FINANCIAL MARKETS

DR. EKTA SHAH

MBA SEM-3
SAL INSTITUTE OF MANAGEMENT
MEANING AND UNDERSTANDING
Financial markets, which include the stock market, bond market,
currency market, and derivatives market, among others, are any
marketplace where trading in securities takes place.
For capitalist economies to run smoothly, financial markets are
essential.
The markets make it easy for buyers and sellers to trade their financial
holdings.
Financial markets create securities products that provide a return
for those who have excess funds (Investors/lenders) and make
these funds available to those who need additional money
(borrowers).
When financial markets fail, economic disruption including
recession and unemployment can result.
TYPES OF FINANCIAL MARKETS
Stock Market
OTC Market
Bond Market
Derivatives
Commodities Markets
Crypto Currency Market
1. Stock Markets

These are venues where companies list their shares

and they are bought and sold by traders and investors.
Stock Markets, or Equities Markets, are used by
companies to raise capital via an initial public offering
(IPO), with shares subsequently traded among various
buyers and sellers in what is known as a secondary
market.
Brokers are third parties that facilitate trades between
buyers and sellers but who do not take an actual
position in a stock.
Stock Markets
The Bombay Stock Exchange (BSE-1875) and the
National Stock Exchange (NSE-1992).
The Sensex and Nifty are two well-known indexes
based on the Indian stock exchanges.
Both indices are governed by the Securities Exchange
Board of India (SEBI).
One must be registered as a foreign institutional
investor (FII) in order to participate in Indian markets.
The BSE & NSE:
The BSE has been in existence since 1875.
The NSE, on the other hand, was founded in 1992 and
started trading in 1994; however, both exchanges
follow the same trading mechanism, trading hours,
and settlement process.
The competitor NSE had 2,137 listed companies as of
March 31, 2023, compared to 5,657 on the BSE end of
June 2023.
The BSE is the more established stock market and lists
twice as many companies as the NSE.
The BSE & NSE:
All trading on stock exchanges takes place between 9:15 a.m. and
3:30 p.m., Indian Standard Time (+ 5.5 hours GMT), Monday
through Friday.
Delivery of shares must be made in dematerialized form, and
each exchange has its own clearing house.
The two prominent Indian market indexes are Sensex and Nifty.
Sensex is the oldest market index for equities; it includes shares
of 30 firms listed on the BSE. It was created in 1986 and provides
time series data from April 1979, onwards.
Another index is the Nifty; it includes 50 shares listed on the
NSE. It was created in 1996 and provides time series data from
July 1990, onwards.
The BSE & NSE:
NSE Clearing Limited (formerly known as National
Securities Clearing Corporation Limited), NSE Clearing,
a wholly owned subsidiary of NSE is responsible for
clearing and settlement of all trades executed on NSE
and deposit and collateral management and risk
management functions.
Indian Clearing Corporation Limited ("ICCL") was
incorporated in 2007 as a wholly owned subsidiary of
BSE Ltd. ("BSE"). ICCL carries out the functions of
clearing, settlement, collateral management and risk
management for various segments of BSE.
The BSE & NSE:
•The overall responsibility for the development, regulation,
and supervision of the stock market rests with the
Securities and Exchange Board of India (SEBI), which was
formed in 1992 as an independent authority.

