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FINANCIAL MARKETS

Introduction
A financial market is a market in which people and entities
can trade financial securities, commodities, and other fungible items of
value at low transaction costs and at prices that reflect supply and demand.
Securities include stocks and bonds, and commodities include precious
metals or agricultural goods. There are both general markets (where many
commodities are traded) and specialized markets (where only one
commodity is traded). Markets work by placing many interested buyers and
sellers, including households, firms, and government agencies, in one
"place", thus making it easier for them to find each other. An economy
which relies primarily on interactions between buyers and sellers to allocate
resources is known as a market economy in contrast either to a command
economy or to a non-market economy such as a gift economy.


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Functions of financial markets

Intermediary Functions: The intermediary functions of financial markets
include the following:
Transfer of Resources: Financial markets facilitate the transfer of
real economic resources from lenders to ultimate borrowers.
Enhancing income: Financial markets allow lenders to earn interest
or dividend on their surplus invisible funds, thus contributing to the
enhancement of the individual and the national income.
Productive usage: Financial markets allow for the productive use of
the funds borrowed. The enhancing the income and the gross
national production.
Capital Formation: Financial markets provide a channel through
which new savings flow to aid capital formation of a country.
Price determination: Financial markets allow for the determination
of price of the traded financial assets through the interaction of
buyers and sellers. They provide a sign for the allocation of funds in
the economy based on the demand and supply through the
mechanism called price discovery process.
Sale Mechanism: Financial markets provide a mechanism for selling
of a financial asset by an investor so as to offer the benefit of
marketability and liquidity of such assets.
Information: The activities of the participants in the financial market
result in the generation and the consequent dissemination of
information to the various segments of the market. So as to reduce
the cost of transaction of financial assets.



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Financial Functions
Providing the borrower with funds so as to enable them to carry out
their investment plans.
Providing the lenders with earning assets so as to enable them to
earn wealth by deploying the assets in production debentures.
Providing liquidity in the market so as to facilitate trading of funds.
it provides liquidity to commercial bank
it facilitate credit creation
it promotes savings
it promotes investment
it facilitates balance economic growth
it improves trading floors

In finance, financial markets facilitate:
The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
Price discovery
Global transactions with integration of financial markets
The transfer of liquidity (in the money markets)
International trade (in the currency markets)

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Role of financial markets
One of the important requisite for the accelerated development of an
economy is the existence of a dynamic financial market. A financial market
helps the economy in the following manner.
Saving mobilization: Obtaining funds from the savers or surplus units
such as household individuals, business firms, public sector units,
central government, state governments etc. is an important role played
by financial markets.
Investment: Financial markets play a crucial role in arranging to invest
funds thus collected in those units which are in need of the same.
National Growth: An important role played by financial market is that,
they contributed to a nations growth by ensuring unfettered flow of
surplus funds to deficit units. Flow of funds for productive purposes is
also made possible.
Entrepreneurship growth: Financial market contributes to the
development of the entrepreneurial claw by making available the
necessary financial resources.
Industrial development: The different components of financial markets
help an accelerated growth of industrial and economic development of a
country, thus contributing to raising the standard of living and the society
of well-being.
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Types of financial markets
Within the financial sector, the term "financial markets" is often used to
refer just to the markets that are used to raise finance: for long term
finance, the Capital markets; for short term finance, the Money markets.
Another common use of the term is as a catchall for all the markets in the
financial sector, as per examples in the breakdown below.
Capital markets which consist of:
Stock markets, which provide financing through the issuance of
shares or common stock, and enable the subsequent trading thereof.
Bond markets, which provide financing through the issuance
of bonds, and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and
investment.
Derivatives markets, which provide instruments for the management
of financial risk.
Futures markets, which provide standardized forward contracts for
trading products at some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign
exchange.
The capital markets may also be divided into primary
markets and secondary markets. Newly formed (issued) securities are
bought or sold in primary markets, such as during initial public offerings.
Secondary markets allow investors to buy and sell existing securities. The
transactions in primary markets exist between issuers and investors, while
in secondary market transactions exist among investors.
Liquidity is a crucial aspect of securities that are traded in secondary
markets. Liquidity refers to the ease with which a security can be sold
without a loss of value. Securities with an active secondary market mean
that there are many buyers and sellers at a given point in time. Investors
benefit from liquid securities because they can sell their assets whenever
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they want; an illiquid security may force the seller to get rid of their asset at
a large discount.
The financial market is broadly divided into 2 types:
1) Capital Market.
2) Money market.

The Capital market is subdivided into
1) Primary market.
2) Secondary market.





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Capital markets

Capital markets are financial markets for the buying and selling of long-
term debt- or equity-backed securities. These markets channel the wealth
of savers to those who can put it to long-term productive use, such as
companies or governments making long-term investments. Financial
regulators, such as the UK's Bank of England (BoE) or the U.S. Securities
and Exchange Commission (SEC), oversee the capital markets in their
jurisdictions to protect investors against fraud, among other duties.
Modern capital markets are almost invariably hosted on computer-
based electronic trading systems; most can be accessed only by entities
within the financial sector or the treasury departments of governments and
corporations, but some can be accessed directly by the public. There are
many thousands of such systems, most serving only small parts of the
overall capital markets. Entities hosting the systems include stock
exchanges, investment banks, and government departments. Physically
the systems are hosted all over the world, though they tend to be
concentrated in financial centres like London, New York, and Hong Kong.
Capital markets are defined as markets in which money is provided for
periods longer than a year.

A key division within the capital markets is between the primary
markets and secondary markets. In primary markets, new stock or bond
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issues are sold to investors, often via a mechanism known as underwriting.
The main entities seeking to raise long-term funds on the primary capital
markets are governments (which may be municipal, local or national) and
business enterprises (companies). Governments tend to issue only bonds,
whereas companies often issue either equity or bonds. The main entities
purchasing the bonds or stock include pension funds, hedge
funds, sovereign wealth funds, and less commonly wealthy individuals and
investment banks trading on their own behalf. In the secondary markets,
existing securities are sold and bought among investors or traders, usually
on an exchange, over-the-counter, or elsewhere. The existence of
secondary markets increases the willingness of investors in primary
markets, as they know they are likely to be able to swiftly cash out their
investments if the need arises.
A second important division falls between the stock markets (for equity
securities, also known as shares, where investors acquire ownership of
companies) and the bond markets (where investors become creditors).

DEFINITION:
A market in which individuals and institutions trade financial securities.
Organizations/institutions in the public and private sectors also often sell
securities on the capital markets in order to raise funds. Thus, this type of
market is composed of both the primary and secondary markets.
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Functions of capital market
1. Mobilization of Savings : Capital market is an important source for
mobilizing idle savings from the economy. It mobilizes funds from
people for further investments in the productive channels of an
economy. In that sense it activate the ideal monetary resources and
puts them in proper investments.
2. Capital Formation : Capital market helps in capital formation. Capital
formation is net addition to the existing stock of capital in the
economy. Through mobilization of ideal resources it generates
savings; the mobilized savings are made available to various
segments such as agriculture, industry, etc. This helps in increasing
capital formation.
3. Provision of Investment Avenue : Capital market raises resources
for longer periods of time. Thus it provides an investment avenue for
people who wish to invest resources for a long period of time. It
provides suitable interest rate returns also to investors. Instruments
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such as bonds, equities, units of mutual funds, insurance policies,
etc. definitely provides diverse investment avenue for the public.
4. Speed up Economic Growth and Development : Capital market
enhances production and productivity in the national economy. As it
makes funds available for long period of time, the financial
requirements of business houses are met by the capital market. It
helps in research and development. This helps in, increasing
production and productivity in economy by generation of employment
and development of infrastructure.
5. Proper Regulation of Funds : Capital markets not only helps in fund
mobilization, but it also helps in proper allocation of these resources.
It can have regulation over the resources so that it can direct funds in
a qualitative manner.
6. Service Provision : As an important financial set up capital market
provides various types of services. It includes long term and medium
term loans to industry, underwriting services, consultancy services,
export finance, etc. These services help the manufacturing sector in a
large spectrum.
7. Continuous Availability of Funds : Capital market is place where
the investment avenue is continuously available for long term
investment. This is a liquid market as it makes fund available on
continues basis. Both buyers and seller can easily buy and sell
securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in
the capital market becomes easy.
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Capital markets can be further classified into:
The Securities Market, however, refers to the markets for those financial
instruments/claims/obligations that are commonly and readily transferable
by sale.
The Securities Market has two interdependent and inseparable segments,
the new issues
Primary Market
The stock (secondary) market.




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Primary market
The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector
institutions can obtain bonds through the sale of a new stock or bond issue.
This is typically done through a syndicate

of securities dealers. The process
of selling new issues to investors is called underwriting. In the case of a
new stock issue, this sale is an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering, though it can
be found in the prospectus. Primary markets create long term instruments
through which corporate entities borrow from capital market.
Features of primary markets are:
This is the market for new long term equity capital. The primary market
is the market where the securities are sold for the first time. Therefore it
is also called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors.
The company receives the money and issues new security certificates
to the investors.
Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital
formation in the economy.
The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as "going
public."
The financial assets sold can only be redeemed by the original holder.
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Methods of issuing securities in the primary market are:
Public issuance, including initial public offering;
Rights issue (for existing companies);
Preferential issue.






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Secondary market (After market)
The secondary market, also called aftermarket, is the financial market in
which previously issued financial instruments suchas stock, bonds, options,
and futures are bought and sold.
With primary issuances of securities or financial instruments, or the primary
market, investors purchase these securities directly from issuers such
as corporations issuing shares in an IPO or private placement, or directly
from the federal government in the case of treasuries. After the initial
issuance, investors can purchase from other investors in the secondary
market.
The secondary market for a variety of assets can vary from loans to stocks,
from fragmented to centralized, and from illiquid to very liquid. The major
stock exchanges are the most visible example of liquid secondary markets
- in this case, for stocks of publicly traded companies. Exchanges such as
the New York Stock Exchange, London Stock
Exchange and Nasdaq provide a centralized, liquid secondary market for
the investors who own stocks that trade on those exchanges. Most bonds
and structured products trade over the counter, or by phoning the bond
desk of ones broker-dealer. Loans sometimes trade online using a Loan
Exchange.

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Money market

A segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. The money market is used by
participants as a means for borrowing and lending in the short term, from
several days to just under a year. Money market securities consist of
negotiable certificates of deposit (CDs), bankers acceptances, U.S.
Treasury bills, commercial paper, municipal notes, federal funds and
repurchase agreements (repos).


Functions of money market
The money market functions are:
Transfer of large sums of money
Transfer from parties with surplus funds to parties with a deficit
Allow governments to raise funds
Help to implement monetary policy
Determine short-term interest rates




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Participants in money market
The money market consists of financial institutions and dealers in money or
credit who wish to either borrow or lend. Participants borrow and lend for
short periods of time, typically up to thirteen months. Money market trades
in short-term financial instruments commonly called "paper." This contrasts
with the capital market for longer-term funding, which is supplied
by bonds and equity.
The core of the money market consists of interbank lending--banks
borrowing and lending to each other using commercial paper, repurchase
agreements and similar instruments. These instruments are often
benchmarked to (i.e. priced by reference to) the London Interbank Offered
Rate (LIBOR) for the appropriate term and currency.
Finance companies typically fund themselves by issuing large amounts
of asset-backed commercial paper (ABCP) which is secured by
the pledge of eligible assets into an ABCP conduit. Examples of eligible
assets include auto loans, credit card receivables, residential/commercial
mortgage loans, mortgage-backed securities and similar financial assets.
Certain large corporations with strong credit ratings, such as General
Electric, issue commercial paper on their own credit. Other large
corporations arrange for banks to issue commercial paper on their behalf
via commercial paper lines.
In the United States, federal, state and local governments all issue paper to
meet funding needs. States and local governments issue municipal paper,
while the US Treasury issues Treasury bills to fund the US public debt:
Trading companies often purchase bankers' acceptances to be tendered
for payment to overseas suppliers.
Retail and institutional money market funds
Banks
Central banks
Cash management programs
Merchant banks
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Money market instruments
Certificate of deposit - Time deposit, commonly offered to consumers
by banks, thrift institutions, and credit unions.
Repurchase agreements - Short-term loansnormally for less than
two weeks and frequently for one dayarranged by selling securities to
an investor with an agreement to repurchase them at a fixed price on a
fixed date.
Commercial paper - short term promissory notes issued by company
at discount to face value and redeemed at face value
Treasury bills - Short-term debt obligations of a national government
that are issued to mature in three to twelve months.
Money funds - Pooled short maturity, high quality investments which
buy money market securities on behalf of retail or institutional investors.
Foreign Exchange Swaps - Exchanging a set of currencies in spot
date and the reversal of the exchange of currencies at a predetermined
time in the future.
Call Money Market The call money market is a mechanism whereby
temporary surplus of some banks is made available to others who have
temporary deficit. In India, the call money market is located mainly in
Mumbai, Kolkata and Chennai.







