FINANCIAL MARKETS Ms.

PREMILA Assistant Professor, Department of Commerce, Sri Krishna Arts & Science College, Coimbatore-641008 E-mail: premila.priya.2010@gmail.com 1) KRISHNAN.M.M 2) HARIRAM.R B.Com, Department of Commerce Sri Krishna Arts & Science College Coimbatore-641008 1) mmkrishnanbcoma2011@gmail.com 2) harirambcoma2011@gmail.com

ABSTRACT
A financial market is a mechanism that enables people to carry out various financial transactions like the purchases of securities and other commodities. The financial markets help the investors and buyers in discovering the prices, borrowing and lending, in the determination of prices, and information aggregation and coordinatio about n financial asset values and the flow of funds from lenders to borrowers. There are various types of markets aiding in trades like capital market, money market, derivatives, commodities, future, foreign exchange, and forward markets. Capital Market is one of the significant aspects of every financial market. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. The major functions of a capital market are: a) mobilisation of savings, b) capital formation c) provision of investment avenues d) proper regulation of funds, e) Speeding up economic growth and development, and some other services. The capital market can be classified into i) primary market and ii) secondary market. The primary market is a market for the fresh issues of securities. A secondary market enables the trade of existing securities. The main feature of primary market is a) direct issue of securities b) it is used by the newly formed business or for the expansion of the business c) it helps in capital formation. The main feature of secondary market is a) It is very vital to capital market b) Securities are transferred from one investor to another directly c) It mesh with investor preference for higher liquidity. When it comes to growth, capital market plays an important role. Indias capital market rose from 75% in 1995 to 135% in GDP in 2005. The number of foreign institutional investors registered with SEBI rose from none in 1992-93 to 528 in 2000-01, to about 1,000 in 2006-07. Indias stock market rose five-fold since mid-2003.

MEANING OF FINANCE: Finance is the business activity which deals with acquisition and conservation of capital funds in meeting the financial needs and meeting the overall objectives of the business. It is the study of funds management. It is the science that describes the management of money, banking, credit, investments, and assets. Finance includes saving of money and lending of money. The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted. MEANING OF MARKET: A market is a place which allows the purchaser and the seller to invent and gather information and lets them carry out exchange of various products and services. In other words the Meaning of Market refers to a place where the trading of goods takes place. This place is called as market. In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. MEANING OF FINANCIAL MARKET: A financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. FUNCTIONS OF FINANCIAL MARKET:
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Price discovery: First, the interactions of buyers and sellers in a financial market determine the price of the traded asset; or, equivalently, the required return on a financial asset is determined. The inducement for firms to acquire funds depends on the required return that investors demand, and this feature of financial markets signals how the funds in the economy should be allocated among financial assets. It is called the price discovery process. Whether these signals are correct is an issue that we discuss when we examine the question of the efficiency of financial markets. Borrowing and Lending: Financial markets permit the transfer of funds (purchasing power) from one agent to another for either investment or consumption purposes. Price Determination: Financial markets provide vehicles by which prices are set both for newly issued financial assets and for the existing stock of financial assets. Information Aggregation and Coordination: Financial markets act as collectors and aggregators of information about financial asset values and the flow of funds from lenders to borrowers.

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Risk Sharing: Financial markets allow a transfer of risk from those who undertake investments to those who provide funds for those investments. Liquidity: Financial markets provide the holders of financial assets with a chance to resell or liquidate these assets. Efficiency: Financial markets reduce transaction costs and information costs. Lower Transaction Costs: A financial market reduces the search and information costs of transacting. Search costs represent explicit costs, such as the money spent to advertise the desire to sell or purchase a financial asset, and implicit costs, such as the value of time spent in locating counterparty. The presence of some form of organized financial market reduces search costs. Information costs are incurred in assessing the investment merits of a financial asset, that is, the amount and the likelihood of the cash flow expected to be generated. In an efficient market, prices reflect the aggregate information collected by all market participants.

TYPES OF FINANCIAL MARKETS: Finance Markets

Capital Mkt

Commodity Mkt

Money Mkt

Deriavatives Mkt

Future Mkt
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Forex Mkt

Forward Mkt

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Capital markets which consist of: o Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. o Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date Forward market. Foreign exchange markets, which facilitate the trading of foreign exchange.

1. Capital Market: A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders. 2. Commodity market: Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. 3. Money market: The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities. It provides liquidity funding for the global financial system. 4. Derivative market: The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for overthe-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both. 5. Future market: A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the underlying asset (stock, physical commodity, index, etc.).

6. Forward market: The forward market is the over-the-counter financial market in contracts for future delivery, so called forward contracts. Forward contracts are personalized between parties (i.e., delivery time and amount are determined between seller and customer). The forward market is a general term used to describe the informal market by which these contracts are entered into. Standardized forward contracts are called futures contracts and traded on a futures exchange. 7. Foreign exchange market: The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. CAPITAL MARKET: In Detail Capital Market is one of the significant aspects of every financial market. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Important Functions the Capital Market are: 1. Mobilization of idle savings of the economy and putting them to proper use. 2. Capital market helps in capital formation i.e. net addition to the existing stock of capital in the economy. 3. Capital market raises resources for longer periods of time and thus providing an investment avenue for people who wish to invest resources for a long period of time. 4. Capital market enhances production and productivity in the national economy speeding economic growth and development. 5. As an important financial set up capital market provides services like long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc

Classification of Capital Market: Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Capital Market

Primary Market

Secondary Market

Primary Market: The primary market provides the channel for creation of new secur it i es t hr ou gh t he issua nce of fi na ncial i nstr u ment s b y p u b l i c companies as well as government companies , bodies and agencies.

Features of Primary Market:

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This is the mar ket for new long ter m capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM). In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new securities certificate to the investors.

Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy.

Secondary Market:
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Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid. Secondary markets mesh the investors preference for liquidity with the capital users preference to be able to use the capital for an extended period of time.

Role of capital market in India:

Indias growth story has important implications for the capital market, which has grown sharply with respect to several parameters amounts raised number of stock exchanges and other intermediaries, listed stocks, market capitalization, trading volumes and turnover, market instruments, investor population, issuer and intermediary profiles. Historically, it contributed significantly to mobilizing funds to meet public and private companies financing requirements. Indias capital markets rose from 75 per cent in 1995 to 130 per cent of GDP in 2005. But the growth relative to the US, Malaysia and South Korea remains low and largely skewed, indicating immense latent potential. India compares well with other emerging economies in terms of sophisticated market design of equity spot and derivatives market. The number of foreign institutional investors registered with SEBI rose from none in 1992-93 to 528 in 2000-01, to about 1,000 in 2006-07. Indias stock market rose five-fold since mid-2003 and outperformed world indices with returns far outstripping other emerging markets, such as Mexico (52 per cent), Brazil (43 per cent) or GCC economies such as Kuwait (26 per cent) in FY-06. In 2006, Indian companies raised more than $6 billion on the BSE, NSE and other regional stock exchanges. Buoyed by internal economic factors and foreign capital flows, Indian markets are globally competitive, even in terms of pricing, efficiency and liquidity.

Conclusion: