1-Creation of financial assets can be in the form such as

intial issue of shares and debentures by a firm.

2-Financial market is a place where financial assets are
created and traded.
Functions-1) To facilitate interaction between buyer and
seller.
2) It provides mechanism for price discovery.
3) Financial markets enables firms to raise capital for
building new facilities, buying new machinery, expansion
of business, etc.
4) They facilitate transaction and provides information at
low cost.
3- Short term financial market is known as money
market(contains certificate of deposits, t-bills, commercial
paper, trade bills, etc.) and long term financial market is
known as capital market(shares, debentures, bonds, g-
sec, etc.).
4-Money market in India- It consists of RBI, commercial
banks, cooperative banks, other specialized financial
institutions. It does not deal in cash but provides a
market for short term credit instruments. There are 2
types in this- Organized and Unorganized money
markets.
1)Unorganized money markets are not regulated. In this
there is Unregulated Non Bank financial intermediaries
such as Nidhi companies, Chit funds, Indigenous bankers,
private lenders, etc.
2) Organized money market refers to diverse set of
regulated short term financial markets. It has 8 different
instruments.
1-Treasury bill market.
2-Cash management bill
3-Call money market
4-Certificate of deposit
5-Trade bills
6-Commercial paper market
7-Repo and Reverse repo
8-Money market mutual fund
5-Treasury bill- These are short term(upto 1 year)
borrowing instruments of the govt which are issued as
promissory notes by RBI on behalf of govt. These are
issued at a price less than their face value and are
redeemed at their face value. No interest is paid on these
bonds.
At present there are 91 day, 182 day and 364 day
treasury bills available. These are very liquid instruments.
6-Cash management bills-It was introduced by Govt in
consultation with RBI in 2010. Issued by the govt to meet
temporary cash flow mismatches. Almost similar to t-bills
but are issued for less than 90 days.
7-Call money market- It is the inter bank funds market in
India. It deals in lending and borrowing by banks among
themselves. They deal in very short term loans from 1 to
14 days. Interest charged on such loans is called the call
money rate and is determined by market.
8-Certificate of deposit- Short term instruments issued by
commercial banks(maturity period is 7 days to 1 year)
and financial institutions(maturity period is 1 year to 3
years). These are similar to savings accounts ,virtually
risk free and are transferable from one party to another.
Minimum value is 1 lakh and max can be in multiples of 1
lakh.
9-Trade bill- Short term negotiable money market
instrument created from a genuine commercial
transaction. When trade bills are accepted by commercial
banks then it is known as commercial bills.
10-Commercial papers- It is a type of unsecured money
market instrument issued in the form of promissory note
issued by a corporate house for raising short term credit.
Can be issued for a minimum of 7 days to a maximum of
1 year. It is issued in the denominations of 5 lakhs or
multiples.
11-Repo and Reverse Repo- Repo enables banks and
other financial institutions to borrow money from the RBI
by selling G-sec with a promise of repurchase at a
predetermined rate and date.
In Reverse repo, banks and other financial institutions
lend to RBI for short term by buying G-sec with a promise
to sell back those securities at predetermined rate and
date.
These 2 rates are announced by RBI and are also
monetary policy tools to control money supply.
12-Money market mutual funds- These are mutual funds
that invest money of its shareholders in short term high
quality liquid instruments such as T-bills, Repos,
commercial papers, certificate of deposits, etc.
13-CAPITAL MARKET- It deals with long term financial
instruments such as bonds, equity, shares, etc. It
provides for long term investment without which creation
of national assets is not possible.
14-Primary capital market- Here securities are created
and 1st buying and selling of a financial instrument
happens in this market. It results in capital formation. It
has 4 types of instruments.
1-Public issue-Mode of fundraising where private
corporations offer their share for 1st time to public. It is
known as Initial public offering(IPO). It allows company to
raise capital from public investors.
2-Rights issues-Here company makes an offer to existing
shareholders to buy additional shares of the company at
discounted price. It is not offered to general public but
only to existing share holders.
3-Preferential issues-It is an issue of shares or convertible
securities by listed or unlisted companies to a select
group of investors. Person holding these shares have a
right to be paid from company assets before common
stockholders.
4-Private placement-Mode of raising funds by sale of
securities to a relatively small number of select investors.
15-Secondary Capital Market- Here securities are traded
by investors. Resale or subsequent selling and buying
until maturity happens in secondary market. It facilitates
liquidity and marketability of outstanding debt and equity
instruments. It has 3 types of instruments.
1-Pure instruments-Includes shares, bonds, debentures
and do not share features of one another.