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Money Market Index
To decide how much and where to invest in money market an investor will
refer to the Money Market Index. It provides information about the
prevailing market rates. There are various methods of identifying Money
Market Index like:
Smart Money Market Index- It is a composite index based on intra day
price pattern of the money market instruments.
Salomon Smith Barneys World Money Market Index- Money market
instruments are evaluated in various world currencies and a weighted
average is calculated. This helps in determining the index.
Bankers Acceptance Rate- As discussed above, Bankers Acceptance is
a money market instrument. The prevailing market rate of this instrument
i.e. the rate at which the bankers acceptance is traded in secondary
market, is also used as a money market index.
LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank
Offered Rate also serves as good money market index. This is the interest
rate at which banks borrow funds from other banks.





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Difference between money market and capital
market


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Unorganized market
Players in unorganized market are money lenders, indigenous bankers,
traders etc. who lend money to the public. Indigenous bankers even collect
money from public in the form of deposits. There are also private finance
companies, chit funds etc.However,activities of these players are not
controlled by RBI.Directions were issued in 1998 to bring finance
companies and chit funds under strict control of RBI.Steps have also been
taken to bring the unorganized sector under organized fold. But these
regulations are inadequate and did not have much
success.therefore,financial instruments in unorganized markets are not
standardized.

2013: Changing Scenario of Indian Equity
2012 finally gave investors a year many wished for. The year brought faith
in investors and traders with higher interest like change in interest rate,
constant flow of FII, stability in growth rate, decline in inflation, decrease in
petrol prices and most importantly government reforms in Indian equities
markets. Most importantly, the Indian markets performed better compared
to other emerging markets. Year 2011 came with disappointment for
investors and traders but year 2012 came with opportunities and looking
ahead, 2013 is expected to be a promising year with more aggressive
reforms from the government and changing scenario of Indian equities.

Nifty Return 27.9% vs -25% and Sensex Return 25.7% vs -15.7%

The enormous growth and improvement of Indian equities defended some
groundbreaking developments in the Indian markets. In 2011 nifty gave a
25% negative return but in 2012 reversal effect with 27.9% positive return
proved the strength in the Indian markets.

While sensex gave a negative return of 15.7% in 2011, in 2012 recovery
was seen with 25.7% positive return. The Indian economy will improve in
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2013 with lower interest rate, drop in inflation and aggressive steps by the
government on reforms might change the overall scenario.

Year 2012 came with more flow of FII in Indian equities. With changes in
policy and attractive government reforms shower the flow from foreign
markets to Indian markets. Last year in 2011 FII sell 26595 cr and DII buy
29206 cr but this year in 2012 scenario changing with FII buy 101167 cr
and DII sell 55800 cr which clearly indicate Indian equities more attractive
with highest return compared to other markets. With another round of
improvement in Indian equities come in year 2013 will help further inflows
with strong case of investment.

In year 2012 rate cut from RBI, decline in inflation, stability in growth rate,
Improvement in IIP and still in the deficit mood of export-import mixed year
indicate recovery in Indian economy. The way Indian government
promoting reforms with taking bold decision might changing the picture of
Indian economy with important player on the stage of world.

With the economic uncertainty, political deadlock in Europe, worry
of Greece, quantitative easing from ECB, reelecting of Obama in
US, strength in Asian markets with austerity plans and stimulus packages
overall world market tremble between gains and losses with the volatile
microeconomic scenario. Shanghai top loser with 3.2% while DAX top
gainer with 29.1%. in 2013 world market faces many challenges like Fiscal
cliff issue in US, decision of Greece and Spain in Europe markets, new
Chinese leadership in the emerging markets.

Rising commodity prices, uncertain exchange rates, fall in demand due to
higher interest rates, overall price hikes and government reforms in
different sectors directly or indirectly affected all the sectors. With the
robust growth in consumer durables, banking and reality sectors and on
other hands consumer goods, IT sectors posted disappointing numbers.
With interest rate event by RBI, FDI policy in retail, Raising FDI cap in
broadcasting etc. factors Auto, Banking, FMCG, Media, Reality, Capital
goods likely to remain in lime light in 2013.
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2013 is expected to be a year of hope with government magic and
domestic business confidence. Year 2012 passed with scams and
government reforms. With also confidence of global investors in Indian
markets, the markets may make long journey towards new highs. The
government is expected to work aggressively in 2013 on the issue of DTC,
GST and land reforms which are still in the queue to clear. On the other
side forecast of GDP, interest rates, inflation and fiscal deficit etc factors
will be a signal that the worst may be behind us. From a fundamental point
of view, there will be positive build up in the environment with domestic
growth and global confidence.



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Commodity market

Commodity market refers to physical or virtual transactions of buying and
selling involving raw or primary commodities. A soft commodity generally
refers to commodities harvested as products
like coffee,cocoa, sugar, corn, wheat, soybean, and fruit traded in
the commodity market. Hard commodities usually refer to commodities that
are extracted such as (gold, rubber, oil). While commodities may be
grouped for regulation purposes etc., in large classes such as energy,
agricultural including livestock, precious metals, industrial metals, other
commodity markets, these are broken down into about a hundred primary
commodities (soybean oil, recycled steel). Investors access about 50 major
commodity markets worldwide uses growing numbers of exchanges with
virtual transactions increasingly replacing physical trades.






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Types of commodities
World-over one will find that a market exits for almost all the commodities
known to us. These commodities can be broadly classified into the
following:
Precious Metals: Gold, Silver, Platinum etc
Other Metals: Nickel, Aluminum, Copper etc
Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar etc
Live-Stock: Live Cattle, Pork Bellies etc
Energy: Crude Oil, Natural Gas, Gasoline etc


Segments in commodity markets
The commodities market exits in two distinct forms namely the Over the
Counter (OTC) market and the Exchange based market. Also, as in
equities, there exists the spot and the derivatives segment. The spot
markets are essentially over the counter markets and the participation is
restricted to people who are involved with that commodity say the farmer,
processor, wholesaler etc. Majority of the derivative trading takes place
through exchange-based markets with standardized contracts, settlements
etc.

