ASSIGNMENT: 3 [MEDHA SINGH; 127/3A2]

WHAT ARE FINANCIAL MARKET?

A financial market is a market in which people trade financial securities and derivatives at
low transaction costs. Some of the securities include stocks and bonds, and precious metals. 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. This
may be a physical location (such as the NYSE, LSE, JSE, BSE) or an electronic system (such
as NASDAQ). Much trading of stocks takes place on an exchange; still, corporate
actions (merger, spinoff) are outside an exchange, while any two companies or people, for
whatever reason, may agree to sell stock from the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a
stock exchange, and people are building electronic systems for these as well, to stock exchanges.

TYPES OF FINANCIAL MARKET

Capital market
The capital market aids raising of capital on a long-term basis, generally over 1 year. It consists
of a primary and a secondary market and can be divided into two main subgroups – Bond market
and Stock market.
 The Bond market provides financing by accumulating debt through bond issuance and
bond trading
 The Stock market provides financing by sharing the ownership of a company through
stocks issuing and trading
A primary market, or the “new issue market”, is where securities such as shares and bonds are
being created and traded for the first time without using any intermediary such as an exchange in
the process. When a private company decides to become a publicly-traded entity, it issues and
sells its stocks at a so-called Initial Public Offering. IPOs are a strictly regulated process which is
facilitated by investment banks or finance syndicates of securities dealers that set a starting price
range and then oversee its sale directly to the investors.
A secondary market, or the “aftermarket” is the place where investors purchase previously issued
securities such as stocks, bonds, futures and options from other investors, rather from issuing
companies themselves. The secondary market is where the bulk of exchange trading occurs and
it is what people are talking about when they refer to the “stock market”. It includes the NYSE,
and all other major exchanges.
Money market
A money market is basically for short-term financial assets that can be turned over rapidly at a
minimum cost that instruments are quickly convertible into money with the least transaction
costs. The operations in the money market are for a duration that can be extended u-to one year
and it deals in short term financial assets. This market is an institutional source of working
capital for the companies. These participants of this market are commercial banks, RBI, large
corporate, etc. the instruments in the money market are commercial bills, commercial paper,
certificates of deposit, treasury bills, etc.
Foreign exchange market
The foreign exchange market abets the foreign exchange trading. It’s the largest, most liquid
market in the world with an average traded value of more than $5 trillion per day. It includes all
of the currencies in the world and any individual, company or country can participate in it.
Commodity market
The commodity market manages the trading in primary products which takes place in about 50
major commodity markets where entirely financial transactions increasingly outstrip physical
purchases which are to be delivered. Commodities are commonly classified in two subgroups.
 Hard commodities are raw materials typically mined, such as gold, oil, rubber, iron ore
etc.
 Soft commodities are typically grown agricultural primary products such as wheat,
cotton, coffee, sugar etc.
Derivatives market
It facilitates the trading in financial instruments such as futures contracts and options used to
help control financial risk. The instruments derive their value mostly from the value of an
underlying asset that can come in many forms – stocks, bonds, commodities, currencies or
mortgages. The derivatives market is split into two parts which are of completely different legal
nature and means to be traded.
 Exchange-traded derivatives
These are standardized contracts traded on an organized futures exchange. They
include futures, call options and put options. Trading in such uniformed instruments requires
from investors a payment of an initial deposit which is settled through a clearing house and aims
at removing the risk for any of the two counterparts not to cover their obligations.
 Over-the-counter derivatives
Those contracts that are privately negotiated and traded directly between the two counterparts,
without using the services of an intermediary like an exchange. Securities such as forwards,
swaps, forward rate agreements, credit derivatives, exotic options and other exotic derivatives
are almost always traded this way. These are tailor-made contracts that remain largely
unregulated and provide the buyer and the seller with more flexibility in meeting their needs.
Insurance market
It helps in relocating various risks. Insurance is used to transfer the risk of a loss from one entity
to another in exchange for a payment. The insurance market is a place where two peers, an
insurer and the insured, or the so-called policyholder, meet in order to strike a deal primarily
used by the client to hedge against the risk of an uncertain loss.
REGULATORS OF FINANCIAL MARKET
Financial regulator regulates the financial services industry including markets, exchanges and
firms. Financial regulation is a form of regulation or supervision, which subjects financial
institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability
and integrity of the financial system. This may be handled by either a government or non-
government organization.
1. RESERVE BANK OF INDIA
They typically work for government bodies or independent standards organizations to ensure
financial service RBI as an apex monetary institution. RBI regulates the banking and financial
system of the country by issuing broad guidelines and instructions.
ROLE OF RBI
 Control money supply
 Monitor key indicators like GDP and inflation
 Maintain people’s confidence in the banking and financial system by providing tools such
as ‘Ombudsman’. Formulate monetary policies such as inflation control, bank credit and
interest rate control
2. SEBI
Securities Exchange Board of India (SEBI) was established in 1988 but got legal status in 1992
to regulate the functions of securities market to keep a check on malpractices and protect the
investors. Headquartered in Mumbai, SEBI has its regional offices in New Delhi, Kolkata,
Chennai and Ahmedabad.
ROLE OF SEBI
 Protect the interests of investors through proper education and guidance
 Regulate and control the business on stock exchanges and other security markets
 Stop fraud in capital market
 Audit the performance of stock market
3. INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
IRDAI is an autonomous apex statutory body for regulating and developing the insurance
industry in India. It was established in 1999 through an act passed by the Indian Parliament.
Headquartered in Hyderabad, Telangana, IRDA regulates and promotes insurance business in
India.
4. FORWARD MARKET COMMISSION OF INDIA (FMC)
Headquartered in Mumbai, FMC is a regulatory authority governed by the Ministry of Finance,
Govt. of India. It is a statutory body, established in 1953 under the Forward Contracts
(Regulation) Act, 1952. The commission allows commodity trading in 22 exchanges in India.
The FMC is now merged with SEBI.
5. PENSION FUND REGULATORY AND DEVELOPMENT AUTHORITY (PFRDA)
Established in October 2003 by the Government of India, PFRDA develops and regulates the
pension sector in India. The National Pension System (NPS) was launched in January 2004 with
an aim to provide retirement income to all the citizens. The objective of NPS is to set up pension
reforms and inculcate the habit of saving for retirement amongst the citizens.
6. PREVENTION OF FRAUD
Regulations and regulators protect customers from financial fraud. These include unethical
mortgages, credit cards, and other financial products. Effective government oversight prevents
excessive risk-taking by companies. Unregulated monopolies gouge prices, sell faulty products
and stifle competition. That occurs when speculators bid up the prices of stocks, houses, and
gold. When the bubbles burst, they create crises and recessions. Government protection can help
some critical industries get started. Examples include the electricity and cable industries.
Companies wouldn't invest in high infrastructure costs without governments to shield them. In
other industries, regulations can protect small or new companies. Proper rules can foster
innovation, competition, and increased consumer choice. Regulations protect social concerns.
Without them, businesses will ignore damage to the environment. They will also ignore
unprofitable areas such as rural counties.
7. ENSURING ENFORCEMENT OF APPLICABLE LAWS
The main responsibilities of financial regulators are to enforce applicable laws, try to prevent
cases of market manipulation, ensure the competence of financial service providers, execute
regular inspections, protect traders and clients, and investigate and prosecute misconduct, such as
insider trading. Banks and brokers that are regulated are more secure to trade with, as they are
obliged to meet certain standards and requirements. Financial regulators are responsible for
ensuring that a broker has segregated accounts. This means that the trading capital of a trader.