Financial Markets – An Overview

MONETARY MARKETS – AN OVERVIEW:

In common parlance, a market is a place where investing takes place. Whenever we think about markets, a picture that flashes across our minds is of a place which is very active, with buyers and sellers, a few sellers, shouting at the top of their tone of voice, trying to convince customers to buy their particular wares. A place abuzz with vibrancy and energy.

In the early stages of civilization, people were self-sufficient. They increased every thing they needed. Food was your main commodity, which could be quickly grown at the backyard, and for the particular non-vegetarians, jungles were open with no restrictions on hunting. However , with all the development of civilization, the needs of every getting grew; they needed clothes, wares, instruments, weapons and many other things that could not be easily made or created by one person or family. Hence, the requirement of a common place was felt, where people who had a commodity to offer and the people who needed that commodity, can gather satisfy their mutual needs.

With time, the manner in which the markets functioned changed and developed. Markets grew to become more and more sophisticated and specialized in their transaction so as to save time and space. Different kinds of markets came into being which specialized in a particular kind of commodity or even transaction. In today’s world, there are markets which cater to the needs of manufacturers, retailers, ultimate consumers, kids, women, guys, students and what not. For the conversation of the topic at hand, the different types of markets that exist in the present day can be broadly classified as goods marketplaces, service markets and financial markets. The present article seeks to give a summary of Financial Markets.

WHAT IS A ECONOMIC MARKET?

According to Encyclopedia II, ‘Financial Markets’ mean:

“1. Organizations that will facilitate trade in financial products. we. e. Stock Exchanges facilitate the particular trade in stocks, bonds and warrants.
2 . The coming with each other of buyers and sellers in order to trade financial product i. electronic. stocks and shares are exchanged between buyers and sellers in a number of ways including: the use of stock trades; directly between buyers and retailers etc . ”

Financial Markets, because the name suggests, is a market where various financial instruments are traded. The instruments that are traded in these markets vary in nature. They may be in fact tailor-made to suit the needs of various people. At a macro level, people with excess money offer their money to the people who need it for investment in various kinds of projects.

To make the dialogue simpler, let’s take help of the example. Mr. X has Rupees 10 lacs as his financial savings which is lying idle with him. He wants to invest this cash so that over a period of time he can grow this amount. Mr. Y could be the promoter of ABC Ltd. He has a business model, but he does not need enough financial means to start a firm. So in this scenario, Mr. Y can utilize the money that is lying idle with people like Mr. By and start a company. However , Mr. By may be a person in Kolkata and Mr. Y may be in Mumbai. So the problem in the present scenario is the fact that how does Mr. Y come to know that a certain Mr. X has money which he is willing to invest in a venture which is similar to one which Mr. Con wants to start?

The above problem can be solved by providing a common place, where people with surplus cash can mobilize their savings towards those who need to invest it. This is precisely the perform of financial markets. They, by means of various instruments, solve just one issue, the problem of mobilizing savings from people who are willing to invest, to the those who can actually invest. Thus from the over discussion, we can co-relate how financial markets are no different within spirit from any other market.

The following issue that needs to be redressed is what may be the distinction between various financial musical instruments that are floated in the market? The answer for this question lies in the nature or requirements of the investors. Investors are of numerous kinds and hence have different requirements. Various factors that motivate traders are ownership of controlling risk in a company, security, trading, saving, etc . Some investors may want to invest for a long time and earn an interest on their investment; others may just want a short term investment. There are investors who want the diverse kind of investment so that their overall investment is safe in case one of the investments fails. Hence, it is the needs of the investors that have brought about so many financial instruments in the market.

There is another player in the financial market apart from buyers and sellers. As stated above, the one who wants to lend money as well as the one who wants to invest the money might be situated in different geographical locations, extremely far from each other. A common place with this transaction will require the meeting of such persons in person to close the particular transaction. This may again result in a lots of hardship. It may also be the case the fact that rate at which the lender wants to provide his money or the duration that he wants his money in order to incur interest, may not be acceptable to the borrower of the money. This would cause a lot of glitches and latches regarding closing the transaction. To solve this problem, we have a body called the Intermediaries, which operate in the financial markets. Intermediaries are the ones from who the borrowers borrow the harbored savings of the lenders. Their chief function is to act as link to mobilize the finances from the lender towards the borrower.

