Introduction to Financial Market

By BYJU'S Exam Prep

Updated on: September 13th, 2023

A financial market plays a vital role in the economic growth of a country. It acts as an intermediary between the flow of funds which belong to those who save a part of their incomes and those who invest in the productive assets. It helps in mobilisation and usefully allocating scarce resources of a country. A financial system is a complex, well-integrated set of sub-systems of financial institutions, markets, instruments, and services which facilitates the transfer and allocation of funds, efficiently and effectively. In this article, we will discuss the Basics of Financial market and further will explain Capital market and terms associated with it. This topic is crucial as it covers the basics of Economics which helps in all exams whether Prelims and Main exam.

Introduction to Financial Market

The Indian financial system can also be broadly classified into:

  • Formal (organised) financial system: It comes under the purview of the Ministry of Finance (MoF), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and other regulatory bodies.
  • Informal (unorganized) financial system: It consists of the Individual moneylenders such as neighbours, relatives, landlords, traders, and store owners.

Dividing the Financial Market on the basis of time

  • Capital Market
  • Money Market

Regulator of Money Market

  • RBI – Reserve Bank of India
  • 1st April 1935 (Reserve Bank of India Act, 1934)
  • Headquarters – Mumbai
  • Governor – Shaktikanta Das (25th Governor of RBI)

Regulator of Capital Market

  • SEBI – Securities and Exchange Board of India
  • Establishment – 12th April 1992 (Securities and Exchange Board of India Act, 1992.)
  • SEBI was established in 1988 to regulate the functions of securities market but initially, it was not able to exercise complete control over the stock market transactions as it was left as a watchdog to observe the activities and was found ineffective in regulating & controlling them. In May 1992, SEBI was granted legal status.
  • SEBI is a corporate body having a separate legal existence and perpetual succession.
  • The head office of SEBI is in Mumbai and it has a branch office in Kolkata, Chennai & Delhi.

Major Functions of Financial Market: 

  • Mobilisation of savings and further ensures their investments in more productive financial assets.
  • It provides platform for the interaction of lenders/investors and the users/borrowers which makes it less time consuming and also cost-effective.  
  • Financial markets are a source of liquidity for various financial assets as well as financial instruments.
  • Pricing information is provided as a result of the interaction between investors and borrowers in the market platform


  • Primary Market
  • Secondary Market

Primary Market

  • Also known as New Issues Market.
  • It is a market for fresh capital and deals with new securities being issued for the first time.
  • A company can raise capital through the primary market in the form of equity shares preference shares, debentures, loans and deposits.
  • Funds are mobilized in the primary market through the prospectus, rights issues and private placement.
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Public Issue

  • Issues are offered to the public through prospectus and the public subscribes directly.
  • When the offer or invitation to subscribe for shares or debentures is made to 50 or more persons, then such an offer or invitation shall be deemed to be a public offering.
  • Public issues are open to the general public.
  • Wide publicity about the offer is given through the media.
  • The work of organizing public issue is done by way of appointing Merchant Banker.
  • Under Public Issue, the securities are offered to the public at large.
  • Anyone in public can purchase these shares.
  • They are of 2 types
    • IPO
    • FPO

Initial Public Offering

  • It is an offering of either a fresh issue of securities or an offer for sale of existing securities or both by an unlisted company for the first time to the public.
  • It includes listing an unlisted company.
  • Any company whether a new, young company or an old company which decides to be listed on an exchange and hence goes public.

Follow-on /Further Public Offer

  • FPO is used by companies for diversifying their equity base
  • A follow-on public offering (FPO) is an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company through an offer document.
  • Investors participating in these offerings take informed decisions based on its track record and performance.


  • A company proposing to issue capital to the public through an online system of the stock exchange is called e-IPO.
  • The e-IPO will help in simplifying the process of IPOs, lowering their costs and helping companies reach more retail investors in small towns.
  • The online issue of shares is carried out through an electronic network of the stock exchanges.
  • The issuer company enters into an agreement with stock exchanges having a system for an on-line offer and has to appoint brokers and registrars having connectivity through stock exchange.
  • This system reduces the time taken for the issue process and securities get listed within 15, thereby enabling faster access to funds.
  • The allotment of securities should be made within 15 days (closure of the issue).
  • In case of failure, the penalty rate is 15%.
  • Corporates, planning an IPO can reduce expenses.

Offer for Sale

  • Under this, securities are not issued directly to the public.
  • The securities are offered for sale through intermediaries like issuing house or stockbrokers.
  • The company sells securities to a broker at an agreed price who in turn resell them to the investing public.

Private Placement

  • The direct sale of securities by a company to some select people or to institutional investors is called private placement.
  • No prospectus is issued in a private placement.
  • Private placement covers equity shares, preference shares, and debentures.
  • It offers access to capital more quickly than the public issue and is quite inexpensive on account of the absence of various issue related expenses.
  • Keys points – Private Placement
    • It is the allotment of securities to selected individuals and not to the public at large.
    • Not more than 50 people can participate.
    • Inexpensive as compared to Public Issue.

