Financial Markets: The Real Deal

A market is a set up where two or more parties interact with one another for the exchange of goods, services or information. The two parties involved in a transaction are the buyer and the seller. A competitive market consists of lots of buyers and lots of sellers, all of whom sell at various quantities and qualities.

by Siddharth Jogani
1 year, 7 months ago
  1. Physical Markets - Physical market is a set up where buyers can physically meet the sellers and purchase the desired merchandise from them in exchange of money. Shopping malls, department stores, retail stores are examples of physical markets.
  2. Non Physical Markets/Virtual markets - In such markets, buyers purchase goods and services through internet. In such a market the buyers and sellers do not meet or interact physically, instead the transaction is done through the internet. Examples include Rediff shopping, eBay, etc.
  3. Auction Market - In an auction market the seller sells his goods to one who is the highest bidder.
  4. Market for Intermediate Goods - Such markets sell raw materials (goods) required for the final production of other goods.
  5. Black Market - A black market is a setup where illegal goods like drugs and weapons are sold.
  6. Knowledge Market - Knowledge market is a set up which deals in the exchange of information and knowledge based products.
  7. Financial Market - Market dealing with the exchange of liquid assets (money) is called a financial market.
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There is no specific place or location to indicate a financial market. The markets are pervasive in nature since the transactions are themselves very pervasive throughout the economic system. Financial Markets transactions include various types of securities which are covered later in this lesson. There are various financial participants and intermediaries involved as the dealings are complex and highly sophisticated (See heading – Market size and participants).  

Capital Markets were never so easy. Check it out. Please leave us some comments. www ...
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There are standardised rules and regulations to be followed and all transactions are under strict supervision and control by various regulatory bodies such as SEBI, RBI, IRDA, etc. This results in high degree of institutionalization and a huge spread with the types of instruments. 

Types of Organised Market: -                                                                                                             1.Capital Market

2. Money Market

1. Capital Market                                                                                                              

It is a market for financial assets which have a long or indefinite maturity. It includes securities with long term maturity (i.e. above one year). The types of Capital Market are: 

A. Industrial Securities Market 

It comprises of the most popular instruments i.e. Equity shares, Preference shares, bonds and debentures. It is a market where industrial concerns raise their capital by issuing appropriate instruments. It is further sub-divided into two:-

       1. Primary Market (New issue market)   

       2. Secondary Market (Stock Exchange)

Primary Market

It is also known as the new issues market, it deals with those securities which are issued to the public for the first time. Primary market facilitates capital formation. There are three ways in which a company may raise capital in a primary market. They are :-

(i) Public Issue                       (ii) Rights Issue                       (iii) Private Placement

Public issue is the most common of these. It is done through sale of securities by a company for the first time. When an existing company wants to raise funds, securities are first offered to its existing shareholders , this is called as rights issue. Private placement is a way of selling securities privately to a small group, which according to SEBI shouldn't exceed 50 investors.

Secondary Market

It is a market for securities which were previously issued in the primary market. These securities are quoted on various stock exchanges. These stock exchanges are regulated under the Securities Contracts (Regulation) Act, 1956 and the regulatory body is Securities Exchange Board of India (SEBI). The principal stock exchange in India is the Bombay Stock Exchange (BSE).

B. Government Securities Market

It is also called gilt Edged Securities market. It is a market where government securities (G-secs) are traded. In India there are many kinds of G-secs are traded. G-secs are sold through Public Debt Office of the RBI. They offer a good source of raising inexpensive finance for the government exchequer and the interest on these securities affect pricing and yields in the market.

C. Long Term Loans Market

Commercial banks and development banks play a significant role in this market by supplying long term loans to corporate customers. It is classified into 3 categories: 

       (i) Term Loans Market        

       (ii) Mortgages               

       (iii) Financial Guarantees Market.

2. Money Market

It is the market for dealing with financial assets and securities which have maturity period of up to one year. It is sub-divided into four parts:

A. Call Money Market 

It is a market for extremely short period loans from say one day to 14 days. So, it is highly liquid. The loans are repayable on demand at the option of the lender or borrower. The interest rates vary from centre-to-centre and time-to-time and sensitive to changes in demand and supply of loans.

B. Commercial bills market

It is a  market for Bills of Exchange arising out of genuine trade transactions. This deals with discounting of bills before due date. In India, the bill market is under-developed. There are no specialised agencies for discounting bills.

C. Treasury bills market

T-bills as they are commonly referred to, are issued by the government. It is highly liquid because of the repayment guaranteed by the Government. There are two types of t-bills i.e. regular and ad-hoc (ad- hoc are issued in favour of RBI only).  T-bills have a maturity period of 91 days or 182 days or 364 days. State Governments do not issue T-bills. They are issued at discount and redeemed at par. Treasury Bills (short term securities) are sold through auctions

D. Short-term loan market

These are the loans given to corporate customers for meeting their working capital requirements. Loans are given in the form of cash credit and overdraft.

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They are money lenders, indigenous bankers, trader’s etc who collect and lend money to and from the public. They also include chit funds and other private finance companies whose activities are not controlled by the RBI. RBI has taken steps to bring these lenders, bankers and traders under its strict control by issuing the Non-Banking Financial Companies Directions, 1998. However not much success is achieved and the instruments are also not standardized.

