FINANCIAL MARKETS

By: Group 2
Ambrish Verma 13P191
Anurag Panwar 13P196
Archit Arora 13P198
Mayank Grover 13P214
Palak Khaneja 13P219
Naveen Mathew 13P232
Smriti Aggarwal 13P237
Financial Market : Overview
Marketplace where buyers and sellers participate in the
trading of financial instruments such as equities, bonds,
currencies and derivatives


Financial
Markets
Capital
Market
Money Market
Foreign
Exchange
Market
Capital Markets : Overview
Involves buying and selling equity and long-term debt
instruments.
A vital element for functioning of economy
Deal with financial instruments for the medium term and long
term
Include various individual as well as institutional investors

Capital Market : Classification



Classification I
Securities
Market
Non-
Securities
Market
Commodities
Market
Classification II
Bond Markets
Stock
Markets
Non- Securities Market
It refers to a market where the following instruments are
included:
Mutual Funds
Fixed Deposits
Bank Deposits
Provident Fund
Small Savings
Insurance

Securities Markets
The Securities Market refers to the markets for those
financial instruments/claims/obligations that are commonly
and readily transferable by sale
It can further be divided into 2 types:
Primary Markets
Secondary Markets

Primary Markets
Part of the capital market that deals with issuing of
new securities
Typically done through I-Banks by Underwriting
Eg : IPO, FPO, New Bond issues Private placements,
Rights issue








Primary Markets (Contd.)
In this market, the flow of funds is from savers to
borrowers (industries), hence, it helps directly in the
capital formation
The money collected from this market is generally used
by the companies to modernize the plant, machinery and
buildings, for extending business, and for setting up new
business unit


Secondary Markets
Subsequent trading of already issued securities like
stocks and bonds amongst both individual and
institutional investors
Basic forces like supply and demand determine the price
of the security
Eg : Trading through Stock Exchanges like BSE,
NASDAQ & Trading of previously issued Bond or
Mortgage-based securities


Secondary Markets (Contd.)
The chief purpose of the secondary market is to create
liquidity in securities
This secondary market has further two components:
The spot market where securities are traded for immediate delivery
and payment
The other is forward market where the securities are traded for
future delivery and payment

Commodities Market
Commodity market refers to markets that trade in primary
rather than manufactured products. It includes trade of:
Soft commodities which includes agricultural products such
as wheat, coffee, cocoa and sugar
Hard commodities such as gold, rubber and oil
These markets also have spot and forward market

Stock Markets : Overview and Characteristics
Also known as the Equity markets, it is the market in which
shares of publicly held companies are traded through public
entities called Stock Exchanges

Stock market is one of the most vital components of a free-
market economy, as it provides investors with higher returns
due to demand and supply gap and the company
performance affecting the share price.

Marked by high risks and also a greater potential for
receiving higher returns

Regulatory Authority (In India) : SEBI




Stock Markets Characteristics
When companies are profitable, stock market investors make
money through the dividends the companies pay out and by
selling appreciated stocks at a profit called a capital gain.

Stocks are traded through exchanges. Eg BSE, NSE,
NYSE. The companies listed in a stock exchange are called
listed companies. When a company gets the privilege of
being listed in an exchange for equity trading, it is referred to
as going Public.

Stock Market Index : An index is a basket of stocks of few
chosen companies, which is made to represent the market
as a whole. The stocks are selected from across industries
making it a well diversified index.
Eg : Sensex (BSE), Nifty (NSE)


Stock Markets Participants
1) Member firms or Brokers: They are members of the
stock exchange. Only members can trade in the exchange.
Hence if an investor wants to access the exchange trading
system, she has to open trading accounts with a member
firm or broker. Member firms accept and route orders on the
account, send notifications and take care of settlement of
the trade in exchange for commission.

2) Custodian Banks/Agencies: These are banks/agencies
where the clients hold their stock in the demat account.
They help in processing securities, and facilitate clearing
and settlement for the client by interacting with the brokers,
depositories and clearing corporations.

Stock Markets Participants
3) Depository: An entity which holds the physical shares and
allots a unique record number to the shares, converting them into
dematerialized form.

There are two depositories in India the National Securities
Depositories Ltd (NSDL) and Central Depository Services (India)
Limited (CDSL).

Investors hold their demat accounts at these depositories
through their custodian banks. The physical shares are held at
the depository.

