FINANCIAL MARKETS - AN OVERVIEW:
In accustomed parlance, a bazaar is a abode area trading takes place. Whenever we anticipate about markets, a account that flashes beyond our minds is of a abode which is actual busy, with buyers and sellers, some sellers, shouting at the top of their voice, aggravating to argue barter to buy their wares. A abode abuzz with action and energy.
In the aboriginal stages of civilization, humans were self-sufficient. They grew every affair they needed. Food was the capital commodity, which could be actual calmly developed at the backyard, and for the non-vegetarians, jungles were accessible with no restrictions on hunting. However, with the development of civilization, the needs of every getting grew; they bare clothes, wares, instruments, weapons and abounding added things which could not be calmly fabricated or produced by one getting or family. Hence, the charge of a accustomed abode was felt, area humans who had a commodity to action and the humans who bare that commodity, could accumulate amuse their alternate needs.
With time, the address in which the markets functioned afflicted and developed. Markets became added and added adult and specialized in their transaction so as to save time and space. Altered kinds of markets came into getting which specialized in a accurate affectionate of commodity or transaction. In today's world, there are markets which baby to the needs of manufacturers, sellers, ultimate consumers, kids, women, men, acceptance and what not. For the altercation of the affair at hand, the altered kinds of markets that abide in the present day can be broadly classified as appurtenances markets, account markets and banking markets. The present commodity seeks to accord an overview of Banking Markets.
WHAT IS A FINANCIAL MARKET?
According to Encyclopedia II, 'Financial Markets' mean:
"1. Organizations that facilitate barter in banking products. i.e. Banal Exchanges facilitate the barter in stocks, bonds and warrants.
2. The advancing calm of buyers and sellers to barter banking artefact i.e. stocks and shares are traded amid buyers and sellers in a bulk of agency including: the use of banal exchanges; anon amid buyers and sellers etc."
Financial Markets, as the name suggests, is a bazaar area assorted banking instruments are traded. The instruments that are traded in these markets alter in nature. They are in actuality custom-built to clothing the needs of assorted people. At a macro level, humans with balance money action their money to the humans who charge it for investment in assorted kinds of projects.
To accomplish the altercation simpler, let's yield advice of an example. Mr. X has Rupees 10 lacs as his accumulation which is lying abandoned with him. He wants to advance this money so that over a aeon of time he can accumulate this amount. Mr. Y is the apostle of ABC Ltd. He has a business model, but he does not acquire abundant banking agency to alpha a company. So in this scenario, Mr. Y can advance the money that is lying abandoned with humans like Mr. X and alpha a company. However, Mr. X may be a getting in Kolkata and Mr. Y may be in Mumbai. So the botheration in the present book is that how does Mr. Y appear to apperceive that a assertive Mr. X has money which he is accommodating to advance in a adventure which is agnate to one which Mr. Y wants to start?
The aloft botheration can be apparent by accouterment a accustomed place, area humans with surplus banknote can activate their accumulation appear those who charge to advance it. This is absolutely the action of banking markets. They, through assorted instruments, break just one problem, the botheration of mobilizing accumulation from humans who are accommodating to invest, to the humans who can in fact invest. Thus from the aloft discussion, we can co-relate how banking markets are no altered in spirit from any added market.
The next affair that needs to be redressed is what is the acumen amid assorted banking instruments that are floated in the market? The acknowledgment to this catechism lies in the attributes or needs of the investors. Investors are of assorted kinds and appropriately acquire altered needs. Assorted factors that actuate investors are buying of authoritative pale in a company, security, trading, saving, etc. Some investors may wish to advance for a continued time and acquire an absorption on their investment; others may just wish a abbreviate appellation investment. There are investors who wish a assorted affectionate of investment so that their all-embracing investment is safe in case one of the investments fails. Hence, it is the needs of the investors that acquire brought about so abounding banking instruments in the market.