History of commodity markets
India, being an agro-based economy, has markets for most of the agro-
based commodities. India is the largest consumer of Gold in the world,
which implies a huge market for the yellow metal. India has huge spot
markets for all these commodities. E.g. Indore has a huge market for soya,
Ahmedabad for castor seeds and Surendranagar for Cotton etc.

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During the pre-independence era India also had a thriving futures market
for commodities such as gold, silver, cotton, edible oils etc. In mid 1960s,
due to wars, natural calamities and the consequent shortages, futures
trading in most commodities were banned.
Currently, the futures markets that exist in India are localized for specific
commodities. For example, Kerala has an exchange for pepper;
Ahmedabad for castor seeds and Mumbai is the major center for Gold etc.
These exchanges, however, have only a regional presence and are
dominated by people who are involved with the physical trade of that
commodity.

Current development in commodity markets



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The government has now allowed national commodity exchanges, similar
to the BSE & NSE, to come up and let them deal in commodity derivatives
in an electronic trading environment. These exchanges are expected to
offer a nation-wide anonymous, order driven, screen based trading system
for trading. The Forward Markets Commission (FMC) will regulate these
exchanges.

Consequently four commodity exchanges have been approved to
commence business in this regard. They are:

o Multi Commodity Exchange of India Ltd. (MCX) located at Mumbai
o National Commodity and Derivatives Exchange Ltd (NCDEX) located at
Mumbai
o National Board of Trade (NBOT) located at Indore
o National Multi Commodity Exchange (NMCE) located at Ahmedabad.








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Need of Commodity Derivatives for India.
India is among top 5 producers of most of the Commodities, in addition to
being a major consumer of bullion and energy products.
Agriculture contributes about 22% GDP of Indian economy. It employees
around 57% of the labor force on total of 163 million hectors of land
Agriculture sector is an important factor in achieving a GDP growth of 8-
10%. All this indicates that India can be promoted as a major centre for
trading of commodity derivatives.
Trends in volume contribution on the three National Exchanges:-
Pattern on Multi Commodity Exchange (MCX).
MCX is currently largest commodity exchange in the country in terms of
trade volumes, further it has even become the third largest in bullion and
second largest in silver future trading in the world.
Coming to trade pattern, though there are about 100 commodities traded
on MCX, only 3 or 4 commodities contribute for more than 80 percent of
total trade volume. As per recent data the largely traded commodities are
Gold, Silver, Energy and base Metals.
Incidentally the futures trends of these commodities are mainly driven by
international futures prices rather than the changes in domestic demand-
supply and hence, the price signals largely reflect international scenario.
Among Agricultural commodities major volume contributors include Gur,
Urad, Mentha Oil etc. Whose market sizes are considerably small making
then vulnerable to manipulations. Pattern on National Commodity &
Derivatives Exchange (NCDEX).
NCDEX is the second largest commodity exchange in the country after
MCX. However the major volume contributors on NCDEX are agricultural
commodities.
But, most of them have common inherent problem of small market size,
which is making them vulnerable to market manipulations and over
speculation. About 60 percent trade on NCDEX comes from guar seed,
chana and Urad (narrow commodities as specified by FMC).
Pattern on National Multi Commodity Exchange (NMCE)
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NMCE is third national level futures exchange that has been largely trading
in Agricultural Commodities.
Trade on NMCE had considerable proportion of commodities with big
market size as jute rubber etc. But, in subsequent period, the pattern has
changed and slowly moved towards commodities with small market size or
narrow commodities.
Analysis of volume contributions on three major national commodity
exchanges reveled the following pattern, Major volume contributors:-
Majority of trade has been concentrated in few commodities that are

Non Agricultural Commodities (bullion, metals and energy)
Agricultural commodities with small market size (or narrow commodities)
like guar, Urad, Mentha etc.


Commodity markets across the world
Africa
Exchange Abbreviation Location Product Types
Africa Mercantile
Exchange
AfMX Nairobi, Kenya
Agricultural,
Energy
Nairobi Coffee
Exchange
NCE Nairobi, Kenya Coffee
Ethiopia Commodity
Exchange
ECX
Addis Ababa,
Ethiopia
Agricultural
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EAST Africa Exchange
Rwanda
EAX Kigali, Rwanda Agricultural
Agricultural Commodity
Exchange for Africa
ACE Lilongwe, Malawi

Auction Holding
Commodity Exchange
AHCX Lilongwe, Malawi Agricultural
Mercantile Exchange of
Madagascar
MEX
Antananarivo,
Madagascar
Agricultural,
Metals, Energy
Global Board of Trade GBOT Ebene, Mauritius Metals, Forex
SAFEX (Johannesburg
Securities exchange)
JSE
Sandton, South
Africa
Agricultural

(Makola Agricuturals
Exchange)

Accra, Ghana
Alternative
Agricultural

Americas
Exchange Abbreviation Location Product Types
Brazilian Mercantile and
Futures Exchange
BMF So Paulo, Brazil
Agricultural,
Biofuels,
Precious
Metals
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Chicago Board of
Trade (CME Group)
CBOT
Chicago, United
States
Grains,
Ethanol,
Treasuries,
Equity Index,
Metals
Chicago Mercantile
Exchange (CME Group)
CME
Chicago, United
States
Meats,
Currencies,
Eurodollars,
Equity Index
Chicago Climate
Exchange
CCX
Chicago, United
States
Emissions
Flett Exchange

Jersey City, United
States
Environmental
HedgeStreet Exchange

California, United
States
Energy,
industrial
Metals
HoustonStreet Exchange

New
Hampshire, United
States
Crude Oil,
Distillates
Intercontinental
Exchange
ICE
Atlanta,
Georgia, United
States
Energy,
Emissions,
Agricultural,
Biofuels
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Kansas City Board of
Trade
KCBT
Kansas
City, United States
Agricultural
Memphis Cotton
Exchange

Memphis, United
States
Agricultural
Mercado a Termino de
Buenos Aires
MATba
Buenos
Aires, Argentina
Agricultural
Mercado a Termino de
Rosario
ROFEX Rosario, Argentina
Financial,
Agricultural
Minneapolis Grain
Exchange
MGEX Minneapolis Agricultural
Nadex Exchange

Chicago, United
States
Energy,
industrial
Metals
New York Mercantile
Exchange (CME Group)
NYMEX
New York, United
States
Energy,
Precious
Metals,
Industrial
Metals
U.S. Futures Exchange USFE
Chicago, United
States
Energy


