FINANCIAL MARKETS – AN OVERVIEW:
In common parlance, a market is a place where investing takes place. Whenever we think about markets, an image that flashes across our minds is of a place which is very busy, with buyers and sellers, some sellers, shouting at the top of their tone of 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 increased every thing they needed. Food was your main commodity, which could be effortlessly grown at the backyard, and for the particular non-vegetarians, jungles were open with no restrictions on hunting. However , using the development of civilization, the needs of every being grew; they needed clothes, wares, instruments, weapons and many other things that could not be easily made or produced by one person or family. Hence, the need of a common place was felt, exactly where people who had a commodity to offer and the people who needed that commodity, could gather satisfy their mutual needs.
With time, the manner in which the markets functioned changed and developed. Markets became more and more sophisticated and specialized in their transaction so as to save time and space. Different kinds of markets came into being which usually specialized in a particular kind of commodity or transaction. In today’s world, there are markets which usually cater to the needs of manufacturers, retailers, ultimate consumers, kids, women, guys, students and what not. For the debate of the topic at hand, the different types of markets that exist in the present day could be broadly classified as goods markets, service markets and financial markets. 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 actually. e. Stock Exchanges facilitate the trade in stocks, bonds plus warrants.
2 . The coming jointly of buyers and sellers in order to trade financial product i. e. stocks and shares are exchanged between buyers and sellers in several ways including: the use of stock trades; directly between buyers and retailers etc . ”
Financial Markets, because the name suggests, is a market exactly where various financial instruments are exchanged. The instruments that are traded during these markets vary in nature. They are in fact tailor-made to suit the needs of various people. At a macro level, individuals with excess money offer their cash to the people who need it for expense in various kinds of projects.
To make the conversation simpler, let’s take help of an example. Mr. X has Rupees 10 lacs as his financial savings which is lying idle with your pet. 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 realize that a certain Mr. X has cash which he is willing to invest in an opportunity which is similar to one which Mr. Con wants to start?
The above problem could be solved by providing a common place, exactly where people with surplus cash can mobilize their savings towards those who need to invest it. This is precisely the function 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 people who can actually invest. Thus from the above discussion, we can co-relate how monetary markets are no different in spirit from any other market.
The following issue that needs to be redressed is what will be the distinction between various financial equipment that are floated in the market? The answer to this question lies in the nature or needs of the investors. Investors are of various kinds and hence have different needs. 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 a diverse kind of investment so that their own 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 an additional 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 may be situated in different geographical locations, really far from each other. A common place with this transaction will require the meeting of such persons in person to close the transaction. This may again result in a wide range of hardship. It may also be the case that the rate at which the lender wants to lend his money or the duration that he wants his money to incur interest, may not be acceptable towards the borrower of the money. This would result in 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 marketplaces. Intermediaries are the ones from who the borrowers borrow the harbored savings of the lenders. Their key function is to act as link to mobilize the finances from the lender to 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 none of the intermediaries are principal parties to a transaction. They merely behave as facilitators. The kinds of intermediaries that will operate in financial markets are:
᾿ Deposit-taking intermediaries,
᾿ Non-deposit consuming intermediaries, and
᾿ Supervisory plus 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 to the persons who are in need of it. Instance – 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. They will act as agents to the principal. They merely bring together the borrower and the lender with similar needs. Device Trusts, Insurers, Pension Funds plus Finance Companies are an example of this kind of intermediaries.
Supervisory and Regulatory Intermediaries tend not to actively participate in the trading associated with securities in the financial markets since parties. They perform the functionality of overseeing that all the dealings that take place in the financial markets are in compliance with the statutory and regulatory platform. They step in only when any error or omission has been committed by either of the parties to the deal, and take steps as is provided by the particular statutory and regulatory scheme. The Bombay Stock Exchange, National Stock Exchange, and so forth are examples of this kind of intermediary.
MAIN MARKETS AND SECONDARY MARKETS:
Economic 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. A single share of XYZ Co. costs Rs. 500. In this scenario, The will purchase 2000 shares of XYZ Co. XYZ Co. is definitely issuing shares to A in return in order to his investment, first hand.
Suppose after purchasing the shares from XYZ Co., A holds the stocks for a year and thereafter really wants to sell the shares, he may market the shares through a stock exchange. B wants to purchase 2000 shares associated with XYZ Co. B approaches the particular stock exchange and purchases the gives 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 Co. directly.
In the first example, A purchased the shares of XYZ Co. directly. Hence, he bought his shares from the Primary marketplace. 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, although he purchased the shares through Secondary market. If you are you looking for more information regarding click here check out our own webpage.
KINDS OF FINANCIAL MARKETS:
When securities are issued in financial markets, the borrower has to pay 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:
᾿ 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 monetary 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 happening of a transaction and closing or even effectuating the transaction. The types of financial markets that can be distinguished with this basis are:
᾿ Spot Marketplaces: The transaction is brought straight 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 since the parties have no scope of going back on their promised actions.
᾿ Forward Markets: In this kind of market, the particular transaction takes place on one date and it is effected on some future day, which is mutually accepted between parties to the transaction. As the date which the mutually accepted transaction is usually effected is different from the date where the transaction is mutually accepted, there is a risk that one of the parties may not be in a position; on the date the particular transaction is to be effected, to recognize the transaction. Hence the level of danger in this market is higher than those of spot markets.
᾿ Future Marketplaces: This kind of financial market closely is similar to Forward Markets, with the difference that in this market, the quality and the volume of the goods that are traded are specified on the date the transaction can be entered into, though the transaction is to be affected on some future date. Addititionally there is an added advantage in this market compared to Forward Markets in the sense that there is securities of guarantee in case one of the events fails to honor his part of the executing which he had promised while getting into the transaction. Hence, the level of danger associated with this market is comparatively lower than that of the Forward Markets.