Financial Markets — Banking Awareness Notes 2026
Money Market • Capital Market • Government Securities • Forex • Derivatives • Bonds • Equity Market
IBPS SBI RRB Banking Awareness 2026Table of Contents
- What is a Financial Market?
- Importance of Financial Markets
- Structure of Financial Markets
- Money Market
- Money Market Instruments
- Call, Notice and Term Money
- Repo and Reverse Repo
- Commercial Paper
- Certificate of Deposit
- Treasury Bills
- Capital Market
- Primary Market
- Secondary Market
- Equity Market
- Debt Market
- Bonds
- Debentures
- Government Securities
- Types of Government Securities
- Foreign Exchange Market
- Derivatives Market
- Futures
- Options
- Swaps
- Participants in Financial Markets
- Financial Market Regulators in India
- RBI and Financial Markets
- SEBI and Financial Markets
- Stock Exchanges
- Clearing and Settlement
- Liquidity in Financial Markets
- Yield and Interest Rates
- Financial Market Risks
- Money Market vs Capital Market
- Primary vs Secondary Market
- Debt vs Equity
- Numerical Examples
- Important Exam Traps
- Rapid Revision Facts
- Important Full Forms
- Frequently Asked Questions
- SEO Keyword Map
- Official Verification Sources
1. What is a Financial Market?
A financial market is a marketplace or financial system where financial assets are issued, bought, sold or transferred between participants.
Financial markets help transfer money from people and institutions that have surplus funds to governments, companies, banks and other entities that require funds.
Surplus Funds
Households, companies and institutions with excess money can invest their funds in financial assets.
Deficit Funds
Governments, companies and other borrowers can raise funds from financial markets.
Price Discovery
Markets help determine prices and yields through demand and supply.
Liquidity
Financial markets provide a mechanism through which financial assets can be bought or sold.
2. Importance of Financial Markets
- Mobilise savings from households and institutions.
- Provide funds to businesses and governments.
- Support economic growth and investment.
- Provide liquidity to financial assets.
- Help in price discovery.
- Provide mechanisms for risk management.
- Support monetary policy transmission.
- Facilitate domestic and international payments and investment.
- Provide investment opportunities to individuals and institutions.
- Help companies raise equity and debt capital.
3. Structure of Financial Markets
Financial markets can be classified in several ways depending on the type of financial asset, maturity, trading mechanism and purpose.
| Market | Main Purpose | Examples |
|---|---|---|
| Money Market | Short-term funds | Call money, T-Bills, CP, CD, Repo |
| Capital Market | Medium and long-term funds | Shares, bonds, debentures |
| Foreign Exchange Market | Trading of currencies | USD/INR and other currency transactions |
| Derivatives Market | Risk management and price exposure | Futures, options, swaps |
4. Money Market
The money market is the market for short-term borrowing, lending and financial instruments, generally involving maturities of up to one year.
It is particularly important for managing short-term liquidity in the banking and financial system.
Main Features
- Deals mainly with short-term funds.
- Generally instruments have maturity up to one year.
- High liquidity is an important feature.
- Risk is generally lower for high-quality money-market instruments.
- RBI plays an important role in India's money market.
- Banks, financial institutions, corporates and government participate through different instruments.
5. Major Money Market Instruments
| Instrument | Full Form / Meaning | Main Purpose |
|---|---|---|
| Call Money | Very short-term inter-bank borrowing/lending | Liquidity management |
| Notice Money | Short-term funds generally beyond overnight and up to 14 days | Short-term liquidity |
| Term Money | Short-term funds generally beyond 14 days and up to one year | Liquidity/funding |
| Repo | Repurchase transaction | Short-term secured borrowing/lending |
| Treasury Bill | Short-term Government security | Government's short-term borrowing |
| Commercial Paper | CP | Short-term unsecured corporate borrowing |
| Certificate of Deposit | CD | Short-term negotiable deposit instrument |
6. Call Money, Notice Money and Term Money
Call Money
Call money refers to very short-term borrowing and lending, traditionally associated with overnight funds.
Notice Money
Notice money refers to short-term funds where the maturity is generally more than overnight and up to 14 days.
Term Money
Term money generally refers to money-market borrowing and lending for a period beyond 14 days and up to one year.