4) Clearing Firms: Clearing firm is an organization that works
with the exchanges to handle confirmation, delivery and
settlement of transactions.
Eg : In India, The National Securities Clearing Corporation
Ltd. (NSCCL) is a clearing authority

Significance of Stock Markets
The stock market is one of the most important sources for
companies to raise money. This allows businesses to be
publicly traded, or raise additional financial capital for
expansion by selling shares of ownership of the company in a
public market.


The liquidity that an exchange affords the investors gives
them the ability to quickly and easily sell securities. This is an
attractive feature of investing in stocks, compared to other
less liquid investments.
Bond Markets : Definition and Characteristics
The division of capital market in which the issuance and
trading of debt securities occurs

Primarily includes government-issued securities and
corporate debt securities, mortgage backed debt-securities

Marked by fixed returns and lesser risk

Most trading in the bond market occurs over-the-counter
through organized electronic trading networks

Regulatory Authorities (In India) : SEBI and RBI


Bond Market Participants
The participants in the bond market are:
a) Government and Corporations: They are the
issuers of bonds, to raise money.
b) Commercial Banks: They are the main subscribers
to the bond issues. They purchase bonds for their own books
(trading) or on behalf of clients.
c) Investment Managers and Mutual Funds: They
manage the wealth of corporations and individuals and are also
subscribers to these bond issues, on their clients behalf.
d) Depository & Clearing Corporation: They perform a
role similar to that in stock markets, of facilitating the trades.
e) Regulators: RBI majorly regulates the bond market in
India.

Significance of Bond Markets:
The debt market is more popular than the equity market. This
is due to the sophisticated bond instruments that have return-
reaping assets as their underlying and lower volatility.


It is considered that the size of a nations capital markets is
directly proportional to the size of its economy.
Eg : Recession occurring due to the sub-prime crisis
caused by failure of mortgage backed debt securities

Capital Markets issues (India)
In India, equity markets are more popular than the debt
markets due to the dominance of the government securities in
the debt markets which has prevented the emergence of a
vibrant bond market.

India has a well-developed stock market with both institutional
and individual investors actively participating and has a total
of around 20 stock exchanges with 3 major ones but the retail
participation is very low(Around 10-12 %)

There is a demand for more integrity and transparency in the
functioning and transactions of Capital markets in India.

Money Market
A segment of the financial market in which financial
instruments with high liquidity and very short
maturities are traded.
They are part of the of fixed income or debt category
instruments of a shorter term
These short-term instruments are called Near Money
Trading here is done OTC.
Used by the participants as a means of borrowing and
lending in the short term, from several days to just under
a year.
Eg: Company can raise money by selling CP into the
market
Money Market Instrument Types
Treasury Bills
A debt security issued by the Govt. (RBI) to raise money
with maturity periods of 91 or 182 or 273 or 364 days
Purchased for a price less than their par value; when they
mature, the govt. pays the holder the full par value

Certificate of deposit (CD)
It is an instrument issued by commercial bank or FI to raise
money, similar to a fixed deposit
It bears a maturity date, a fixed interest rate and can be
issued in any denomination
Term period : One month to 5 years


Commercial Papers

It is an unsecured money market instrument issued in the
form of a promissory note, which enables corporates to
borrow short-term funds

Maturity period: 7 days to a year (credit rating of the issuer
should remain valid)

Denomination: Rs 5 lakh or its multiples

Proceeds from this type of financing can only be used on
current assets & are not allowed to be used on fixed assets

Repurchase Agreements
Refers to a lending transaction where the borrower uses
debt securities as collateral for the borrowing
The seller of the security agrees to buy it back at a
specified price
In India, it is part of the Monetary policy
Call Money Market
A short-term money market, which allows for large
financial institutions, such as banks, mutual funds and
corporations to borrow and lend money at interbank
rates.
Funds are raised to help banks meet reserve
requirements and are repayable on demand
Period : Overnight to 14 days



Foreign Exchange Market
Forex market is a de-centralized market at a global level where
currencies are traded.

Exporters need to sell the foreign currency they receive for
their exports. Importers need to buy foreign currency to pay for
their imports.

Over-the-counter: There is no central marketplace for foreign
exchange; conducted via computer networks between traders
around the world, rather than on one centralized exchange

Trading occurs in the form of spot, futures, forwards, options or
swaps

Foreign Exchange Markets : Characteristics
Demand & supply of different currencies determine the
relative value of those currencies

It is affected by economic stability and scenario as well as
political stability of a country

Also depends on the Balance of Payments surplus or
deficit

Also dependent on the type of exchange rate system that
the country follows Fixed, Floating or Managed float

Spot Markets
Currencies are bought and sold on a daily basis by
demand and supply
Spot transactions occur at a rate which prevails at that
point of time.

