Monetary Markets – An Overview

MONETARY MARKETS – AN OVERVIEW:

In common parlance, a market is a place where trading takes place. Whenever we think about markets, an image that flashes across our thoughts is of a place which is very active, with buyers and sellers, some sellers, shouting at the top of their voice, trying to convince customers to buy their own wares. A place abuzz with vibrancy and energy.

In the early stages associated with civilization, people were self-sufficient. They grew every thing they needed. Food was your main commodity, which could be effortlessly grown at the backyard, and for the non-vegetarians, jungles were open with no restrictions on hunting. However , with all the development of civilization, the needs of every getting grew; they needed clothes, wares, instruments, weapons and many other things which could not be easily made or made by one person or family. Hence, the requirement of a common place was felt, where people who had a commodity to offer and the people who needed that commodity, could gather satisfy their mutual requirements.

With time, the manner in which the markets functioned changed and developed. Markets grew to become more and more sophisticated and specialized in their own transaction so as to save time and space. Different kinds of markets came into being which usually specialized in a particular kind of commodity or even transaction. In today’s world, there are markets which cater to the needs of manufacturers, sellers, ultimate consumers, kids, women, guys, students and what not. For the discussion of the topic at hand, the different kinds of markets that exist in the present day could be broadly classified as goods marketplaces, service markets and financial markets. The present article seeks to give a summary of Financial Markets.

WHAT IS A ECONOMIC MARKET?

According to Encyclopedia II, ‘Financial Markets’ mean:

“1. Organizations that facilitate trade in financial products. i actually. e. Stock Exchanges facilitate the particular trade in stocks, bonds plus warrants.
2 . The coming collectively of buyers and sellers to trade financial product i. e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock trades; directly between buyers and retailers etc . ”

Financial Markets, as the name suggests, is a market where various financial instruments are exchanged. The instruments that are traded during these markets vary in nature. These are in fact tailor-made to suit the needs of numerous people. At a macro level, people with excess money offer their cash to the people who need it for investment decision in various kinds of projects.

To make the discussion simpler, let’s take help of the example. Mr. X has Rupees 10 lacs as his savings which is lying idle with him. He wants to invest this cash so that over a period of time he can grow this amount. Mr. Y could be the promoter of ABC Ltd. He has a business model, but he does not need enough financial means to start a business. So in this scenario, Mr. Con can utilize the money that is lying down idle with people like Mr. X and start a company. However , Mr. X may be a person in Kolkata and Mr. Y may be in Mumbai. So the problem in the present scenario is the fact that how does Mr. Y come to realize that a certain Mr. X has money which he is willing to invest in a business which is similar to one which Mr. Con wants to start?

The above problem can be solved by providing a common place, exactly where people with surplus cash can mobilize their savings towards those who need to invest it. This is precisely the functionality of financial markets. They, via various instruments, solve just one issue, the problem of mobilizing savings through people who are willing to invest, to the people who can actually invest. Thus from the over discussion, we can co-relate how financial markets are no different in spirit from any other market.

The following issue that needs to be redressed is what will be the distinction between various financial musical instruments that are floated in the market? The answer to this question lies in the nature or needs of the investors. Investors are of numerous kinds and hence have different needs. Various factors that motivate traders are ownership of controlling stake in a company, security, trading, preserving, etc . Some investors may want to spend for a long time and earn an interest on their investment; others may just want a short-term investment. There are investors who want the diverse kind of investment so that their particular overall investment is safe in case one of the investments fails. Hence, it is the requirements of the investors that have brought about a lot of financial instruments in the market.

There is yet another player in the financial market aside from buyers and sellers. As stated above, the one who wants to lend money and the one who wants to invest the money may be situated in different geographical locations, extremely far from each other. A common place with this transaction will require the meeting of those persons in person to close the particular transaction. This may again result in a wide range of hardship. It may also be the case the rate at which the lender wants to give his money or the duration that he wants his money to incur interest, may not be acceptable towards the borrower of the money. This would result in a lot of glitches and latches with regard to closing the transaction. To solve this issue, we have a body called the Intermediaries, which operate in the financial marketplaces. Intermediaries are the ones from who the borrowers borrow the harbored savings of the lenders. Their chief function is to act as link to mobilize the finances from the lender towards the borrower.