Intermediaries may be of different types. The basic difference in these intermediaries relies upon the kind of services they provide. However , they are similar in the sense that nothing of the intermediaries are principal parties to a transaction. They merely act as facilitators. The kinds of intermediaries that will operate in financial markets are:

᾿ Deposit-taking intermediaries,
᾿ Non-deposit using intermediaries, and
᾿ Supervisory and regulatory intermediaries.

Deposit-taking intermediaries are those that accept deposits from a primary. They accept deposits so that the build up can be utilized for the purpose of advancing loans to the persons who are in need of it. Instance – Reserve Bank of India, Private Banks, Agricultural Banks, Postal office shooting, Trust Companies, Caisses Populaires (Credit Unions), Mortgage Loan Companies, etc .

Non-deposit taking intermediaries are those which only manage funds on behalf of the client. These people act as agents to the principal. They will merely bring together the borrower and the lender with similar needs. Unit Trusts, Insurers, Pension Funds plus Finance Companies are an example of this kind of intermediaries.

Supervisory and Regulatory Intermediaries never actively participate in the trading associated with securities in the financial markets since parties. They perform the functionality of overseeing that all the transactions that take place in the financial markets are in conformity with the statutory and regulatory framework. They step in only when any error or omission has been committed simply by either of the parties to the transaction, and take steps as is provided by the particular statutory and regulatory scheme. The Bombay Stock Exchange, National Stock Exchange, etc . are examples of this kind of intermediary.

MAJOR MARKETS AND SECONDARY MARKETS:

In financial markets, the financial instruments (securities) may be traded first hand or second hand. For example , A wants to invest Rs. 1 million in XYZ Corporation, which is a newly incorporated company. 1 share of XYZ Co. expenses Rs. 500. In this scenario, The will purchase 2000 shares associated with XYZ Co. XYZ Co. can be issuing shares to A in return in order to his investment, first hand.

Suppose right after purchasing the shares from XYZ Co., A holds the stocks for a year and thereafter would like to sell the shares, he may market the shares through a stock exchange.
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W wants to purchase 2000 shares of XYZ Co. B approaches the stock exchange and purchases the shares therefrom. In this case, B has not straight purchased shares from XYZ Co., however , he is as good an owner of shares as anyone who purchased the shares from XYZ Company. directly.

In the first example, The purchased the shares of XYZ Co. directly. Hence, he bought his shares from the Primary market. In the second example, B failed to purchase the shares from XYZ directly, however , his title over the gives is as good as A’s, even though he purchased the shares through Secondary market.

KINDS OF FINANCIAL MARKETS:

When securities are issued in financial markets, the borrower has to pay an interest on the amount borrowed. Securities may be classified based on the duration for which they are floated. The kinds economic markets that exist based on the duration for which the securities have been issued are usually:

᾿ Capital Markets: This kind of financial market is one in which the securities are usually issued for a long-term period.
᾿ Money Markets: In this kind of financial markets, securities are issued to get a short-term period.

The trading associated with financial instruments and the closing associated with transaction need not necessarily take place at the same time. There may be a time gap between the occurring of a transaction and closing or even effectuating the transaction. The kinds of financial markets that can be distinguished about this basis are:

᾿ Spot Markets: The transaction is brought directly into effect at the time the trading happens. By the very nature of the transaction, it can be understood that the risk associated with this kind of market is very minimal because the parties have no scope of returning on their promised actions.

᾿ Ahead Markets: In this kind of market, the particular transaction takes place on one date and is effected on some future date, which is mutually accepted between parties to the transaction. As the date which the mutually accepted transaction can be effected is different from the date on which the transaction is mutually approved, there is a risk that one of the celebrations may not be in a position; on the date the particular transaction is to be effected, to recognition the transaction. Hence the level of risk in this market is higher than that of spot markets.

᾿ Future Markets: This kind of financial market closely resembles Forward Markets, with the difference that will in this market, the quality and the volume of the goods that are traded are specified on the date the transaction will be entered into, though the transaction is to be affected on some future date. There is also an added advantage in this market in comparison to Forward Markets in the sense that there is securities of guarantee in case one of the parties fails to honor his part of the commencing which he had promised while entering into the transaction. Hence, the level of danger associated with this market is comparatively lower than that of the Forward Markets.