Qualified Institutional Placement

QIP is an issue of equity shares or securities convertible into equity shares by a listed company to qualified institutional buyers only.

Intermediaries in Primary Market

There are three categories of participants in the primary market. They are:     

  • The issuers of securities
  • Investors in securities
  • Intermediaries to an issue

The intermediaries render services to both the issuers and investors to enable the sale and purchase of securities. They are:

  • Merchant bankers or book running lead managers,
  • Registrars to the issue,
  • Bankers to the issue etc.

Merchant Banker

  • A merchant banker should be registered with the SEBI [SEBI (Merchant Bankers) Regulations, 1992] to act as a book running lead manager (BRLM) to an issue.
  • The lead merchant banker performs most of the pre-issue and post-issue activities.
  • Pre-issue activities – due diligence of the company’s management/ business plans etc., drafting and designing offer document, finalizing the prospectus, ensuring compliance with requirements of the exchanges and ROC.
  • Post-issue activities include management of escrow accounts, dispatching of refunds, dematerializing of securities, listing and trading of securities.

Right Issue

  • Right Issue’ means offering shares to existing members in proportion to their existing shareholding.
  • The “right” to buy shares is given to the existing shareholders at a discounted price.
  • The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares at a pre-determined price.


  • Depository Receipts are called American Depository Receipts (ADRs) if they are listed on a stock exchange in the USA.
  • If the DRs are listed on a stock exchange outside the US, they are called Global Depository Receipts (GDRS).
  • When DRs are issued in India and listed on stock exchanges here with foreign stocks as underlying shares, these are called Indian Depository Receipts (IDRs)

Secondary Market

  • The secondary market is a market in which existing securities are resold or traded. This market is also known as the stock market.
  • In India, the secondary market consists of stock exchanges and commodity exchange.
  • It helps existing investors to disinvest and fresh investors to enter the market.

Stock Exchange

  • They are defined under section 2(3) of the Securities Contract (Regulation) Act, 1956.
  • They are defined as ‘as any body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities’.
  • After the initiation of reforms in 1991, the Indian secondary market now has a four-tier form as follows:
    • Regional stock exchanges
    • The National Stock Exchanges (BSE and NSE)
    • The Over the Counter Exchange of India (OTCEI)
    • The Inter-Connected Stock Exchange of India (ISE)

Bombay Stock Exchange

  • Foundation – In 1975 with the name “ The Native Share and Stock Brokers’ Association”.
  • Established under SCRA, 1956 with the name Bombay Stock Exchange.
  • Headquarters – Mumbai
  • MD and CEO – Ashish Kumar Chauhan
  • Chairman – S. Ravi
  • Index of BSE – Sensex (Sensitive Index)
  • Sensex represent companies from 30 sectors.

National Stock Exchange

  • Established – 1992
  • Headquarters – Mumbai
  • MD and CEO – Vikram Limaye
  • Chairman – Ashok Chawla
  • Index of NSE – Nifty
  • Nifty represents companies from 50 sectors.

Over the Counter Exchange of India

  • Establishment – 1992
  • Headquarters – Mumbai
  • It was set up to provide small and medium companies access to the capital market for raising finance in a cost-effective manner.
  • It allowed companies with a paid-up capital as low as Rs. 30 lakh to Rs. 2 crores to get listed.

Trading and Settlement

  • The trading in securities is now executed through an online, screen-based electronic trading system.
  • In this process securities held by the investor in the physical form are cancelled and the investor is given electronic shares in Demat account.
  • This process is called dematerialization.
  • The Settlement of all trades is done within 2 days of trade date i.e. T+2 days.

Demat Account

  • The Demat Account is also known as Dematerialized account.
  • It is like a bank account which is opened through a Depository Participant.
  • PAN Card is mandatory for opening this account.
  • In this account, one can hold shares in electronic form.


  • The depository is like a bank which keeps securities safe in electronic form on behalf of the investor.
  • Securities here can be purchased, sold, withdrawn at any time.
  • Established under Depositories Act, 1996
  • There are 2 depositories in India at present
    • NSDL – National Securities Depository Limited.
      • It is the first and largest
      • Establishment – 1996
      • Promoted by NSE and others
    • CDSL – Central Depository Services Limited.
      • It is the second depository and
      • Establishment – 1999
      • Promoted by BSE and others
  • Depository Participant
    • They are the agent of depository.
    • DP act as intermediaries between Depository and investors.
    • They are authorised to maintain the accounts of dematerialized shares.
    • Demat Account can be opened through a DP.
    • Examples: Share Khan, HDFC securities etc.

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