Financial Markets

Financial Markets
Financial markets provide facilities for the buying and selling of financial claims and services. The
participants on the demand and supply sides of these markets are financial institutions, agents,
brokers, dealers, borrowers, lenders, savers and others who are linked by laws, contracts,
covenants and communication networks. Financial markets are classified as primary (direct) and
secondary (indirect). The primary markets deal in new financial claims or new securities. On the
other hand, secondary markets deal in securities already issued or existing or outstanding. More
often the classification is into money and capital markets. The former deals with short-term claims
(having a period of maturity of one year or less), the latter does so with long-term claims (maturity
period above one year).

Stock Markets
A stock market is a place where trading of shares and stocks takes place. The word stock, in
American usage, means equity or ownership in a corporation. A share is the basic unit of a
companys capital, which it tries to raise from the stock market. When you own a stock, you are
referred to as a share- or stockholder. A stock shows that you own a small fraction of a
corporation, hence if you buy stock in the Coca-Cola Corporation, and they come out with a hot
new drink, then you get to share the profits. A stock also gives you the right to make decisions
that may influence the company. Each stock you own gives you a vote/s, so the more stocks you
own, the more decision-making power you have.
The broker calls a person, usually his employee, on the floor. He runs to the space that is allotted
to this stock, and then buys the necessary amount from the specialists, or companies, that are
there to sell and buy on a regular basis, and calls back. Regulating these services and their
providers is an important. The Securities and Exchange Bureau of India (SEBI) is the premier
body involved with the task.
SEBI: The Securities and Exchange Board of India (SEBI) was established in 1998 to regulate
and develop the growth of the capital market. It regulates the working of stock exchanges and
intermediaries such as brokers and merchant bankers, approves mutual funds, and registers
Foreign Institutional Investors who wish to trade in Indian scrips. It promotes investors education
and trains intermediaries in securities markets. It prohibits fraudulent and unfair trade practices
relating to the latter, and insider trading in securities by imposing monetary penalties. It also
regulates substantial share-acquisitions and takeovers, calls for information from, carries out
inspection, conducts inquiries and audits of stock exchanges and self-regulatory organizations in
the securities market.

FOREX MARKETS
The Foreign Exchange or forex market is the largest financial market in the world. Here,
settlement is made for international purchases and sales, i.e., for exports and imports, as also for
payments international purchases and sales of assets. Operating virtually round the clock, the
forex market trades enormous amounts of money-- estimated at several trillion dollars daily.
Unlike the futures exchange that brings buyers and sellers together in a central location, the forex
market is not centrally located. It is an over-the-counter market where business is conducted
through telephones, computers, fax machines et al. Among its members are large corporations,
commercial banks, money centers, pension funds and investment banking firms. Foreign
exchange involves trading one nations currency for that of another. As individuals or companies
from one country trade across borders, the need for foreign currency arises. For example, when a
U.S. importer buys French wine, either the importer needs francs to pay or the French merchant
must accept U.S. dollars. The resultant trading differential generates profits and keeps the forex
market in animation.

Factors Affecting Exchange Rates

There are two factors that determine exchange rates. They are as follows:
1. Demand and supply of various currencies: If there is an import surplus in India and most of
Indias imports are from the USA, importers need to pay in $. This will create a demand for the
greenback. However, if there are not many exporters and $-supply is limited, the greenback will
become costly.
2. (Central) Bank Regulation: The Reserve Bank of India (RBI) plays an important, almost
exclusive, role in determining exchange rates in India. When $-demand rises, rupee-value goes
down. The RBI, on such an occasion, might put some restrictions on imports, which might bring
$-demand down.
DEBT MARKET