Call = shortest
Notice = more than overnight, up to 14 days
Term = beyond 14 days
7. Repo and Reverse Repo
Repo
Repo is a transaction in which one party obtains funds by selling securities and agreeing to repurchase them later at a predetermined price.
In monetary policy operations, the RBI can use repo transactions to inject liquidity into the financial system.
Reverse Repo
In a reverse repo transaction, funds move in the opposite direction from the perspective of the liquidity provider.
8. Commercial Paper (CP)
Commercial Paper (CP) is a short-term money-market instrument issued by eligible entities to raise short-term funds.
- It is generally an unsecured instrument.
- It is issued for short-term funding requirements.
- It is used mainly by financially sound eligible entities.
- It is issued at a discount or as prescribed under applicable regulations.
- RBI regulates the CP market through applicable directions.
9. Certificate of Deposit (CD)
A Certificate of Deposit (CD) is a negotiable money-market instrument issued by eligible banks and financial institutions subject to applicable regulatory conditions.
- It is used to raise short-term funds.
- It is negotiable subject to applicable rules.
- It is different from an ordinary bank fixed deposit.
- Eligibility, maturity and denomination requirements are governed by applicable RBI regulations.
10. Treasury Bills
Treasury Bills (T-Bills) are short-term Government securities issued to meet the Government's short-term funding requirements.
Important Features
- They are short-term Government securities.
- They are issued at a discount to face value and redeemed at face value.
- The difference between purchase price and redemption value represents the return.
- They are considered highly liquid instruments.
- They are part of the money market.
| Instrument | Market | Typical Nature |
|---|---|---|
| Treasury Bill | Money Market | Short-term Government security |
| Government Bond | Capital / Government Securities Market | Medium or long-term Government borrowing |
11. Capital Market
The capital market deals mainly with medium and long-term financing and investment.
It includes markets for equity securities, bonds, debentures and other longer-term financial instruments.
Major Segments
- Equity market
- Corporate bond market
- Government securities market
- Primary market
- Secondary market
12. Primary Market
The primary market is the market where new securities are issued to investors for the first time.
Examples
- Initial Public Offering (IPO)
- Further Public Offering (FPO)
- Rights issue
- Private placement
- Qualified institutional placement, subject to applicable regulations
13. Secondary Market
The secondary market is where already-issued securities are bought and sold between investors.
In a normal secondary-market transaction, the issuer does not receive the sale proceeds from the investor-to-investor trade.
Importance
- Provides liquidity to investors.
- Supports price discovery.
- Allows investors to enter and exit investments.
- Improves attractiveness of primary-market securities.
14. Equity Market
The equity market is the market for ownership interests in companies.
Equity shareholders are owners of the company and may receive dividends, subject to the company's performance and applicable law.
Important Characteristics
- Equity represents ownership.
- Returns are not normally fixed.
- Shareholders can benefit from capital appreciation.
- Equity investors bear business and market risk.
- Listed shares can be traded on recognised stock exchanges.
15. Debt Market
The debt market deals with instruments through which an issuer borrows money from investors and agrees to repay the principal according to specified terms.
Debt instruments may provide periodic interest or other forms of return.
- Government securities
- Corporate bonds
- Debentures
- Commercial paper
- Other debt instruments
16. Bonds
A bond is a debt instrument through which an investor lends money to an issuer for a specified period in return for interest or another agreed return.
Important Bond Terms
| Term | Meaning |
|---|---|
| Face Value | Nominal/principal value of the bond |
| Coupon | Interest rate/payment associated with the bond |
| Maturity | Date when principal becomes payable according to terms |
| Yield | Return earned relative to the investment price and cash flows |
| Issuer | Entity borrowing funds |
17. Debentures
A debenture is a debt instrument representing borrowing by a company or other eligible entity, subject to the legal and regulatory framework applicable to the issue.
Depending on the structure, debt instruments may be secured or unsecured, convertible or non-convertible.
18. Government Securities (G-Secs)
Government securities are debt instruments issued by the Central Government or State Governments to raise funds.
Central Government securities include Treasury Bills and dated Government securities.
Why are G-Secs Important?
- Government borrowing.
- Investment by banks and financial institutions.
- Liquidity management.
- Benchmarking of interest rates.
- Transmission of monetary and financial conditions.