2-Hybrid instruments-Have the combinations of pure
instruments. Ex: Combination of bond and equity.
3-Derivatives-These instruments have no value of their
own but derive their value from one or more underlying
financial assets. Ex:futures, options.
16-Equity and Shares- Shares are the smallest unit into
which total share capital of a company is divided.
Equity is measure of ownership of an asset and
represents the money value of the asset after all the
debts attached with the asset have been paid off.
Shares are easily tradable but equity cannot be easily
traded. For dilution of ownership, a portion of equity is 1 st
converted into shares and then shares are traded.
Shares are 2 types-Equity and Preferential.
1-Equity shares- Ordinary shares-company raises capital
for its business-ownership rights are given to
shareholders-have voting rights-dividends depend on
profit and company policy-higher risk instrument.
2-Preferential shares-Receives dividends 1st-in case of
company liquidation also these are paid 1st-They have
ownership in company but cant be part of management-
These shares offer fixed dividend and so not traded in
stock market-Lesser risk.
17-BONDS-Long term debt instrument where investor
lends money to an entity. Entity borrows funds for a
defined period of time at a variable or fixed interest rate.
It is less risky than share.
G-Sec are also a type of bonds. Generally they are called
t-bills when issued for short period and bonds when
issued for long periods. State govts issues bonds or dated
securities known as State development loans.
Bearer bond is a type of bond that is unregistered.
Secured bonds are backed by any underlying asset and
unsecured bonds are not backed.
18-Bond yeild- It is rate of returns realized on a bond. It
doesn’t include principal amount. Rate of return is not
fixed and changes with the price of the bond.
Fall in bond yeild indicates in the slowdown of the
economy. Decline in yeild can be good for equity
markets, also reduces the risk of bankruptcy.
Interest rate in an economy and bond have inverse
relationship.
If inflation rises then demand for bonds decreases.
Zero coupon bonds are bonds that have no periodic
interest payment and they are sold at a huge discount to
the face value.
19-Debentures- Financial instrument used by private
companies to raise long term capital via debt. These are
not backed by any specific security and holders do not
get any shareholding. Convertible debentures are can be
converted into shares of equity stock after a specified
period.
20-Derivatives-It derives value from underlying assets.
Ex:futures, options, forwards, snaps, etc.
1)Futures is legally binding agreement to buy or sell a
particular asset or security on a future date at
predetermined price.
Future contracts are traded on exchange but forward
contracts are traded directly between buyer and seller.
Hence forward is also called Over the counter transaction.
Future contracts cannot be customized but forward
contracts can be.
2)Options contract is a type of derivative contract that
gives buyer or holder contract the right to buy or sell
underlying asset at a predetermined price within or at the
end of specified period. These are traded on stock
exchange.
21-Stock exchange-It is an institution that provides a
platform for buying and selling existing securities. It helps
companies raise finance, provide liquidity and safety of
the investment to investors and enhance credit
worthiness of the companies.
Market capitalization is the aggregate valuation of the
company based on its current share price and the total
number of outstanding stocks.
22-Foreign Institutional Investors-Investors invests in
assets that belong to a different country. These are
eligible to purchase shares and convertible debentures
issued by Indian companies under Portfolio investment
scheme.
23-Participatory Notes-It allows an overseas investor to
invest in Indian stock markets without registering
themselves with SEBI. These derive value from underlying
securities such as equity and equity linked instruments.
These are generally issued by India based foreign
brokerage houses such as Morgan stanley, goldman
sachs, etc.
24-Angel Investors-These are wealthy individuals who
invests in a small startup company in exchange for
ownership equity in the company. They operate
independently.
25-Venture capital fund-It is made up of investments from
wealthy individuals or companies who give money to a VC
firm to manage their investments and to invest in high
risk startups in exchange for equity. VC firms usually
demand some level of operational control to influence
major decisions of the company.
26-Sweat Equity-It refers to non monetary contribution of
individuals or founders towards business. It is rewarded
through sweat equity shares. Section 79A of companies
act laid down conditions for sweat equity shares.
27-Floating rate bonds-These bonds have variable rate of
interest and it is linked to benchmark rate and is reset at
a regular interval.
28-Masala bonds-These are bonds issued in Indian
currency outside India by Indian entities to raise funds
from foreign investors. 1st Masala bond was issued in
2014 for an infra project.
29-Hedge fund-These are pooled funds used for
investment in a diverse set of instruments such as buying
and selling equities, trading bonds, currencies,
convertible securities, etc. These are professionally
managed and are more risky.