There is one added amateur in the banking bazaar afar from buyers and sellers. As declared above, the one who wants to accommodate money and the one who wants to advance the money may be anchored in altered bounded locations, actual far from anniversary other. A accustomed abode for this transaction will crave the affair of these bodies in getting to abutting the transaction. This may afresh aftereffect in a lot of hardship. It may aswell be the case that the bulk at which the lender wants to accommodate his money or the continuance for which he wants his money to acquire interest, may not be adequate to the borrower of the money. This would aftereffect in a lot of glitches and latches for closing the transaction. To break this problem, we acquire a physique alleged the Intermediaries, which accomplish in the banking markets. Intermediaries are the ones from whom the borrowers borrow the harbored accumulation of the lenders. Their arch action is to act as hotlink to activate the affairs from the lender to the borrower.
Intermediaries may be of altered kinds. The basal aberration in these intermediaries is based aloft the affectionate of casework they provide. However, they are agnate in the faculty that none of the intermediaries are arch parties to a transaction. They alone act as facilitators. The kinds of intermediaries that accomplish in banking markets are:
• Deposit-taking intermediaries,
• Non-deposit demography intermediaries, and
• Supervisory and authoritative intermediaries.
Deposit-taking intermediaries are those that acquire deposits from a principal. They acquire deposits so that the deposits can be activated for the purpose of advancing loans to the bodies who are in charge of it. Archetype - Reserve Bank of India, Private Banks, Agricultural Banks, Post Office, Trust Companies, Caisses Populaires (Credit Unions), Mortgage Loan Companies, etc.
Non-deposit demography intermediaries are those which alone administer funds on account of the client. They act as agents to the principal. They alone accompany calm the borrower and the lender with agnate needs. Unit Trusts, Insurers, Pension Funds and Finance Companies are an archetype of this affectionate of intermediaries.
Supervisory and Authoritative Intermediaries do not actively participate in the trading of balance in the banking markets as parties. They accomplish the action of administering that all the affairs that yield abode in the banking markets are in acquiescence with the approved and authoritative framework. They footfall in alone if any absurdity or blank has been committed by either of the parties to the transaction, and yield accomplish as is provided by the approved and authoritative scheme. The Bombay Banal Exchange, National Banal Exchange, etc. are examples of this affectionate of intermediary.
PRIMARY MARKETS AND SECONDARY MARKETS:
In banking markets, the banking instruments (securities) may be traded aboriginal duke or additional hand. For example, A wants to advance Rs. 1 actor in XYZ Company, which is a anew congenital company. One allotment of XYZ Co. costs Rs. 500. In this scenario, A will acquirement 2000 shares of XYZ Co. XYZ Co. is arising shares to A in acknowledgment to his investment, aboriginal hand.
Suppose afterwards purchasing the shares from XYZ Co., A holds the shares for a year and thereafter wants to advertise the shares, he may advertise the shares through a banal exchange. B wants to acquirement 2000 shares of XYZ Co. B approaches the banal barter and purchases the shares therefrom. In this case, B has not anon purchased shares from XYZ Co., however, he is as acceptable a holder of shares as anyone who purchased the shares from XYZ Co. directly.
In the aboriginal example, A purchased the shares of XYZ Co. directly. Hence, he purchased his shares from the Primary market. In the additional example, B did not acquirement the shares from XYZ directly, however, his appellation over the shares is as acceptable as A's, even admitting he purchased the shares from Secondary market.
KINDS OF FINANCIAL MARKETS:
When balance are issued in banking markets, the borrower has to pay an absorption on the bulk borrowed. Balance may be classified based on the continuance for which they are floated. The kinds banking markets that abide based on the continuance for which the balance acquire been issued are:
• Capital Markets: This affectionate of banking bazaar is one in which the balance are issued for a abiding period.
• Money Markets: In this affectionate of banking markets, balance are issued for a concise period.
The trading of banking instruments and the closing of transaction charge not necessarily yield abode at the aforementioned time. There may be a time gap amid the demography abode of a transaction and closing or effectuating the transaction. The kinds of banking markets that can be acclaimed on this base are:
• Atom Markets: The transaction is brought into aftereffect at the time the trading takes place. By the actual attributes of the transaction, it can be accustomed that the accident associated with this affectionate of bazaar is actual basal aback the parties acquire no ambit of traveling aback on their promised actions.
• Forward Markets: In this affectionate of market, the transaction takes abode on one date and is accomplished on some approaching date, which is mutually accustomed amid parties to the transaction. As the date on which the mutually accustomed transaction is accomplished is altered from the date on which the transaction is mutually accepted, there is a accident that one of the parties may not be in a position; on the date the transaction is to be effected, to account the transaction. Appropriately the akin of accident in this bazaar is college than that of atom markets.
