of all securities
of the worst periods of deflation ever. in particular market risk or fall to large
R.A.C.E
e. Economic and political shocks outside influences. This change in rate is due
Changes around the world can affect both to market risk.
the economy and stock prices. For example, Inflation risk:
a rise in energy costs can lead to lower It is the risk of a loss of your purchasing
sales, lower profits and lower stock prices. power because the value of your
An act of terrorism can also lead to a investments does not keep up with
downturn in economic activity and a fall in inflation. This is sometimes referred to as
stock prices. ‘loss of purchasing power.’ Whenever the
f. Changes in economic policy rate of inflation exceeds the earnings on
If a new government comes into power, it your investments, you will run the risk that
may decide to make new policies. you will be able to buy less and not more.
Sometimes these changes can be seen as Credit risk:
good for business, and sometimes not. They In short, how stable is the company or
may lead to changes in inflation and interest entity to which you lend your money when
rates, which in turn may affect stock prices. you invest? How confident are you that will
26
be able to pay the interest you are promised Fluctuations in foreign currency in which
or repay your principal when the investment an investment is valued compared to home
matures? It is the risk that the government currency may add risk to the value of a
or the company that issued the bond will run security.
into financial difficulties and won’t be able to Reinvestment risk:
pay the interest or repay the principal at Investors such as bondholders who would
maturity. like to re-invest the proceeds after
Interest rate risk: redemption. In case of declining, interest
Interest rate movements in the Indian rate situation will lead to lead to a decline
debt markets can change time to time and in cash flow from an investment when its
lead to the possibility of significant price principal and interest payments are
movements up or down in debt and money reinvested at lower rates.
market securities. Concentration risk:
Investment risk: This risk is associated because all our money
It is the probability or chance of occurrence is concentrated in one investment. When
R.A.C.E
of losses relative to the expected return you diversify your investments, you spread
on any particular investment. the risk over different types of investments,
Liquidity risk: industries and geographic locations.
This occurs due to the inability to convert Foreign investment risk:
security or asset to cash easily without a There is a risk involved when investing in
loss of capital and income. foreign companies. When you buy
Social/Political/Legislative risk: investments of a foreign company, you may
It is due to changes in legislation, changes face risk, for example, the risk of
in government policies. Instability in the nationalization.
country, change in foreign policies. Social
changes are causing a loss in value. Any WALL STREET & MAIN STREET
government policy which results in WALL STREET:
adverse consequences is known as Wall Street refers to all the banks, hedge
legislative risk. funds, and securities traders that drive
Exchange rate/currency risk: the American financial system.
27
Geographically, Wall Street is the centre of business. Some people believe that the Main
Manhattan's financial district. It runs Street's interest to grow their money in the
east/west for eight blocks from Broadway to capital markets that contrasts the interest of
South Street. Wall Street, which is to generate profit.
"Wall Street" stands in contrast to "Main
Street." While Wall Street is used to TERMS USED IN FINANCIAL MARKETS
describe the capital markets and the Beta: A financial instrument’s beta is a
financial industry, Main Street is typically measure of its risk or volatility when
used to describe the larger economy in compared to the wider market.
which the vast majority of people live and Bear market: a general decline in the stock
work. market over a period of time.
Bull market: a period of generally rising
MAIN STREET: prices.
Main Street refers collectively to members of Face Value: Face value is the nominal
the general population who invest in the value or dollar value of a security stated
R.A.C.E
capital markets. Individuals and businesses by the issuer. For stocks, it is the original
that do not work for financial and investment cost of the stock shown on the certificate.
companies are considered part of Main For bonds, it is the amount paid to the
Street. Main Street should not be confused holder at maturity, generally $1,000. It is
with Wall Street, which refers to members of also known as "par value" or simply "par."
the brokerage and financial services Initial public offering or IPO: a type of
community. Main Street invests in the public offering in which shares of a company
capital markets as investment clients are sold to institutional investors.
through Wall Street. Institutional investor: an entity which
How it works? pools money to purchase securities, real
Main Street investors grow their money in property, and other investment assets or
the capital markets through Wall originate loans.
Street's brokerage and advisory
services. Wall Street depends on Main
Street's capital to function and stay in
28

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IS NOW IN CHENNAI | MADURAI | TRICHY | SALEM | COIMBATORE | ERODE NAMAKKAL |

LIC AAO FINANCIAL

S.NO TOPICS PAGE NO

2 TYPES OF FINANCIAL MARKETS 3

5 TYPES OF MUTUAL FUNDS 20

6 SHARES AND STOCK MARKET 22

7 FACTORS THAT AFFECTS THE STOCK MARKET 24

8 RISKS ASSOCIATED WITH FINANCIAL MARKETS 26

9 WALL STREET & MAIN STREET 27

10 TERMS USED IN FINANCIAL MARKETS 28

FINANCIAL MARKET helpful to the investors in giving them

 Cryptocurrency market Securities Market

this market trades mostly in long-term

exchange for trading.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

Financing It supplies funds to budding It does not provide funding to

Who will gain the amount Company Investors

Price Fixed price Fluctuates, depends on the

COMMODITY MARKET secure an agreement with B to sell the bales

The money market is where financial Financing Industry:

Sr. Participant Borrowing Lending

operative Banks/District Central Co-

The prudential limits in respect of both Commodity money:

Commercial Bank Money:  Federal agency short-term securities

thrift institutions, and credit unions. term notes issued by municipalities in

DERIVATIVE MARKETS For example: The cash market price of ABC

On the basis of their trading rationale, the derivatives market.

their risk in the future. No matter how much

Their customers include governments, anyone sending money to you from

generated by a number of similar assets and

RELATIONSHIP BETWEEN LENDERS AND BORROWERS

MUTUAL FUNDS investment trusts that trade on an exchange.

principal investments as money market

investments that may be available only to Open-End Funds

be significantly different from NAV; it may be

Debt Funds the gap between equity funds and debt

Closed-Ended Funds: individuals to increase profit of the

purchased or exited only at specific Dividend

paid at a fluctuating/floating rate. STOCK MARKET

Preferred Stock: Stock prices can be affected by:

 A change of management Economic factors

can cause stock prices to rise or fall. The

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