•India started permitting outside investments only in the

1990s. Foreign investments are classified into two
categories: foreign direct investment (FDI) and
foreign portfolio investment (FPI).
FDI & FPI:
All investments in which an invest or participates in
the company's day-to-day management and operations
are classified as FDI, whereas investments in shares
with no authority over management and operations
are defined as FPI.
For making portfolio investments in India, one should
be registered either as a foreign institutional investor
(FII) or as one of the sub-accounts of one of the
registered FIIs. Both registrations are granted by the
market regulator, SEBI.
FDI & FPI:
Mutual funds, pension funds, endowments, sovereign
wealth funds, insurance companies, banks, and asset
management firms are the most common types of
foreign institutional investors.
Most portfolio investments consist of investments in
securities in the primary and secondary markets,
including shares, debentures, and warrants of
companies listed or to be listed on a recognized stock
exchange in India.
FDI & FPI:
Foreign institutional investors and their sub-accounts can
invest directly in any of the stocks listed on any of the stock
exchanges.
FIIs can also invest in unlisted securities outside stock
exchanges, subject to the approval of the price by the
Reserve Bank of India.
Finally, they can invest in units of mutual funds and derivatives
traded on any stock exchange.
Currently, foreign individuals are not permitted to engage
directly in India's stock market; however, high-net-worth
people (those with a net worth of at least $50 million) can be
registered as sub-accounts of a FII.
FDI & FPI:
According to SEBI, an FII can invest up to 10% of the
equity of any one company, subject to the 24% limit on
overall investments.
The 24% limit may be raised to 30% for individual
companies that have received shareholder approval to
do so.
FIIs are also allowed to invest 100% of their portfolios
in debt securities.
2. OVER THE COUNTER MARKET:
OTCEI
The Over-The-Counter Exchange of India (OTCEI) is
an Indian electronic stock exchange comprised of
small and medium-sized businesses seeking
access to international financial markets,
particularly electronic exchanges in the United
States such as the NASDAQ.
There is no central exchange, and all trading takes
place via computer networks.
OTCEI:
The Over-The-Counter Exchange of India (OTCEI) is an
Indian electronic stock exchange composed of small- and
mid-cap companies.
The purpose of the OTCEI is for smaller companies to raise
capital, which they cannot do at the national exchanges due
to their inability to meet the exchange requirements.
The OTCEI implements specific capitalization rules that
make it suited for small- to medium-sized companies while
preventing larger companies from being listed.
The key players in the OTCEI include brokers, market
makers, custodians, and transfer agents.
OTCEI:
The exchange was established in 1990 to provide investors and
companies with an additional way to trade and issue securities.
The OTCEI has rules that are not as rigid as the national
exchanges, allowing small companies to gain access to the
capital they need to grow.
The objective is that once they grow to a certain level and are
able to meet the requirements to be listed on the national
stock exchanges, they will make the switch over and leave the
OTCEI behind.
the differences between traditional exchanges and
over-the-counter (OTC) networks are no longer vast, greatly
benefiting the small- and medium-sized companies.
Features of the Over-The-Counter Exchange
of India (OTCEI)
Stock Restrictions:
Minimum Capital Requirements: The requirement
for the minimum issued equity capital is 30 lakh
rupees, which is approximately $40,000.
Large Company Restrictions: Companies with
issued equity capital of more than 25 crore rupees ($3.3
million) are not allowed to be listed.
Member Base Capital Requirement: Members
must maintain a base capital of 4 lakh rupees ($5,277)
to continue to be listed on the exchange.
OTCEI:
In addition, once a company is listed, it cannot be
delisted for at least three years, and a certain
percentage of issued equity capital needs to be kept by
promoters for a minimum of three years. This
percentage is 20%.
3. BOND MARKET:
The bond market can also be referred to as the debt
market, the fixed-income market, or the credit
market.
It is a collective term for all debt securities trades and
issues.
Governments issue bonds to raise funds for debt
repayment or infrastructure investments.
Bonds are issued by publicly traded firms to finance
corporate growth projects or to maintain continuing
operations.
BOND MARKET:
During the Middle Ages, governments issued
sovereign debt to support wars.
The Bank of England, the world's oldest central
bank, was founded in the 17th century to collect
funds to rebuild the British navy through bonds.
The first U.S. Treasury bonds were issued to assist
fund the military, first during the American
Revolutionary War, and then again in the form of
"Liberty Bonds" to generate funds to fight World
War I. 1914-18.
Types of Bonds:
CORPORATE BONDS:
Companies issue corporate bonds to raise money for
current operations, expanding product lines, or
opening up new manufacturing facilities.
Corporate bonds are commonly longer-term
debt instruments with a maturity of at least one year
and are commonly categorized into two types based on
the credit rating assigned to the bond and its issuer.
Investment grade signifies a high-quality bond that
presents a relatively low risk of default.