Intermediaries may be of different types. The basic difference in these intermediaries relies upon the kind of services they provide. Nevertheless , they are similar in the sense that nothing of the intermediaries are principal events to a transaction. They merely act as facilitators. The kinds of intermediaries that operate in financial markets are:

᾿ Deposit-taking intermediaries,
᾿ Non-deposit consuming intermediaries, and
᾿ Supervisory and regulatory intermediaries.

Deposit-taking intermediaries are that accept deposits from a principal. They accept deposits so that the debris can be utilized for the purpose of advancing loans to the persons who are in need of it. Instance – Reserve Bank of India, Private Banks, Agricultural Banks, Postal office shooting, Trust Companies, Caisses Populaires (Credit Unions), Mortgage Loan Companies, etc .

Non-deposit taking intermediaries are those which just manage funds on behalf of the client. They act as agents to the principal. They will merely bring together the borrower and the lender with similar needs. Device Trusts, Insurers, Pension Funds plus Finance Companies are an example of this kind of intermediaries.

Supervisory and Regulatory Intermediaries never actively participate in the trading of securities in the financial markets because parties. They perform the perform of overseeing that all the transactions that take place in the financial markets are in compliance with the statutory and regulatory framework. They step in only when any error or omission has been committed simply by either of the parties to the transaction, and take steps as is provided by the particular statutory and regulatory scheme. The Bombay Stock Exchange, National Stock Exchange, and so forth are examples of this kind of intermediary.

MAIN MARKETS AND SECONDARY MARKETS:

In financial markets, the financial instruments (securities) may be traded first hand or second-hand. For example , A wants to invest Rs. 1 million in XYZ Business, which is a newly incorporated company. 1 share of XYZ Co. expenses Rs. 500. In this scenario, A will purchase 2000 shares of XYZ Co. XYZ Co. is definitely issuing shares to A in return in order to his investment, first hand.

Suppose right after purchasing the shares from XYZ Co., A holds the gives for a year and thereafter would like to sell the shares, he may market the shares through a stock exchange. B wants to purchase 2000 shares of XYZ Co. B approaches the stock exchange and purchases the stocks therefrom. In this case, B has not straight purchased shares from XYZ Company., however , he is as good an owner of shares as anyone who purchased the shares from XYZ Company.
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directly.

In the first example, The purchased the shares of XYZ Co. directly. Hence, he bought his shares from the Primary marketplace. In the second example, B did not purchase the shares from XYZ directly, however , his title over the stocks is as good as A’s, despite the fact that he purchased the shares through Secondary market.

KINDS OF FINANCIAL MARKETPLACES:

When securities are issued monetary markets, the borrower has to pay out an interest on the amount borrowed. Investments may be classified based on the duration for which they are floated. The kinds monetary markets that exist based on the duration for which the securities have been issued are:

᾿ Capital Markets: This kind of financial market is one in which the securities are issued for a long-term period.
᾿ Money Markets: In this kind of economic markets, securities are issued for the short-term period.

The trading associated with financial instruments and the closing of transaction need not necessarily take place at the same time. There may be a time gap between the happening of a transaction and closing or even effectuating the transaction. The types of financial markets that can be distinguished with this basis are:

᾿ Spot Marketplaces: The transaction is brought directly into effect at the time the trading happens. By the very nature of the deal, it can be understood that the risk associated with this kind of market is very minimal since the parties have no scope of returning on their promised actions.

᾿ Ahead Markets: In this kind of market, the transaction takes place on one date and it is effected on some future date, which is mutually accepted between events to the transaction. As the date which the mutually accepted transaction is effected is different from the date where the transaction is mutually approved, there is a risk that one of the parties may not be in a position; on the date the transaction is to be effected, to recognition the transaction. Hence the level of danger in this market is higher than that of spot markets.

᾿ Future Markets: This kind of financial market closely resembles Forward Markets, with the difference that in this market, the quality and the amount of the goods that are traded are specific on the date the transaction is definitely entered into, though the transaction is to be affected on some future date. Addititionally there is an added advantage in this market compared to Forward Markets in the sense that there is securities of guarantee in case one of the celebrations fails to honor his part of the executing which he had promised while entering into the transaction. Hence, the level of risk associated with this market is comparatively less than that of the Forward Markets.