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Asia
Exchange Abbreviation Location Product Types
International
Commodity
Exchange
Kazakhstan

Almaty Kazakhstan
Industrial and
Mineral Products,
Oil By-products and
Petrochemicals,
Agricultural
Agricultural
Futures
Exchange of
Thailand
AFET Bangkok Thailand Agricultural
Bursa
Malaysia
MDEX Malaysia Biofuels
Cambodian
Mercantile
Exchange
CMEX
Phnom Penh,
Cambodia
Energy, Industrial
Metals, Rubber,
Precious Metals,
Agricultural
Central Japan
Commodity
Exchange

Nagoya, Japan
Energy, Industrial
Metals, Rubber
Chittagong

Chittagong, Bangladesh Tea
34 | P a g e

Tea Auction
Dalian
Commodity
Exchange
DCE Dalian, China
Agricultural,
Plastics, Energy
Dubai
Mercantile
Exchange
DME Dubai Energy
Dubai Gold &
Commodities
Exchange
DGCX Dubai Precious Metals
Hong Kong
Mercantile
Exchange
HKMEx Hong Kong Gold, Silver
Iran
Mercantile
Exchange
IME Tehran, Iran
Industrial and
Mineral Products,
Oil By-products and
Petrochemicals,
Agricultural
Iranian oil
bourse
IOB Kish Island, Iran
Oil, Gas,
Petrochemicals
Kansai
Commodities
KANEX Osaka, Japan Agricultural
35 | P a g e

Exchange
Commodities
& Metal
Exchange
Nepal Ltd.
COMEN Nepal Gold, Silver
National Spot
Exchange
Limited
[NSEL] Mumbai, India

Nepal
Derivative
Exchange
Limited
[NDEX] Kathmandu, Nepal
Agricultural,
Precious Metals,
Base Metals,
Energy
Mercantile
Exchange
Nepal Limited
MEX Kathmandu, Nepal
Agricultural, Bullion,
Base Metals,
Energy
Derivative and
Commodity
Exchange
Nepal Ltd.
DCX Kathmandu, Nepal
Agricultural, Bullion,
Base Metals,
Energy
Nepal Spot
Exchange
Limited
NSE Kathmandu, Nepal Agricultural, Bullion
36 | P a g e

Indian
Commodity
Exchange
Limited
ICEX India
Energy, Precious
Metals, Base
Metals, Agricultural
Multi
Commodity
Exchange
MCX India
Precious Metals,
Base Metals,
Energy, Agricultural
National
Commodity
and
Derivatives
Exchange
NCDEX India
Precious Metals,
Base Metals,
Energy, Agricultural
National Multi-
Commodity
Exchange of
India Ltd
NMCE India
Precious Metals,
Base Metals,
Agricultural
Ace
Derivatives &
Commodity
Exchange Ltd.
ACE India Agricultural
Bhatinda Om
& Oil
Exchange Ltd.
BOOE India Agricultural
37 | P a g e

UCX UCX India Agricultural
Pakistan
Mercantile
Exchange
PMEX Pakistan
Precious Metals,
Agricultural
Products, Crude Oil,
Interest Rate Future
Shanghai
Futures
Exchange

Shanghai, China
Industrial metals,
Gold,
Petrochemicals,
Rubber
Shanghai
Gold
Exchange

Shanghai, China Precious Metals
Singapore
Commodity
Exchange
SICOM Singapore Agricultural, Rubber
Singapore
Mercantile
Exchange
SMX Singapore
Precious Metals,
Base Metals,
Agricultural, Energy
Uzbek
Commodity
Exchange
UZEX Tashkent, Uzbekistan
Metals, crude oil
products,
chemicals, base
oils, LPG and
polyethylene, sugar,
38 | P a g e

agricultural, etc.
Tokyo
Commodity
Exchange
TOCOM Tokyo, Japan
Energy, Precious
Metals, Industrial
Metals, Agricultural
Tokyo Grain
Exchange
TGE Tokyo, Japan Agricultural
Zhengzhou
Commodity
Exchange
CZCE Zhengzhou, China Agricultural, PTA
Vietnam
Commodity
Exchange
VNX
Ho Chi Minh
city, Vietnam
Coffee, Rubber,
Steel
Buon Ma
Thuot Coffee
Exchange
Center
BCEC
Buon Ma Thuot,
Vietnam
Coffee


Europe
Exchang
e
Abbreviati
on
Location
Product
Types
Life Time
39 | P a g e

APX-
ENDEX
APX-
ENDEX
Amsterdam, Netherla
nds
Energy

Trieste
Commodi
ty
Exchange
BMTS Trieste, Italy Agricultural

Commodi
ty
Exchange
Bratislava
, JSC
CEB Bratislava, Slovakia
Emissions,
Agricultural,
Diamonds

Climex CLIMEX
Amsterdam, Netherla
nds
Emissions

NYSE
Liffe
LIFFE Europe Agricultural
Founded in
1982, merged
into Euronext
in 2002
European
Climate
Exchange
ECX Europe Emissions

Energy
Exchange
Austria
EXAA Vienna, Austria
Energy,
Emissions
40 | P a g e

Integrated
Nano-
Science
Commodi
ty
Exchange
INSCX United Kingdom
Nanomateria
ls
London
Commodi
ty
Exchange
LCE London, UK Agricultural
Merged
into LIFFE in
1996
London
Metal
Exchange
LME London, UK
Industrial
Metals,
Plastics

European
Energy
Exchange
EEX Leipzig, Deutschland
Energy,
Emissions








41 | P a g e

Foreign exchange market


The market in which participants are able to buy, sell, exchange and
speculate on currencies. The forex markets is made up of banks,
commercial companies, central banks, investment management firms,
hedge funds, and retail forex brokers and investors. The currency market is
considered to be the largest financial market in the world, processing
trillions of dollars worth of transactions each day.
The exchange rate is just the price of one currency in terms of another
currency. Currency markets are the world's largest financial market - over
$1T ($1000B) is traded daily vs. $10-15B traded daily in the entire US
equity market. Foreign exchange market operates daily around the clock -
24/7. There is not a physical location or exchange (like NYSE) for currency
trading, it is more like NASDAQ, an over-the-counter network of currency
traders, most large banks, linked by telephone and computer. Trading is
usually in transactions of $1m or more per trade, at the wholesale level.
42 | P a g e

