Definition of Constituents of Financial Services

The major components in the financial system are:

           a)      Financial instruments

           b)      Market players

           c)      Specialized Institutions

           d)     Regulatory bodies

           a)      Financial Instruments

           Financial instruments in the Indian financial system may be categorized into Money Market instruments and capital Marketinstruments.

Money Market Instruments

           The instruments which deal in the money market are of short-term nature. Their maturity period usually varies between 14 and 364 days. Money market instruments are:

           Ø  Treasury Bills

           Ø  Bills of Exchange or Trade bills

           Ø  Finance bills or usance promissory notes

           Ø  Commercial Paper

           Ø  Certificates of Deposits

Capital Market instruments

           The instruments which deal in Capital market are of long-term nature. There are various types of securities such as:

           Ø  Equity shares

           Ø  Preference shares

           Ø  Debentures

           Ø  Gilt-edged securities

           Ø  Zero coupon bonds

           Ø  Deep discount bonds

           Ø  Option bonds

           Ø  Derivative securities - options, futures etc.,

           b)     Market players

           The players in the market include:

                   i.            Commercial banks

                 ii.            Finance companies

               iii.            Stock brokers

               iv.            Consultants

                 v.            Underwriters

               vi.            Market makers

                   i.            Commercial Banks

           In the developed countries, commercial banks are not only providing loans but also participating in the debt and equity finance of the corporate sector. Now-a-days all commercial banks in developing countries are also engaged in merchant banking services, hire purchasing finance, leasing, factoring, mutual funds, insurance and other services.

                 ii.            Finance companies

           The role of Finance companies is vital in the economic growth. It is also called as Non-banking finance company whose business is receiving deposits besides engaging in any of the following activities:

           Ø  Financing by way of loans, advances etc.,

           Ø  Acquisition of shares/stocks/bonds/debentures/securities

           Ø  Hire-Purchase

           Ø  Any class of insurance, stock broking etc.

           Ø  Chit funds and

           Ø  Collection of money by way of subscription/sale of units or other instruments/any other manner and their disbursement.

               iii.            Stock Brokers

           The role of stock brokers is very important in stock market. They act as an agent and bridge between buyer and seller of securities in a recognized stock exchange. They should have obtained certificate of registration from SEBI after satisfying all the terms and conditions. The certificate from SEBI is mandatory to act as stock brokers. They may get an individual membership or corporate (firm) membership.

                iv.            Consultants

           Corporate sector may get expert advice or opinion for their decision making. Those experts are specialized in the field of finance and they are called as Finance experts or professionals. They give only consultancy service in all areas of functional management such as production, finance, marketing and human resources management.

                  v.            Underwriters

           Underwrites are important intermediaries in the new issue/primary market to issues of capital who agree to take up securities which are not fully subscribed. They make a commitment to get the issue subscribed either by themselves or others. They are appointed by the issuing companies in consultation with the lead managers/merchant bankers to the issues. They get commission from issuing company for the assurance of subscribing to the stocks of issuing company.

                vi.             Market makers

           The system of market making is popular in stock exchanges like London, New York and Chicago. A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ‘ask and bid price’. They actually purchase the stock from the seller even without any offer from the buyers’ side. The market maker maintains a spread on each stock to prevent the risk of fall in price of stock. The temporary disparity between the supply and demand for scrip is eliminated by them.

c)      Specialized Institutions

           Specialized institutions are providing financial services in various forms such as Acceptance Houses, Discount houses, Factors, Depositories, Credit rating agencies, Venture capital etc. Financial market is dynamic and solves the contemporary issues of corporate sectors through these specialized service providers.

d)     Regulatory Bodies