Financial Services and Financial Markets
Financial services and markets tests the flow of funds, market segments, instruments and intermediaries. Expect primary versus secondary markets, money versus capital markets, and the role of SEBI.
Core structure
The financial system has institutions, markets, instruments and services. The money market deals in instruments up to one year: Treasury bills, commercial paper, certificates of deposit, call money and repo. The capital market deals in equity, debt and derivatives with longer maturities. The primary market raises new capital through IPOs, rights issues and private placements; the secondary market trades listed securities on exchanges such as NSE and BSE. SEBI regulates securities markets; depositories NSDL and CDSL hold shares in demat form. Financial services include mutual funds, portfolio management, merchant banking, credit rating, leasing, venture capital and insurance.
Worked example
A company raises ₹100 crore through an IPO. This is a primary-market transaction regulated by SEBI's ICDR norms; a merchant banker conducts due diligence, and the shares are allotted and listed. Later buyers and sellers trade those shares on an exchange through a broker and demat account, which is the secondary market. Reasoning: new capital to the company is primary; transfer between investors is secondary.
Traps that cost marks
Calling an IPO a secondary-market sale; believing SEBI fixes the issue price; treating money-market instruments as long-term; assuming mutual fund returns are guaranteed; and confusing a depository with a broker. A depository holds securities; a broker executes trades.