Trading in the foreign exchange market is mainly to facilitate international
trade and international investment - the buying and selling of foreign goods,
services and financial assets. Think of the three functions of money - unit
of account, medium of exchange and store of value. Foreign goods are
usually priced in foreign currency - German wine/beer is priced in Euros for
example. The unit of account is the euro, the medium of exchange is the
euro. American liquor distributors need Euros to buy the German
wine/beer. Also, American investors may consider the euro a better store
of value than the US dollar. They could buy a CD from a German bank
denominated in Euros, instead of putting money in a U.S. bank. Or
American investors want to buy stock of a company in UK, Brazil or Turkey.
They need foreign currency to buy foreign assets.
Note: Exchange rates can be quoted two ways:
e = / $, or the Foreign Currency per U.S $. When e gets bigger (100 to
120), dollar gets stronger, appreciates in value (and the Yen depreciates).
$1 will buy more foreign currency, or it takes more Yen to buy a $1. When
e gets smaller (100 to 80), dollar gets weaker, depreciates in value (and the
Yen appreciates). $1 will buy fewer Yen, or it takes fewer Yen to buy a $1.
Just like a price of $2/gallon of gasoline, when the P gets bigger the value
(price) of gas increases (it's in the denominator), when P gets smaller the
value (price) of gas decreases.
e = $ / (British pound), or the U.S. $ equivalent, or U.S. Dollars per
national currency unit. When this e gets bigger, the get stronger
(appreciates) and the dollar gets weaker (depreciates), because it takes
more dollars to buy a . When e gets smaller, the depreciates and the
dollar gets stronger. It costs less for us, in U.S. $, to buy a pound.
POINT:
1. When e (ex-rate) gets bigger, the currency in the DENOMINATOR gets
stronger (appreciates).
2. When e (ex-rate) gets smaller, the currency in the DENOMINATOR gets
weaker (depreciates).
43 | P a g e

3. Since the ex-rate is just a ratio of two currencies, when one ($) gets
stronger, the other () gets weaker.
Two Types of Exchange Rates:

1. Spot Rates (e or E) - Buyer and Seller agree on P (ex-rate) and Q for
immediate delivery (within two days).

2. Forward rates (F) - Buyer and Seller agree on P (ex-rate) and Q for
delivery in the future - 1 month, 3 month, 6 months or more in the future.





44 | P a g e

Debt Market
The debt market in India consists of mainly two categoriesthe
government securities or the G-Sec markets comprising central
government and state government securities, and the corporate bond
market. In order to finance its fiscal deficit, the government floats fixed
income instruments and borrows money by issuing G-Secs that are
sovereign securities issued by the Reserve Bank of India (RBI) on behalf of
the Government of India. The corporate bond market (also known as the
non-Gsec market) consists of financial institutions (FI) bonds, public sector
units (PSU) bonds, and corporate bonds/debentures. The G-secs are the
most dominant category of debt markets and form a major part of the
market in terms of outstanding issues, market capitalization, and trading
value. It sets a benchmark for the rest of the market. The market for debt
derivatives have not yet developed appreciably, although a market for OTC
derivatives in interest rate products exists. The exchange-traded interest
rate derivatives that were introduced recently are debt instruments; this
market is currently small, and would gradually pick up in the years to come.

History
The National Stock Exchange started its trading operations in June 1994 by
enabling the Wholesale Debt Market (WDM) segment of the Exchange.
This segment provides a trading platform for a wide range of fixed income
securities that includes central government securities, treasury bills (T-
bills), state development loans (SDLs), bonds issued by public sector
undertakings (PSUs), floating rate bonds (FRBs), zero coupon bonds
(ZCBs), index bonds, commercial papers (CPs), certificates of deposit
(CDs), corporate debentures, SLR and non-SLR bonds issued by financial
institutions (FIs), bonds issued by foreign institutions and units of mutual
funds (MFs). To further encourage wider participation of all classes of
investors, including the retail investors, the Retail Debt Market segment
(RDM) was launched on January 16, 2003.This segment provides for a
nation wide, anonymous, order driven, screen based trading system in
government securities. In the first phase, all outstanding and newly issued
45 | P a g e

central government securities were traded in the retail debt market
segment. Other securities like state government securities, T-bills etc. will
be added in subsequent phases. The settlement cycle is same as in the
case of equity market i.e., T+2 rolling settlement cycle.


Types of securities
Treasury Bills: Treasury bills (T-bills) are money market instruments, i.e.,
short-term debt instruments issued by the Government of India, and are
issued in three tenors91 days, 182 days, and 364 days. The T-bills are
zero coupon securities and pay no interest. They are issued at a discount
and are redeemed at face value on maturity.
Cash Management Bills: Cash management bills (CMBs)3 have the
generic characteristics of T-bills but are issued for a maturity period less
46 | P a g e

than 91 days. Like the T-bills, they are also issued at a discount, and are
redeemed at face value on maturity. The tenure, noticed amount, and date
of issue of the CMBs depend on the temporary cash requirement of the
government. The announcement of their auction is made by the RBI
through a Press Release that would be issued one day prior to the date of
auction. The settlement of the auction is on a T+1 basis.
Dated Government Securities: Dated government securities are long-
term securities that carry a xed or oating coupon (interest rate), which is
paid on the face value, payable at xed time periods (usually half-yearly).
The tenor of dated securities can be up to 30 years.
State Development Loans: State governments also raise loans from the
market. State Development Loans (SDLs) are dated securities issued
through an auction similar to the auctions conducted for the dated
securities issued by the central government. Interest is serviced at half-
yearly intervals, and the principal is repaid on the maturity date. Like the
dated securities issued by the central government, the SDLs issued by the
state governments qualify for SLR. They are also eligible as collaterals for
borrowing through market repo as well as borrowing by eligible entities
from the RBI under the Liquidity Adjustment Facility.