19. Types of Government Securities
| Security | Meaning |
|---|---|
| Treasury Bills | Short-term Central Government securities |
| Dated G-Secs | Medium and long-term Central Government securities |
| State Development Loans | Debt securities issued by State Governments |
| Cash Management Bills | Short-term Government borrowing instrument used for temporary cash mismatches |
20. Foreign Exchange Market
The foreign exchange market (Forex/FX market) is the market where currencies are bought and sold.
For India, foreign exchange transactions are governed by the applicable regulatory framework, including the Foreign Exchange Management Act, 1999 (FEMA).
Examples
- USD/INR
- EUR/INR
- GBP/INR
- JPY/INR
Participants
- Banks
- Authorised dealers
- Businesses involved in international trade
- Investors
- Central banks
- Other eligible market participants
21. Derivatives Market
A derivative is a financial contract whose value is derived from an underlying asset, rate, index or other reference variable.
Major Types
- Futures
- Options
- Swaps
- Forwards
Common Underlyings
- Equities
- Stock indices
- Interest rates
- Foreign currencies
- Commodities
22. Futures
A futures contract is a standardised exchange-traded derivative contract to buy or sell an underlying asset at a specified price for settlement according to the contract's terms.
Futures are commonly used for hedging, speculation and price exposure management.
23. Options
An option gives the buyer a right, but generally not an obligation, to buy or sell an underlying asset at a predetermined price within or on a specified period, depending on the option structure.
Call Option
A call option gives the holder the right to buy the underlying asset.
Put Option
A put option gives the holder the right to sell the underlying asset.
CALL = Right to Buy
PUT = Right to Sell
24. Swaps
A swap is a derivative contract in which counterparties exchange specified cash flows according to agreed terms.
Common Examples
- Interest rate swaps
- Currency swaps
Swaps can be used to manage interest-rate or currency exposure.
25. Participants in Financial Markets
Individuals
Invest savings in deposits, shares, bonds, mutual funds and other financial assets.
Banks
Participate in money, government securities, foreign exchange and other financial markets.
Companies
Raise funds through equity and debt instruments and manage financial risks.
Government
Raises funds through government securities and manages public finances.
Financial Institutions
Participate as investors, lenders, intermediaries and market infrastructure providers.
Foreign Investors
Participate in eligible Indian financial markets subject to applicable rules.
26. Financial Market Regulators in India
| Institution | Full Form | Main Area |
|---|---|---|
| RBI | Reserve Bank of India | Banking, monetary policy and major parts of money/financial markets |
| SEBI | Securities and Exchange Board of India | Securities market |
| IRDAI | Insurance Regulatory and Development Authority of India | Insurance sector |
| PFRDA | Pension Fund Regulatory and Development Authority | Pension sector |
27. RBI and Financial Markets
The Reserve Bank of India plays a major role in India's money market, government securities market, foreign exchange market and banking system.
Important RBI Functions Related to Markets
- Conducting monetary policy operations.
- Managing systemic liquidity through appropriate instruments.
- Regulating and supervising banks and certain financial market activities.
- Managing India's foreign exchange reserves.
- Acting as banker and debt manager to the Government, subject to applicable arrangements.
- Supporting orderly development of financial markets.
28. SEBI and Financial Markets
SEBI is the principal regulator of India's securities market.
Major Areas
- Stock exchanges
- Securities intermediaries
- Listed companies
- Investor protection
- Mutual funds
- Market intermediaries
- Securities market disclosure and conduct requirements
29. Stock Exchanges
A stock exchange provides an organised platform for trading securities according to applicable rules and regulations.
Major Indian Stock Exchanges
| Exchange | Full Form | Important Index |
|---|---|---|
| NSE | National Stock Exchange of India | Nifty 50 |
| BSE | BSE Ltd. / formerly Bombay Stock Exchange | Sensex |
NSE → Nifty
BSE → Sensex
30. Clearing and Settlement
Clearing
Clearing determines the obligations of parties after trades have been executed.
Settlement
Settlement is the process through which the actual transfer of securities and/or funds takes place according to the applicable settlement cycle.
| Concept | Meaning |
|---|---|
| Trading | Execution of buy/sell transaction |
| Clearing | Calculation of obligations |
| Settlement | Final exchange of funds and securities |
31. Liquidity in Financial Markets
Liquidity refers to the ability to buy or sell an asset quickly without causing a major change in its price.
A highly liquid market normally has many buyers and sellers and relatively efficient price discovery.
Examples
- Cash is extremely liquid.
