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Assignment
On
Submitted to
Prof. Nikunj Patel
On
31/10/2017
By
Group No.: 2
Section: B
Financial Market
Financial markets are market places which facilitates and encourages exchanging of securities
including values, securities, monetary forms, bonds, currencies, treasury bills etc. Businessman
regularly turn to financial markets when they are in desperate need of money for development
reason, venture reason and so forth. Financial markets follow a critical part in designating assets
in an economy. Money markets also plays a key role in discovering costs of financial resources.
Other than this, it gives a platform to investors and speculators to invest their monetary resources
and securities. It is not easy for an economy to work without the presence of monetary markets
and we will see its nitty gritty significance in the later piece of this report. Different stock trades
(BSE, NSE), commodity markets and so forth are basic examples of money related markets. Just
like any other market, this market is also all pervasive and operates through intervention of market
forces of demand and supply. Hence, price is determined where demand meets supply. The various
functions which are performed by Financial Markets are:
Provides a platform for investors and borrowers to meet, interact and transact.
Fast selling of assets becomes easy which ensures liquidity.
Price determination totally depends on market forces.
Provides security of dealing in financial assets.
(b) Prices the financial instruments as per the forces of demand and supply
(d) Ensures liquidity by providing platform to sell such assets very quickly
Finance related markets can frequently be considered as the gathering of every potential
purchaser and merchants of different sorts of monetary items or/and benefits alongside the
particular exchanges between them. Specifically, they give a protected and directed stage for
borrowers and loan specialists to lead exchanges between them that would be commonly
advantageous to both the parties. One may then expect, with essential comprehension of how
economy functions, that borrowers and loan specialists in a finance related market would not
exchange with each other straightforwardly but instead do as such through an operator of a specific
form and usefulness; much similarly that a man normally buys their week after week basic need at
a high street retailer as opposed to from the first makers in this modern age.
Financial intermediaries are finance organizations working in financial markets such specialists,
for borrowers and banks to exchange through them in a indirect way. As such, with respect to a
much-simplified instance of exchanging stores, a budgetary middle person gives intends to
associate surplus operators (loan specialists) and deficiency specialists (borrowers). A typical
example of a financial intermediaries would be a business bank that attracts surplus the type of
client stores and utilize these assets to issue a wide range of advances to those with deficits. In this
situation the loan specialists are adequately individuals who spare with the bank and they
Capital Markets
The capital market is a body of financial system which raises capital by dealing in shares,
bonds, and other long-term investments. These markets are also known as the Long-Term Markets
as the money invested in these markets are mainly for a period more than one year. Capital Market
consists of two types of markets and these are Primary Market and Secondary Market. In primary
capital market newly, issued stocks and bonds are being exchanged while in secondary capital
market exchange of already existing bonds and stocks takes place. Both of the market plays a
crucial role as primary market provides you place where you can raise long term funds by issuing
shares and debentures while secondary market provides a readily available platform for those
investors who want to sell or exchange their securities. For better understanding it can be further
divided into two parts-
1) Bond Markets- The bond market, also known as debt market or credit market is a financial
market where its participants can issue new debt or buy and sell debt securities in the form of
bonds.
2) Stock Markets- The stock market, also known as equity market or share market is a
collection of buyers and sellers of stocks or shares.
Foreign exchange Market is a market where trading of currencies takes place and that is why
it is also known as currency market. The forex market is the largest, most liquid market in the
world with an average traded value that exceeds over $5 trillion per day (As per Bank for
International Settlements, as of 2016) and includes all of the currencies in the world. In the global
foreign exchange markets, the average daily turnover is continuously growing. Foreign exchange
market is the worlds largest market in terms of total cash value traded and any person can actively
participate in this market irrespective of the place from which they are trading. Digitalization and
increased use of internet has helped in increasing the easy of doing money transactions as now you
can trade in securities in just one click.
Commodity Market
A commodity market is a market that rather than manufactured products, trades in primary
economic sector. It includes soft commodities such as agricultural products and hard commodities
such as gold, oil, etc. Worldwide, investors access about 50 major commodity markets with pure
financial transactions. New York Mercantile Exchange (NYMEX), the London Metal Exchange
(LME) and the Chicago Board of Trade (CBOT) are some of the leading commodity markets in
the world.
Money Market
In this market the financial instruments are traded with very high liquidity and short maturity
time. This market is also known as market for short term fund investment, which deals in
borrowing, buying and selling with maturities that usually range from overnight to just under a
year. These investments are known as liquid investments due to their short-term maturities. A few
money market instruments include treasury bills, commercial paper, deposits, bankers
acceptances, bills of exchange, certificates of deposit, federal funds, repurchase agreements and
short lives mortgage and asset backed securities.
Call money is the money borrowed or lent for a very short-term which is repayable on
demand. It usually has a maturity period of one to fourteen days or overnight to fortnight. It is used
for inter-bank transactions. The money that is lent for one day in this market is known as "call
money" and, if it is lent for more than one day then it is called notice money." Any holidays or
Sundays are not considered while counting the period. These are not backed by any collateral
security.