Fixed Rate Bonds: These are bonds on which the coupon rate is xed for
the entire life of the bond. Most government bonds are issued as xed
rate bonds.
Floating Rate Bonds: Floating rate bonds are securities that do not have a
xed coupon rate. The coupon is re-set at pre-announced intervals (say,
every 6 months, or 1 year) by adding a spread over a base rate. In the case
of most oating rate bonds issued by the Government of India so far, the
base rate is the weighted average cut-off yield of the last three 364-day
Treasury Bill auctions preceding the coupon re-set date, and the spread is
decided through the auction. Floating rate bonds were rst issued in India
in September 1995.
47 | P a g e

Zero Coupon Bonds: Zero coupon bonds are bonds with no coupon
payments. Like T-Bills, they are issued at a discount to the face value. The
Government of India issued such securities in the 90s; it has not issued
zero coupon bonds after that.
Capital Indexed Bonds: These are bonds, the principal of which is linked
to an accepted index of ination with a view to protecting the holder from
ination. Capital indexed bonds, with the principal hedged against in ation,
were rst issued in December 1997. These bonds matured in 2002. The
government is currently working on a fresh issuance of Ination Indexed
Bonds wherein the payment of both the coupon as well as the principal on
the bonds would be linked to an Ination Index (Wholesale Price Index). In
the proposed structure, the principal will be indexed and the coupon will be
calculated on the indexed principal. In order to provide the holders
protection against actual in ation, the nal WPI will be used for indexation.
Bonds with Call/Put Options: Bonds can also be issued with features of
optionality, wherein the issuer can have the option to buy back (call option)
or the investor can have the option to sell the bond (put option) to the
issuer during the currency of the bond.The optionality on the bond could be
exercised after the completion of ve years from the date of issue on any
coupon date falling thereafter. The government has the right to buy-back
the bond.





48 | P a g e

Derivatives market


Derivative is a product whose value is derived from the value of one or
more basic variables, called bases (underlying asset, index, or reference
rate), in a contractual manner. The underlying asset can be equity, forex,
commodity or any other asset. For example,wheat farmers may wish to sell
their harvest at a future date to eliminate the risk of a change in prices by
that date. Such a transaction is an example of a derivative. The price of this
derivative is driven by the spot price of wheat which is the underlying.
In the Indian context the Securities Contracts (Regulation) Act, 1956
(SC(R)A) defines derivative to include
49 | P a g e


A security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other form of
security.
A contract, which derives its value from the prices, or index of prices, of
underlying securities.

Derivatives are securities under the SC(R)A and hence the trading of
derivatives is governed by the regulatory framework under the SC(R)A.

Products, Participants and Functions
Derivative contracts have several variants. The most common variants are
forwards, futures, options and swaps. The following three broad categories
of participants - hedgers, speculators, and arbitrageurs trade in the
derivatives market. Hedgers face risk associated with the price of an asset.
They use futures or options markets to reduce or eliminate this risk.
Speculators wish to bet on future movements in the price of an asset.
Futures and options contracts can give them an extra leverage; that is, they
can increase both the potential gains and potential losses in a speculative
venture. Arbitrageurs are in business to take advantage of a discrepancy
between prices in two different markets. If, for example, they see the
futures price of an asset getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a profit. First, prices in an
organized derivatives market reflect the perception of market participants
about the future and lead the prices of underlying to the perceived future
level. The prices of derivatives converge with the prices of the underlying at
the expiration of the derivative contract. Thus derivatives help in discovery
of future as well as current prices. Second, the derivatives market helps to
transfer risks from those who have them but may not like them to those
who have an appetite for them. Third, derivatives, due to their inherent
nature, are linked to the underlying cash markets. With the introduction of
derivatives, the underlying market witnesses higher trading volumes
because of participation by more players who would not otherwise
participate for lack of an arrangement to transfer risk. Fourth, speculative
50 | P a g e

trades shift to a more controlled environment of derivatives market. In the
absence of an organized derivatives market, speculators trade in the
underlying cash markets. Margining, monitoring and surveillance of the
activities of various participants become extremely difficult in these kind of
mixed markets. Fifth, an important incidental benefit that flows from
derivatives trading is that it acts as a catalyst for new entrepreneurial
activity. The derivatives have a history of attracting many bright, creative,
well-educated people with an entrepreneurial attitude. They often energize
others to create new businesses, new products and new employment
opportunities, the benefit of which are immense. Finally, derivatives
markets help increase savings and investment in the long run.


Types of derivatives

The most commonly used derivatives contracts are forwards, futures and
options.

Forwards: A forward contract is a customized contract between two
entities, where settlement takes place on a specific date in the future at
todays pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or
sell an asset at a certain time in the future at a certain price. Futures
contracts are special types of forward contracts in the sense that the former
are standardized exchange traded contracts.

Options: Options are of two types - calls and puts. Calls give the buyer the
right but not the obligation to buy a given quantity of the underlying asset,
at a given price on or before a given future date. Puts give the buyer the
right, but not the obligation to sell a given quantity of the underlying asset at
a given price on or before a given date.

51 | P a g e

Swaps: Swaps are private agreements between two parties to exchange
cash flows in the future according to a prearranged formula. They can be
regarded as portfolios of forward contracts. The two commonly used swaps
are:

1. Interest rate swaps: These entail swapping only the interest related
cash flows between the parties in the same currency and

2. Currency swaps: These entail swapping both principal and interest
between the parties, with the cash flows in one direction being in a
different currency than those in the opposite direction.
















52 | P a g e

Regulators in financial market

SEBI
The Securities and Exchange Board of India (SEBI) emerged as a non-
statutory body in 1988 and became an autonomous body on April 12, 1992,
under Securities and Exchange Board of India Act, 1992. The present
Chairman of SEBI is Upendra Kumar Sinha. The board protects the
interests of investors in securities and promotes the development of, and to
regulate, the securities market and for matters connected with them.

SEBI has adopted many rules and regulations for enhancing the Indian
capital market regularly. SEBI made it mandatory for every broker or sub
broker to get registered with the body or any stock exchange in India before
getting into the business. An asset limit of 20 lakhs has been fixed for
working as an underwriter. All Indian companies are free to determine their
respective share prices and premiums on the share prices. SEBI have
direct control on all mutual funds of both public and private sector through
SEBI (Mutual Funds) Regulation in 1993.


RBI
Reserve Bank of India is the apex monetary institution of India which is
responsible for the regulation of currency, printing of banknotes and
minting coins. It is also called as the central bank of the country. The
bank was established on April1, 1935 in Kolkata according to the Reserve
Bank of India act 1934 but was later shifted to Mumbai in 1937. RBI was
initially privately owned but since nationalization in 1949, the Reserve Bank
is owned by the Government of India. The Governor sits in Central Office
where policies are formulated.