• Approaching Markets: This affectionate of banking bazaar anxiously resembles Forward Markets, with the aberration that in this market, the superior and the abundance of the appurtenances that are traded are defined on the date the transaction is entered into, admitting the transaction is to be accomplished on some approaching date. There is aswell an added advantage in this bazaar in allegory to Forward Markets in the faculty that there is a aegis of agreement in case one of the parties fails to account his allotment of the adventure which he had promised while entering into the transaction. Hence, the akin of accident associated with this bazaar is analogously lower than that of the Forward Markets.
RISKS IN FINANCIAL MARKETS AND HEDGING THEM:
"In this business if you're good, you're appropriate six times out of ten. You're never traveling to be appropriate nine times out of ten."
~Peter Lynch (Research Consultant, Fidelity Consultant)
When a transaction takes abode in banking markets, there is consistently a accident agency associated with the transaction. The assorted risks that banking markets are usually associated with are:
• The lender may not accord the money to the borrower,
• There may be an aberrant advancement or a bottomward movement in the amount of securities, thereby arrest the absorption of the client or agent of balance respectively,
• Negative sentiments or expectations may accomplish some banking instruments airedale or the accomplished banking bazaar an airedale abode to the investors and force them to abjure their investments, consistent in abysmal attempt of prices of the balance which already seemed actual adorable and attractive,
• Change in the budgetary behavior of the government may accomplish the banking markets airedale for adopted or calm investors,
• Change in political ability in a country may aftereffect in a best analysis to one industry, and/ or step-motherly analysis to another, which was not accountable by the investors, thereby acutely abbreviating the amount of their securities.
From the aloft discussion, we can accept that investment in Banking Markets entails a lot of risks. There are added risks associated to advance in banking markets which may be a aftereffect of abounding blended factors which are anxiously or accidentally related; like austere fluctuations in adopted markets or in Indian scenario, abortion of monsoons. To course over this problem, assorted ambiguity balance are traded in the banking markets. The holders of these kinds of apparatus lower the accident that is associated with banking markets, by purchasing the accident that is associated with a affectionate of transaction. Therefore, the holders of ambiguity instruments are not a affair to the aboriginal transaction. They are alone the ones who abbreviate the accident in a transaction by purchasing the accident associated with a transaction. Aback these banking instruments are acquired from addition transaction, these instruments are aswell alleged 'derivatives'. The ones who buy the accident are compensated in budgetary terms. The college the risk, college will be the advantage and carnality versa.
"An broker afterwards investment objectives is like a adventurer afterwards a destination."
~Ralph Seger (Founder, Seger-Elvekrog Inc.)
Financial Markets are circuitous and unpredictable. The movements in banking markets of one country may be the aftereffect of incidents occurring in some adopted land. It may be difficult to appreciate the banking markets at a accustomed time and place. However, an able amateur in banking markets consistently takes decisions by anxiously belief the trends in the banking markets and anxiously afterward the cues in the calm and all-embracing markets.
One aswell needs to be bright as to why one wants to access the banking markets. If one wants to access as an investor, one should advance in balance which acquire the abeyant of abiding his investment with absorption afterwards the aeon of time for which one wants to invest. In this case one should about acquirement balance which are safe and acquire a acceptability of giving acceptable returns. On the added hand, if one wants to barter in securities, one should anxiously abstraction the trends prevailing in the day to day markets and accomplish an able accommodation by basing one's acumen on that ground. To abbreviate risks, one should acquire a assorted portfolio, so that even if one or some of the investments suffer, the others accomplish acceptable one's loss.
To conclude, the columnist would like to accept that banking markets are a actual absorbing playground, in which a amateur needs to be adjustable and patient. There may be antecedent hiccups if one starts investing, however, with time, as one starts to accept the banking markets, things alpha falling in place; and a reminder, never under-estimate the aftereffect of a accidentally affiliated adventure in banking markets.
"It's not whether you're appropriate or amiss that's important, but how abundant money you accomplish if you're appropriate and how abundant you lose if you're wrong."
~ George Soros (Chairman, Soros Fund Management)