Types of Bonds:
GOVERNMENT BONDS:
In the U.S., government bonds are known as Treasuries and
the most active and liquid bond market.
Treasury Bill (T-Bill): a short-term U.S. government debt
obligation backed by the Treasury Department with a
maturity of one year or less.
Treasury note (T-note): a marketable U.S. government debt
security with a fixed interest rate and a maturity between one
and ten years.
Treasury bonds (T-bonds): government debt securities issued
by the U.S. government with maturities greater than 20 years.
Types of Bonds:
MUNICIPAL BONDS
Municipal bonds, often known as "muni" bonds, are
issued locally by states, cities, special-purpose
districts, public utility districts, school districts,
publicly owned airports and seaports, and other
government-controlled institutions to raise funds for a
wide range of efforts.
Types of Bonds:
Mortgage-Backed Bonds (MBS):ABS
Emerging Market Bonds: Bonds are issued by
governments and businesses in emerging market
economies, offering chances for growth but carrying
higher risk than domestic or developed bond markets.
J p Morgan
4. COMMODITY MARKET
A commodity market is a marketplace for buying,
selling, and trading raw materials or primary products.
Commodities are often split into two broad categories:
hard and soft commodities.
Hard commodities: natural resources that must be
mined or extracted, such as gold, rubber, and oil
Soft commodities: agricultural products or livestock,
such as corn, wheat, coffee, sugar, soybeans
 Similar to how the shares of a company are traded in the stock
market, commodities are bought and sold in the commodities
market.
 This financial market is widely utilized by producers,
manufacturers, and wholesale traders as a price discovery
mechanism for various goods and commodities.
 Just like the stock market, there are dedicated commodity exchanges
that enable the market participants to easily buy and sell
commodities online.
 Three primary commodity exchanges are currently operational in
India - the Multi Commodity Exchange (MCX), National
Commodity and Derivatives Exchange (NCDEX),and Indian
Commodity Exchange (ICEX).
What are the different commodities that are
traded?
 Most traders and investors simply classify the different commodities
into agricultural and non-agricultural commodities.
 The non-agricultural commodities can be further sub-classified into
three different categories - bullion, energy, and base metals.
 HARD
 Bullion - Gold and silver
 Energy - Crude oil and natural gas
 Base Metals - Aluminum, copper, lead, nickel, and zinc
 SOFT
 Agriculture - Black pepper, castor seed, cotton, palm oil, kapas, wheat,
chana, bajra, sugar
HOW TO INVEST?
 Trading Account with brokerage firm
 Since commodities are physical goods and not electronically held
securities, you only require a trading account and not a Demat account.
There are two ways in which you can invest in the commodities of your
choice - through a futures contract or an options contract.
 Both futures and options are known as derivatives.
 They derive their value from the underlying asset, which in this case
would be the commodity.
 When you purchase or sell a derivative contract, you essentially agree
to either buy or sell the underlying asset at a predetermined price and
quantity at a specific time in the future.
 you’re interested in investing in gold.
 you can either purchase a gold futures contract or a gold options
contract through your trading account.
 Let’s say that you purchase a futures contract for around Rs. 52,000 for
10 grams of gold. The contract expires after a month from today.
 By entering into this contract, you’ve essentially agreed to buy 10 grams
of gold for Rs. 52,000 on a future date that’s one month from today.
Now, assume that you hold onto the contract till its expiry.
 Upon expiry of the contract, the seller, who sold the 10 grams of gold
for Rs. 52,000 to you, would now be obligated to physically deliver the
specified quantity to you.
Futures:
futures, is an agreement between two parties
for the purchase and delivery of an asset
at an agreed-upon price at a future date.
Futures are standardized contracts that trade on an
exchange.
Traders use a futures contract to hedge their risk or
speculate on the price of an underlying asset.
The parties involved are obligated to fulfil a
commitment to buy or sell the underlying asset.
 For example, say that on Nov. 6, 2022, Company A buys a futures
contract for oil at a price of $62.22 per barrel that expires Dec. 19,
2022.
 The company does this because it needs oil in December and is
concerned that the price will rise before the company needs to buy.
 Buying an oil futures contract hedges the company's risk because
the seller is obligated to deliver oil to Company A for $62.22 per
barrel once the contract expires.
 Assume oil prices rise to $80 per barrel by Dec. 19, 2021. Company
A can accept delivery of the oil from the seller of the futures
contract, but if it no longer needs the oil, it can also sell the
contract before expiration and keep the profits.
Forwards:
Forwards, are similar to futures, but they do not trade
on an exchange.
These contracts only trade over-the-counter.
When a forward contract is created, the buyer and
seller may customize the terms, size, and settlement
process.
As OTC products, forward contracts carry a greater
degree of risk.
Derivatives are securities whose value is dependent on
or derived from an underlying asset. For example, an
oil futures contract is a type of derivative whose value
is based on the market price of oil.