Other Types of Markets:

Foreign Exchange Market

In such type of market, parties are involved in trading of currency. In a foreign exchange market (also called currency market), one party exchanges one country’s currency with equivalent quantity of another currency.

Predictive Markets

Predictive market is a set up where exchange of good or service takes place for future. The buyer benefits when the market goes up and is at a loss when the market crashes.

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When one uses the term Financial Markets , its more often that the reference is made to the Stock Markets. However its of importance to know how it originated and how it evolved. Stock markets did not begin as the super-sophisticated, simultaneous, worldwide trading exchanges of today. It was not until 1531 when the first institution roughly approximating a stock market emerged, in Antwerp, Belgium. Initially people dint buy and sell shares of companies, they instead formed groups to deal in business. In 1600s, Britain, France and Netherlands along with the western countries could afford trade voyages overseas. As a result, Limited Liability companies were formed and money was raised from investors and they got profits in order to compensate them for the risks they have beared in the form of investments. This was a risk management technique. This led to formation of various merchant associations and later they developed into stock exchanges

In India, the Bombay Stock Exchange (BSE) is the oldest and most prominent exchange. It is also Asia’s oldest exchange. It was first set-up under an banyan tree where few gujarati and parsi stockbrokers performed their trades. However with time , now it is more sophisticated with dematerialisation of securities and rolling settlement.

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Market Size and Participants

The market size is directly proportional to two factors:

- Number of sellers and Buyers

- Total money involved annually

The major players in the market include -

1.     Households

2.     Foreign investors

3.     Corporations

4.     Bankers

5.     Insurers

6.     Fund managers

7.     Governments

This animation introduces the learner to financial markets, money markets and its instruments and capital ...
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These include the financial assets that are traded or transferred in the financial market. They are of two types:

1. Marketable assets

They are easily transferred from one party to another. E.g. Shares, Govt. Securities, Bonds, Mutual Fund Units, Bonds of Public Sector Undertakings.

2. Non-Marketable assets

They cannot be transferred easily. E.g. Bank deposits, Provident funds, pension funds, National savings Certificate, Insurance policies etc.

The major categories of assets under financial markets -

Stock Asset 

Stock is issued by business organisations for the purpose of raising capital. It is also known as share i.e. part ownership in the company. There are two types of stocks /shares i.e. Equity and Preference. Equity shareholders are the real owners of the company and they enjoy the ownership but also bear certain risks. Preference Shareholders get a fixed rate of dividend along with certain characteristics of equity.

Debt Asset

Debt is issued by a variety of organisations for the purpose of raising fixed capital i.e. it entails a fixed repayment schedule with regard to interest and principal.

E.g. Issue of debentures, raising of term loans, working capital advance, etc.

Cash Asset 

In India, all coins and currency notes are issued by the RBI, Ministry of finance and Government of India. Commercial banks can also create money by the way of deposits. When loans are sanctioned, liquid cash isn’t granted, instead an account is opened and deposit is created.   

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The Financial Markets are regulated by Securities Exchange Board of India (SEBI)  which is acting as a supervisor since 1992 after replacing the Controller of capital Issues (CCI). SEBI was officially established in 1988 and given powers in 1992 with SEBI Act 1992. SEBI was given additional statutory powers in 1995. SEBI has set up various committees since its inception for protection of investors and better regulation of securities markets. The SEBI is the Indian equivalent for the Securities and Exchange Commission of the USA. The unorganised Markets do not have any regulatory body, but Reserve Bank of India (RBI) has taken several steps to bring private financial companies and chit funds under its strict regulation by issuing the Non-banking Financial Companies Directions, 1998. However, this hasn’t really been successful. The RBI was nationalised in 1947 and is the regulatory body for the banking sector in India. The Insurance sector is regulated by the Insurance Regulatory and Development Authority (IRDA). The Derivatives Markets is regulated by the Forwards Market Commission (FMC). However, FMC doesn’t have much power in comparison to SEBI.

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The financial markets play a significant role in the economic development of any country. The markets act as a ground to unite the buyer and seller and lead to a win-win position for both the parties. As a result they play a crucial role in spurring economic growth in the following ways:

  1. The capital market serves as an important source for productive use of economy’s     savings.
  2. It finances trade , Industry and agriculture.
  3. Promotes stability in values of securities.
  4. Facilitates capital formation by offering suitable rates of interest.
  5. Provides an avenue for investors, particularly for the household sector to invest in financial assets which are usually more productive than physical ones.
  6. Facilitates increase in production and productivity of the economy and results in the economic welfare of the society.
  7. The Money market ensures liquidity in the market and allows short-term stability.
  8. Development of Backward areas as a part of their Corporate Social Responsibility (CSR).
  9. Providing various financial services to meet the ever increasing demands of the various participants.
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After introducing the various instruments and regulations for a a more developed and integrated market, the markets still face certain challenges/weaknesses as listed below : 

1.     Lack of Co-ordination amongst various regulatory bodies

2.     Monopolistic Market structures e.g. LIC in the Life Insurance sector.

3.     Lack of awareness in remote areas.

4.     Inefficiency and mismanagement of funds.

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1. Types of Markets
2. Financial Markets
3. Classification of Financial Markets: Organised Markets
4. Classification of Financial Markets: Unorganised Markets
5. Evolution of Financial Markets
6. Financial Market Participants
7. Financial Instruments
8. Regulation of Financial Markets
9. Role & Functions of the Financial Markets
10. Limitations of Financial Markets
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