- Highly traded government securities can be relatively liquid.
- Thinly traded securities may have lower liquidity.
32. Yield and Interest Rates
Yield represents the return associated with an investment, taking into account its price and relevant cash flows.
Bond Price and Yield Relationship
Generally, when market interest rates fall → existing fixed-rate bond prices rise.
33. Major Financial Market Risks
| Risk | Meaning |
|---|---|
| Market Risk | Loss caused by adverse movement in market prices/rates. |
| Interest Rate Risk | Risk caused by changes in interest rates. |
| Credit Risk | Risk that a counterparty fails to meet obligations. |
| Liquidity Risk | Risk of being unable to sell or fund positions efficiently. |
| Foreign Exchange Risk | Risk caused by changes in currency exchange rates. |
| Operational Risk | Risk arising from inadequate processes, systems, people or external events. |
34. Money Market vs Capital Market
| Basis | Money Market | Capital Market |
|---|---|---|
| Purpose | Short-term funds | Medium/long-term funds |
| Typical Maturity | Up to one year | Generally more than one year |
| Examples | CP, CD, T-Bills, call money, repo | Shares, bonds, debentures |
| Main Focus | Liquidity | Capital formation |
35. Primary Market vs Secondary Market
| Basis | Primary Market | Secondary Market |
|---|---|---|
| Securities | New securities | Existing securities |
| Main Purpose | Raise fresh capital | Provide liquidity and trading |
| Buyer | Investor buys from issuer/issue process | Investor buys from another investor |
| Example | IPO | Stock exchange trading |
36. Debt vs Equity
| Basis | Debt | Equity |
|---|---|---|
| Nature | Borrowed funds | Ownership capital |
| Investor Position | Creditor | Owner/shareholder |
| Return | Interest/contractual return | Dividend/capital appreciation, subject to performance |
| Risk | Generally lower than equity in the capital structure, subject to issuer risk | Generally higher market/business risk |
37. Numerical Examples
Example 1 — Treasury Bill Return
Suppose a Treasury Bill has a face value of ₹100 and an investor buys it for ₹97 and receives ₹100 at maturity.
The investor's return is generated from the discount between the purchase price and redemption value, subject to the exact yield calculation and holding period.
Example 2 — Simple Bond Coupon
Suppose a bond has a face value of ₹1,000 and a coupon rate of 8% per year.
If the bond's market price changes, its current yield can differ from the coupon rate.
38. Important Exam Traps
39. Rapid Revision — 75 Important Facts
- Financial markets facilitate the transfer of funds.
- Money market deals mainly with short-term funds.
- Capital market deals mainly with medium and long-term funds.
- Money-market instruments generally have maturity up to one year.
- Treasury Bills are money-market instruments.
- Commercial Paper is a money-market instrument.
- Certificate of Deposit is a money-market instrument.
- Repo is used for short-term secured funding.
- Call money is very short-term money-market funding.
- Notice money is generally beyond overnight and up to 14 days.
- Term money generally extends beyond 14 days up to one year.
- Capital market includes equity and debt markets.
- Shares represent ownership.
- Bonds represent debt.
- Primary market deals with new issues.
- Secondary market deals with existing securities.
- IPO is a primary-market activity.
- Stock exchange trading is secondary-market activity.
- Secondary markets provide liquidity.
- Financial markets help price discovery.
- RBI plays a major role in India's money market.
- SEBI regulates India's securities market.
- Forex market deals in currencies.
- USD/INR is a foreign exchange currency pair.
- Derivatives derive value from an underlying asset or reference variable.
- Futures are derivatives.
- Options are derivatives.
- Swaps are derivatives.
- A call option gives a right to buy.
- A put option gives a right to sell.
- Options normally give the buyer a right rather than an obligation.
- Government securities are debt instruments.
- T-Bills are short-term Government securities.
- Government bonds are generally longer-term securities.
- SDL means State Development Loan.
- G-Sec means Government Security.
- Yield represents return relative to investment price and cash flows.
- Bond prices generally move inversely to market yields.
- Liquidity means ease of buying or selling an asset.
- Market risk arises from adverse market movements.
- Interest-rate risk arises from changes in interest rates.
- Credit risk relates to counterparty default.
- Liquidity risk relates to difficulty in funding or selling assets.
- Foreign exchange risk arises from currency movements.
- Operational risk can arise from people, processes, systems or external events.