It is one in which mainly debt is transacted which could be in the form of debt instruments or
cash. In the first place, there is the money market-- a huge market trading in debt instruments
with an original maturity of one year or less. Typical instruments here include Treasury Bills, bank
certificates of deposits etc. Secondly, there is the bond market in which long-term debt obligations
are traded. As such, the bond market is the long-term complement to the money market.
I. The Money Market: In this, the short-term surpluses of financial and other institutions and
individuals are bid by borrowers comprising institutions and individuals and also by the
Government. Thus the short-term requirements of borrowers are met lenders get liquidity. In other
words, a money market is one in which short-term funds are borrowed and lent. The borrowers
are traders, speculators, brokers and producers of various commodities as well as government
and institutional borrowers. The lenders include commercial banks, insurance companies and
other institutional borrowers.
II. The Bond Market: This deals in bonds. A bond is a debt instrument. An example of a bond can
be a debenture. The following are the terms mostly used in the bond market.
Bond Term: The term of the bond is the number of years between the date it was initially issued and the
date it matures.

Current Yield: A current yield is simply the yearly amount you receive in coupon income dividend by the
market value of your bond. The current yield does not take into account the timing of coupon interest or the
interest you might earn when you invest your coupon income.

EQUILIBRIUM IN FINANCIAL MARKETS

Financial markets are said to be perfect when the following conditions are met:
1. A large number of savers and investors operate in markets.
2. The savers and investors are rational.
3. All operators in the market are well-informed and information is freely available.
4. There are no transaction costs.
5. The financial assets are infinitely divisible.
6. The participants in the market have homogeneous expectations.
7. There are no taxes.
On the whole it can be stated that equilibrium is established in the financial markets when the
expected demand for funds for short-term and long-term investments matches with the planned
supply of funds generated out of savings and credit creation.

Indian Economy and Financial Markets

Globalization of the Indian economy. Since the last ten-odd years, India has embarked on a
liberalization and globalization drive. There have been ups and downs, but now India stands on
the threshold of an economic boom. Many pundits have forecast that the Indian economy will be

one of the fastest growing Asian Tiger Economies in the coming years. With a vast, growing and
prosperous middle class providing a ready market, businesses will prosper.
Indian Stock Markets. India is a vast country with a wealth of entrepreneurial talent and a
bustling business and industrial environment. Business needs equity funding, which in turn needs
stock markets. The Indian capital markets, prior to 1992, were confusing, stifled under the weight
of paperwork, at times perceived as being unfriendly to genuine investors, and sometimes scamconducive.
After 1992, the newly-empowered Securities and Exchange Board of India (SEBI) became active
as the statutory capital market regulator (similar to the SEC in the USA). Since then astounding
progress has been made and, today, Indian markets are among the most modern, advanced and
best-regulated in the world.
In Evidence of this We Have the Following Facts: All major stock exchanges have fully
computerized on-line screen-based trading systems, ensuring efficiency, transparency and
fairness of trade practices under the supervision of interval surveillance departments, and
overseen by SEBI.
Tight norms have been implemented for corporate disclosures and insider-trading. Modern
technology has streamlined the flow of information to all market participants. This makes for a fair
marketplace, safeguarding the investors interest. Modern Clearing Corporations and Guarantee
Funds with adequate funding ensure the safety of the stock markets.
A fully computerized national depository connected by a nationwide VSAT network has been
started to eliminate endless paperwork and bad deliveries. This ensures that the investors
assets are in safe custody at all times. Dividends and other corporate benefits flow automatically
to the investors account. The touchstone policy at all levels in the new system is, Investors
Interest First.

The Great Indian DreamRuling the Money Markets!

As far as the future is concerned we can say that the coming decade should be very good for
India. This is because, in the first place, after a long time we have a stable government. This
stabilizes the whole system and the investor is not reluctant to invest. Secondly, the excellent
performance of the software and pharmaceutical scrips has helped the market to revive. Thirdly,
the banks are ready to invest since they have a lot of funds. When the market sentiment was low
and people were not investing, they were keeping their money in the banks. This is one of the
reasons why banks have a lot of funds now. Fourthly, Indians have made their presence felt in the
global market through their excellence in software development. This has enthused foreign
investors to invest in the Indian market.
All these factors and various economic indicators point towards a high vis-a-vis the economy.
Hence, it can be said that the coming decade is going to be good for both the investors and the
companies that can forge ahead with confidence.