FINANCIAL MARKETS – AN OVERVIEW:
In common parlance, a market is a place where trading takes place. Whenever we think about markets, a picture that flashes across our thoughts is of a place which is very hectic, with buyers and sellers, a few sellers, shouting at the top of their voice, trying to convince customers to buy their wares. A place abuzz with vibrancy and energy.
In the early stages of civilization, people were self-sufficient. They grew every thing they needed. Food was the main commodity, which could be effortlessly grown at the backyard, and for the non-vegetarians, jungles were open without restrictions on hunting. However , using the development of civilization, the needs of every getting grew; they needed clothes, items, instruments, weapons and many other things which could not be easily made or made by one person or family. Hence, the requirement of a common place was felt, where people who had a commodity to offer as well as the people who needed that commodity, could gather satisfy their mutual requirements.
With time, the manner in which the markets performed changed and developed. Markets became more and more sophisticated and specialized in their transaction so as to save time plus space. Different kinds of markets came into being which specialized in a particular kind of commodity or transaction. In today’s world, there are markets which cater to the needs of manufacturers, sellers, ultimate consumers, kids, women, males, students and what not. For the debate of the topic at hand, the different kinds of markets that exist in the present day can be broadly classified as goods markets, service markets and financial marketplaces. The present article seeks to give an overview of Financial Markets.
WHAT IS A MONETARY MARKET?
According to Encyclopedia II, ‘Financial Markets’ mean:
“1. Organizations that facilitate trade in financial products. i. e. Stock Exchanges facilitate the trade in stocks, bonds and warrants.
2 . The coming with each other of buyers and sellers in order to trade financial product i. e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and retailers etc . ”
Financial Markets, as 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 numerous people. At a macro level, individuals with excess money offer their cash to the people who need it for purchase in various kinds of projects.
To make the debate simpler, let’s take help of an example. Mr. X has Rupees 10 lacs as his financial savings which is lying idle with him. He wants to invest this money so that over a period of time he can multiply this amount. Mr. Y may be the promoter of ABC Ltd. He has a business model, but he does not take enough financial means to start a firm. So in this scenario, Mr. Y can utilize the money that is resting idle with people like Mr. X 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 understand that a certain Mr. X has money which he is willing to invest in an enterprise which is similar to one which Mr. Y wants to start?
The above problem can be solved by providing a common place, exactly where people with surplus cash can mobilize their savings towards those who have to invest it. This is precisely the function of financial markets. They, via various instruments, solve just one issue, the problem of mobilizing savings from people who are willing to invest, to the people who can actually invest. Thus from the over discussion, we can co-relate how financial markets are no different in spirit from any other market.
The following issue that needs to be redressed is what may be the distinction between various financial tools that are floated in the market? The answer to this question lies in the nature or requirements of the investors. Investors are of various kinds and hence have different requirements. Various factors that motivate traders are ownership of controlling stake in a company, security, trading, conserving, etc . Some investors may want to make investments for a long time and earn an interest on their investment; others may just want a short-term investment. There are investors who want a diverse kind of investment so that their particular overall investment is safe in case among the investments fails. Hence, it is the requirements of the investors that have brought about a lot of financial instruments in the market.
There is one more player in the financial market apart from buyers and sellers. As stated over, 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, very far from each other. A common place for this transaction will require the meeting of those persons in person to close the transaction. This may again result in a wide range of hardship. It may also be the case the rate at which the lender wants to lend his money or the duration for which he wants his money in order to incur interest, may not be acceptable towards the borrower of the money. This would cause a lot of glitches and latches with regard to closing the transaction. To solve this issue, we have a body called the Intermediaries, which operate in the financial markets. Intermediaries are the ones from whom the borrowers borrow the harbored savings of the lenders. Their main function is to act as link to mobilize the finances from the lender to the borrower.
Intermediaries may be of different kinds. The basic difference in these intermediaries is based upon the kind of services they provide. However , they are similar in the sense that nothing of the intermediaries are principal celebrations to a transaction. They merely behave as facilitators. The kinds of intermediaries that will operate in financial markets are:
᾿ Deposit-taking intermediaries,
᾿ Non-deposit taking intermediaries, and
᾿ Supervisory and regulatory intermediaries.
Deposit-taking intermediaries are that accept deposits from a principal. They accept deposits so that the build up can be utilized for the purpose of advancing loans towards the persons who are in need of it. Example – Reserve Bank of Indian, Private Banks, Agricultural Banks, Postal office shooting, Trust Companies, Caisses Populaires (Credit Unions), Mortgage Loan Companies, etc .
Non-deposit taking intermediaries are those which just manage funds on behalf of the client. These people act as agents to the principal. These people merely bring together the borrower as well as the lender with similar needs. Unit Trusts, Insurers, Pension Funds and Finance Companies are an example of this kind of intermediaries.
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Supervisory and Regulatory Intermediaries do not 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 compliance with the statutory and regulatory platform. They step in only when any mistake or omission has been committed 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.
PRIMARY MARKETS AND SECONDARY MARKETS:
Monetary markets, the financial instruments (securities) may be traded first hand or second hand. For example , A wants to invest Rs. 1 million in XYZ Business, which is a newly incorporated company. One share of XYZ Co. costs Rs. 500. In this scenario, A will purchase 2000 shares of XYZ Co. XYZ Co. is issuing shares to A in return to his investment, first hand.
Suppose 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. M wants to purchase 2000 shares of XYZ Co. B approaches the stock exchange and purchases the stocks therefrom. In this case, B has not directly purchased shares from XYZ Company., 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 marketplace. In the second example, B did not purchase the shares from XYZ straight, however , his title over the gives is as good as A’s, despite the fact that he purchased the shares through Secondary market.
KINDS OF FINANCIAL MARKETS:
When securities are issued monetary markets, the borrower has to spend an interest on the amount borrowed. Investments may be classified based on the duration that they are floated. The kinds monetary markets that exist based on the duration that the securities have been issued are usually:
᾿ Capital Markets: This kind of economic market is one in which the securities are issued for a long-term period.
᾿ Money Markets: In this kind of economic markets, securities are issued for any 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 taking place 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 into effect at the time the trading takes place. By the very nature of the deal, it can be understood that the risk associated with this kind of market is very minimal since the parties have no scope of going back on their promised actions.
᾿ Forwards Markets: In this kind of market, the particular transaction takes place on one date and is effected on some future day, which is mutually accepted between events to the transaction. As the date where the mutually accepted transaction will be effected is different from the date where the transaction is mutually accepted, there is a risk that one of the events may not be in a position; on the date the transaction is to be effected, to recognition the transaction. Hence the level of danger 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 in this market, the quality and the amount of the goods that are traded are specific on the date the transaction is usually entered into, though the transaction is to be affected on some future date. There is also an added advantage in this market compared to Forward Markets in the sense that there is a security of guarantee in case one of the events fails to honor his part of the undertaking 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.