- NSE stands for National Stock Exchange of India.
- Nifty 50 is associated with NSE.
- BSE stands for BSE Ltd.; historically Bombay Stock Exchange.
- Sensex is associated with BSE.
- Clearing determines obligations after trading.
- Settlement completes the transfer of funds and securities.
- Equity investors are shareholders.
- Debt investors are creditors.
- Coupon is the stated interest associated with a bond.
- Face value is the nominal value of a security.
- Maturity is the date/period when principal becomes payable under the instrument terms.
- Primary issuance raises funds for the issuer.
- Secondary trading generally transfers ownership between investors.
- Money market supports liquidity management.
- Capital market supports capital formation.
- Financial markets can be domestic or international.
- Banks are major participants in financial markets.
- Institutional investors are important market participants.
- Governments raise funds through securities.
- Companies raise equity and debt capital.
- Foreign investors participate subject to applicable regulations.
- Price discovery is an important market function.
- Risk management is an important financial-market function.
- Liquidity improves the tradability of financial assets.
- Repo involves an agreement to repurchase securities.
- Reverse repo represents the opposite side of a repo transaction.
- CP means Commercial Paper.
- CD means Certificate of Deposit.
- G-Sec means Government Security.
- FX means Foreign Exchange.
- FEMA is important for India's foreign exchange framework.
- SEBI is the principal securities-market regulator in India.
40. Important Full Forms for Exams
| Short Form | Full Form |
|---|---|
| RBI | Reserve Bank of India |
| SEBI | Securities and Exchange Board of India |
| FEMA | Foreign Exchange Management Act |
| CP | Commercial Paper |
| CD | Certificate of Deposit |
| T-Bill | Treasury Bill |
| G-Sec | Government Security |
| SDL | State Development Loan |
| IPO | Initial Public Offering |
| FPO | Further Public Offering |
| FX | Foreign Exchange |
| OTC | Over-the-Counter |
| NSE | National Stock Exchange of India |
| BSE | BSE Ltd. / Bombay Stock Exchange |
| NSDL | National Securities Depository Limited |
| CDSL | Central Depository Services (India) Limited |
| FII | Foreign Institutional Investor |
| FPI | Foreign Portfolio Investor |
| ETF | Exchange Traded Fund |
| F&O | Futures and Options |
41. Frequently Asked Questions
It is a system where financial assets are issued, traded or transferred between market participants.
Money market and capital market are the two major broad segments.
It is the market for short-term funds and instruments, generally with maturities up to one year.
It is the market for medium and long-term financing and investment.
Treasury Bills, Commercial Paper, Certificates of Deposit, repo and short-term money-market transactions are important examples.
It is the market where new securities are issued.
It is the market where already-issued securities are traded.
A derivative is a contract whose value is derived from an underlying asset, rate, index or reference variable.
A call gives the holder the right to buy, while a put gives the holder the right to sell.
The Securities and Exchange Board of India (SEBI).
The Reserve Bank of India (RBI).
It is the market where currencies are bought and sold.
Liquidity is the ability to buy or sell an asset quickly without causing a significant price impact.
Generally, bond prices and yields move in opposite directions.
42. One-Page Financial Markets Memory Chart
| Remember | Answer |
|---|---|
| Short-term market | Money Market |
| Longer-term market | Capital Market |
| New securities | Primary Market |
| Existing securities | Secondary Market |
| Short-term Government security | Treasury Bill |
| Short-term corporate instrument | Commercial Paper |
| Negotiable deposit instrument | Certificate of Deposit |
| Ownership | Equity |
| Borrowing | Debt |
| Currency market | Forex Market |
| Value derived from underlying | Derivative |
| Right to buy | Call Option |
| Right to sell | Put Option |
| Securities regulator | SEBI |
| Major money-market/monetary authority | RBI |
| NSE index | Nifty 50 |
| BSE index | Sensex |
| Price vs yield | Generally inverse |
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44. Official Verification Sources
Financial-market rules, eligibility conditions, settlement systems, securities regulations and market practices can change. Always verify current regulatory details before treating a rule as current.
- Reserve Bank of India (RBI): Official RBI Website
- Securities and Exchange Board of India (SEBI): Official SEBI Website
- Government of India — Department of Economic Affairs: Official DEA Website
- Government of India — Ministry of Finance: Official Ministry of Finance Website