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Learning Outcomes

• Understand key aspects of Financial Markets, including:

  • Introduction to Financial Markets

  • Role of Financial Market in Economic Development of a Country

  • Stakeholders in Financial Market (Domestic and Global)

  • Indian Financial Market Scenario

Overview of Financial Markets

• Financial Markets:

  • Provide a marketplace for buying and selling financial assets.

  • Include equity stocks, bonds, foreign exchange, commodities, and derivatives.

Major Types of Financial Markets

1. Stock Market

   • A market for trading equity stocks of companies.

   • Lower dividend yield; returns mainly from capital appreciation.

   • Known for volatility reflecting economic expectations.

2. Bond Market

   • Allows companies/govt. to raise funds through bonds for projects/deficits.

   • Investors buy bonds with agreed interest repayment terms.

3. Commodities Market

   • Traders buy/sell natural resources (e.g., corn, oil, gold).

   • Prices are determined for future delivery dates.

4. Currency Markets

   • Traders exchange currencies, aiding importers/exporters.

   • Opportunity for hedging currency exposure.

5. Money Market

   • Short-term funding market with instruments maturing in less than a year.

   • Key players: RBI and commercial banks; crucial for liquidity management.

6. Derivatives Market

   • Involves contracts based on market assets (underlying), e.g., futures and options.

   • Significant markets observed in India and China.

Importance of Financial Markets

• Facilitate social benefits such as:

  • Access to capital for individuals, companies, and governments.

  • Fair treatment for surplus fund providers through regulation.

  • Transparency through institutions like SEBI (Securities and Exchange Board of India).

Economic Development Roles

• Capital markets channel surplus funds to sectors in need:

  • Create jobs through increased production.

  • Increase demand for goods/services, driving further investment.

  • Generate government tax revenues, enhancing spending and further economic activity.

Functions of Financial Markets

1. Channeling Savings: Redirect savings into productive investments.

2. Price Determination: Securities' prices reflect companies' prospects (price discovery).

3. Liquidity Provision: Facilitates easy trading of securities, enhancing investment appeal.

4. Transaction Cost Reduction: Provides information access reducing costs for market participants.

Stakeholders in Financial Market

Primary Stakeholders

• Shareholders: Company owners who trade shares based on market conditions.

• Lenders: Entities providing loans/equity, facilitating fund flow into the market.

• Corporates: Raise capital through shares/bonds but face regulatory burdens.

• Mutual Funds: Pooled investments managed for diversified market exposure.

Service Providers

• Merchant Bankers: Manage issues of securities, ensure compliance.

• Brokers: Facilitate stock transactions for clients.

• Underwriters: Guarantee subscriptions for new issuances.

• Depositories: Maintain investor accounts electronically, facilitating trades.

• Custodians: Provide safekeeping and other related services.

Regulators

• SEBI: Protects investor interests and regulates securities markets.

• RBI: Regulates banking and monetary policies in India.

• IRDAI: Governs insurance policies and protects policyholder interests.

• PFRDA: Promotes organized pension systems for sustainable income.

Administrative Authorities

• AMFI: Regulates mutual fund practices in India.

• FEDAI: Governs foreign exchange transactions among banks.

• FIMMDA: Represents players in bond and derivatives markets.

• AIBI: Focuses on merchant banking standards and practices.

Indian Financial Market Scenario

• The Indian financial market is developing, regulated primarily by SEBI.

• Growing quickly, yet still catching up to developed markets.

Money Market Instruments

1. Treasury Bills: Short-term gov. securities, maturities <1 year.

2. Cash Management Bills: Short-term, issued to manage cash mismatches.

3. Call Money: Overnight borrowing between banks; terms vary by lend duration.

4. Certificates of Deposits: Issued by banks for short-term funding.

5. Commercial Papers: Issued by corporates for short-term financing needs.

6. Repurchase Agreements: Short-term loans with same security sold and repurchased.

Capital Market Features

• Primary Market: Companies raise funds directly from investors.

• Secondary Market: Stocks/bonds traded post-issue through exchanges.

• Growth in market capitalization versus GDP indicates financial market health.

Historical Returns & Market Analysis

• Sensex returns have been volatile over the years with varying growth rates.

• Long-term investments show a high probability of positive returns, making them appealing to investors.

Conclusion

• The interplay between financial markets and economic development is crucial for sustaining growth and managing risks in an evolving economy.