The Commercial banks have to maintain a minimum cash balance known as the cash reserve
ratio. Call money is a method by which banks lend to each other to be able to maintain the cash
reserve ratio. The interest rate paid on call money is known as the call rate. This call rate fluctuates
on a daily basis and sometimes even fluctuates on an hourly basis. There is an inverse relationship
between call rates and other short-term money market instruments such as treasury bills and
commercial papers. A rise in call money rates makes other sources of finance, such as commercial
paper, way cheaper for banks to raise funds from.
Treasury bills are short term maturity promissory notes issued by a federal government as a
primary instrument for regulating money supply and raising funds through open market
operations. Here, short terms refer to a period of less than a year, more likely of 3 months. T-
bills usually do not pay any interest but are sold at a discount; their earning is usually the
difference between the purchase price and redemption price. Although their yield is lower as
compared to other securities available in the market, T-bills are very popular with institutional
investors because they are backed up by the government and have no risk and that makes up for
a very good risk-free investment. So, investors who are risk averse, always prefer go for treasury
bills.
Commercial Papers
Commercial paper is a money-market security issued usually by large corporations to acquire
or raise funds to meet short-term debt liabilities. Here, the company promises to pay the face
value of the commercial paper on the maturity date which is mentioned on the commercial paper.
Since, it is not backed by any collateral, only firms with excellent credit ratings from a recognized
Certificate of Deposit
A certificate of deposit is a negotiable money market instrument and is issued in
dematerialised form in exchange of funds deposited at a bank or other eligible financial
institution for a specified period of time. These are similar to savings accounts and are perfect
for investors who are risk averse because they are completely risk-free instruments. However,
they do differ from the savings account in the sense that the Certificate of Deposit has a specific
fixed term and a fixed interest rate. The maturity term can range from 1 month to 5 years. The
bank holds the money of the customer till the maturity and post that, the customer can withdraw
both - the invested amount as well as the accrued interest. Banks usually offer a higher interest
rate to such CoD bearers as compared to the normal saving accounts customers who can
withdraw their money on demand.
Trade Bills
Trade bills are basically credit bills that are drawn by traders on each other to facilitate credit
sales. Trade bills or Bills of Exchange provides necessary liquidity to the traders as they can be
discounted from banks if the need arises.
The derivatives market is a financial market for derivatives (a security with a price
dependent upon an asset or assets). These derivatives can be traded either as OTC (over-the-
counter) or on an exchange. The participants of this market can be classified as Hedgers,
Speculators, Margin Traders or Arbitrageurs.
Following the growing instability in the financial markets, the financial derivatives gained
prominence after 1970. In recent years, the market for financial derivatives has grown in terms of
the variety of instruments available, as well as their complexity and turnover. Moreover, people
have become more risk takers and hence prefer to invest their money in the derivative market.
Financial derivatives have changed the world of finance through the creation of innovative ways
to comprehend, measure, and manage risks.
Future Markets
Future market is a place where the participants can buy and sell futures contracts (a contract
which gives the buyer an obligation to buy and the seller an obligation to sell an asset at a set price
at a future point in time). The New York Mercantile Exchange, the Chicago Board of Trade, the
Chicago Mercantile Exchange, the Chicago Board of Options Exchange, the Chicago
Climate Futures Exchange, the Kansas City Board of Trade, and the Minneapolis Grain Exchange
are a few common examples of futures markets.
In the cash market, as the name suggests, goods are sold for cash and are delivered
immediately. Similarly, contracts bought and sold in the spot market are immediately effective.
Prices are settled in cash "on the spot" at current market prices. This is notably different from other
markets, in which trades are determined at forward prices. The cash markets tend to be dominated
by institutional market players such as hedge funds, limited partnerships and corporate investors.
The very nature of the products traded requires access to far-reaching, detailed information and a
high level of macroeconomic analysis and trading skills.
Financial markets also provide efficient allocation of resources within any economy. It also
provides employment to thousands of individuals.
(Source- centerforcapitalmarkets.com)
The global financial system is immense and varied; it comprises of numerous sorts of
financial institutions, and also monetary markets in stocks, securities, products, and derivatives.
The worldwide capital market includes 46,000 exchanged stocks that worth over $54 trillion. In
2012 the global bond market exchanged securities worth about $80 trillion, and the mutual fund
industry exchanged about $26.8 trillion. Exchange traded funds exchanged securities worth $2
trillion in 2012, and during the end of 2013 the aggregate notional measure of over-the-counter
subordinates was about $710.2 trillion globally.
The global financial system supports worldwide exchange through financing components
outside the system, such as trade credit. Firms in more developed financial systems tend to utilize
more bank debt with respect to trade credit, and firms in less-developed financial frameworks
utilize more trade credit. In this way, trade credit makes the global financial systems more effective
by substituting for bank credit when such substitution is productive.
Financial intermediaries play an important role in a financial market. They reconcile the
conflicting demands and preferences of both lenders and borrowers to make redistribution of
surplus to where deficits are possible in an efficient manner. During the process of doing so, some
financial intermediaries offer the major benefits of maturity and risk transformation, as well as
denomination.
Although it is possible for direct finance to achieve these objectives, the cost saving
advantages of employing financial intermediaries are significant. Apart from a financial
intermediarys ability to reconcile conflicting demands and preferences of lenders and borrowers
as well as its risk aversion capacity, economies of scale and economies of scope also contribute to
lowering the overall cost.
http://www.investopedia.com/walkthrough/corporate-finance/1/financial-markets.aspx