Forwards & Futures Markets
They deal in contracts that represent claims to a certain
currency type, a specific price per unit and a future date for
settlement

Companies use these markets in order to hedge against
future rate fluctuations

Note: Forward trading is done OTC while Future trading is
done through a Futures exchange



Forex swap markets
It is a simultaneous purchase and sale of identical
amounts of one currency for another with two different
value dates
These are not standardized contracts and are not traded
through an exchange

Forex Option markets
It is a financial instrument that gives the owner the right but
not the obligation to exchange money denominated in
one currency into another currency at a pre-
agreed exchange rate on a specified date
Financial Instruments
Equity shares

Common shares represent ownership in a company
The company requires shareholders approval for any major action taken
by company
There is no tenure of common shares
Common shareholders have the last claim on the profit

Preference shares

Preference shareholders also represent ownership but dont have voting
rights
Preference shareholders carry a fixed rate of dividends
Preference shareholders have preference over common shareholders on
dividend and capital when company liquidates
Any increase in profit in future does not increase the earning of a
preference shareholder
Participating preference share gives the holder the right to receive
dividends equal to the normally specified rate that preferred dividends
receive as well as an additional dividend based on some predetermined
condition
Convertible preference share gives the assurance of a fixed rate of return
plus the opportunity for capital appreciation. Here we review what these
securities are, how they work and how to determine when a conversion is
profitable.
ADR
ADRs provides a convenient way for overseas investors to invest in U.S.
securities.
An American Depositary Receipt ("ADR") is a U.S. dollar denominated
form of equity ownership in a non-U.S. Company
They are traded in the same manner as shares in U.S. companies, on the
New York Stock Exchange (NYSE) and the American Stock Exchange
(AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market.

GDR
Global Depository Receipts (GDRs) may be defined as a global finance
vehicle that allows an issuer to raise capital simultaneously in two or more
markets through a global offering.
GDRs may be used in public or private markets inside or outside US
Bonds
Bond is a long-term debt security
Issued by Banks & Financial Institutions
Issuer of the bond promises to pay the bondholder
typically a fixed amount of interest each year for a fixed
time period
At the end of that time period (the maturity date), the
issuer promises to pay the bondholder the face value of
the bond
Bonds are secured in nature but generally yield low to
medium interest rate

Bonds (Contd.)
Convertible bonds:
can be exchanged for common stock after a certain
period of time. The right to convert is with the bond
holder
Non-convertible bonds:
cannot be exchanged for stock
Optionally convertible bonds:
can be partially converted into common stock after a
certain period of time. The right to convert is with the
lender

Sovereign Bond

A debt security issued by a national government within a

given country and denominated in a foreign currency. The
foreign currency used will most likely be a hard currency,
and may represent significantly more risk to the
bondholder.
The government of a country with an unstable economy
will tend to denominate its bonds in the currency of a
country with a stable economy. Because of default risk,
sovereign bonds tend to be offered at a discount. Brady
bonds, which are issued by governments in developing
countries, are a popular example of sovereign debt
securities

Debentures
Debentures are long-term debt securities issued by
company/corporates
They are unsecured in nature but yield higher interest rate in general
They are of 4 types
Non-Convertible Debentures : These instruments retain the debt character
and cant be converted into equity shares
Partly Convertible Debentures : A part of these are converted into Equity
shares in the future at the notice of the issuer. The issuer decides the ratio
for conversion which is decided at the time of subscription.
Fully Convertible Debentures : These are fully convertible at the issuers
notice
Optionally Convertible Debentures : The investor has the option to either
convert these debentures into shares at price decided by the issuer/agreed
upon at the time of issue



Government Securities
Government Securities are issued by Central Government in India

Also known as Gilts & G-Sec

Risk is very minimum and the interest rate also very minimum
compares to many other private financial investment

The maturity period of the securities are different from five years to
twenty years

The biggest investor of these securities are commercial banks to
safe their investment and to maintain a certain percentage of
Statutory Liquidity Ratio (SLR)



How G-sec transaction is done :


These securities are sold in the primary market mainly through the
auction mechanism
The RBI notifies issue of a new tranche of securities. Prospective
buyers submit their bids. The RBI decides to accept bids based on
a cut off price.
Government Securities are mainly bought by Institutional
Investors. Insurance companies, provident funds, and mutual funds
are the other large investors.

Bonds vs. Shares
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