53 | P a g e

Conclusion
The contours of the nancial markets are expanding with the advent of new
technology, innovations in products and fast changing customer
expectations. The Indian nancial services sector comprises a good blend
of domestic and foreign participants. Opening up of the nancial markets
has resulted in competition and greater eciency; however, foreign
participation could also bring in the baggage of increased risk and
exposure as recent events have shown. Stability is therefore a critical need
for nancial markets for which safeguarding mechanisms need to be
established, to prevent systemic risks and absorb shocks.The equity
market in India is extremely vibrant, but equity based funding solely, cannot
lead the economy to growth. The debt market remains underdeveloped,
with a huge potential for increased activity. A strong bond market is
required to drive long term nancing of infrastructure, housing and private
sector development. The role of capital markets is vital for enhancing
growth in wealth distribution and increasing availability of funds for
infrastructure development. One of the underlying challenges that the
banking and nancial services sector is dealing with is the issue of
increasing the out-reach & enhancing nancial inclusion. The huge scale of
the drive towards inclusive growth is intimidating, as various stakeholders
like banks, insurance companies and asset management companies
struggle to move a step closer to the untapped areas and newer target
consumers. The challenge lies in devising a cost eective delivery model to
reach out to the low income group of society, penetrating the remote areas.
A debate on new banking licenses, banks developing and formulating
strategies for inclusive banking and an increasing thrust on infrastructure
nancing, have been some of the initiatives which have been taken to give
an added impetus to nancial inclusion. The road ahead for deepening the
nancial markets needs to be paved by the formulation of a strong linkage
between the development of the economy and the capacity of the nancial
system. The global nancial environment is moving towards an integrated
nancial system, and will serve in good stead to standardise compliance
norms and procedures. A greater measure of transparency is also required
54 | P a g e

to be built into regulatory procedures, to bring in a new dimension to
nancial markets, and take it to the next level.






55 | P a g e

Financial instruments

Introduction
A real or virtual document representing a legal agreement involving some
sort of monetary value. In today's financial marketplace, financial
instruments can be classified generally as equity based, representing
ownership of the asset, or debt based, representing a loan made by an
investor to the owner of the asset. Foreign exchange instruments comprise
a third, unique type of instrument. Different subcategories of each
instrument type exist, such as preferred share equity and common share
equity.

Financial instruments are legal documents that embody monetary value.
There are a number of different types of documents that are properly
identified as a financial instrument, including cash instruments and
derivatives.
When most people think in terms of financial instruments, they tend to
identify what is commonly known as a cash instrument. This is simply those
documents that are recognized as cash that can be utilized for various
transactions. Currency is the most easily identified of all cash instruments,
although such documents as checks or funds transfers from bank accounts
are also seen as cash instruments.
Derivative instruments are another example of the financial instrument.
This classification would include such instruments as futures, options, and
swaps. Some analysts also prefer to include stocks, bonds, and currency
futures within this category as well, while others tend to think of these
as cash equivalents, since it is possible to settle debts by transferring
ownership of stocks and bonds. In broad terms, a derivative instrument is
some type of contract that has value based on the current status of the
underlying assets.
56 | P a g e

Other types of documents are often understood to function as a financial
instrument. In the world or real estate funding, the mortgage qualifies as a
financial instrument. A commercial paper or stock index also meets the
basic definition, as do bills of exchange.






57 | P a g e


Characteristics of financial instruments
Most of these instruments are freely transferable from one person to
another.
They are mostly liquid in nature i.e. they can be easily converted into
cash.
Most of the instruments can be offered as security for obtaining loan.
Risk is involved in the investment in financial instruments as there is
uncertainty about payment of principal or interest or dividend.
The return on these instruments is directly proportional to the risk
involved.
They are generally classified into short term, medium term and loan
based on the maturity period.















58 | P a g e

Types of financial instruments

Equities


Equities are a type of security that represents the ownership in a company.
Equities are traded (bought and sold) in stock markets. Alternatively, they
can be purchased via the Initial Public Offering (IPO) route, i.e. directly
from the company. Investing in equities is a good long-term investment
option as the returns on equities over a long time horizon are generally
higher than most other investment avenues. However, along with the
possibility of greater returns comes greater risk.
Equity, also called shares or scrips, is the basic building blocks of a
company. A company's ownership is determined on the basis of its
shareholding. Shares are, by far, the most glamorous financial instruments
for investment for the simple reason that, over the long term, they offer the
highest returns. Predictably, they're also the riskiest investment option. The
59 | P a g e

BSE Sensex is the most popular index that tracks the movements of shares
of 30 blue-chip companies on a weighted average basis. The rise and fall in
the value of the Sensex, measured in points, broadly indicates the price-
movement of the value of shares. Of late, technology has played a major
role in enhancing the efficiency, safety, and transparency of the markets.
The introduction of online trading has made it possible for an investor to
trade in equities at the click of a mouse.



Suitability
Shares are meant to be long-term investments. Three golden rules for
investment in equity - Diversify, Average out & most importantly stay
invested. Shares do generate income from dividend as
well as capital appreciation and have a strong potential to increase value of
investment. But shares are risky - share prices are affected by factors
beyond anyone's control and hence one needs to have an appetite for that
kind of risk.
if the company earns good profits and pays dividends regularly, shares are
ideal for income purposes. But not all good companies regularly pay
60 | P a g e

dividends as they may chose to employ the profits for investments and
growth purposes.

liquidity
Shares are the most liquid financial instruments as long as there is a buyer
for your shares on the stock exchange. Most shares belonging to the A
Group on the BSE are among the most liquid. However, shares of some
companies may not witness any trading for many days altogether. In such a
case, you will not be able to sell your shares. So, the liquidity factor varies
to a large extent.

Tax Implications
While dividend is not taxable at the hands of the investor, capital gains are.
When you sell your shares at a profit, it attracts a capital gains tax. Gains
realized within one year of purchase of shares come under the short-term
capital gains tax, and are included in gross taxable income. If the duration
is more than one year, it is termed as long-term



















61 | P a g e

Bonds
Bonds are fixed income instruments which are issued for the purpose of
raising capital. Both private entities, such as companies, financial
institutions, and the central or state government and other government
institutions use this instrument as a means of garnering funds. Bonds
issued by the Government carry the lowest level of risk but could deliver
fair returns.
A Bond is a loan given by the buyer to the issuer of the instrument.
Companies, financial institutions, or even the government can issue bonds.
Over and above the scheduled interest payments as and when applicable,
the holder of a bond is entitled to receive the par value of the instrument at
the specified maturity date.

Bonds can be broadly classified into:
Tax-Saving Bonds
Regular Income Bonds

Tax-Saving Bonds offer tax exemption up to a specified amount of
investment, examples are:
a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act,
1961
b. REC Bonds under Section 54EC of the Income Tax Act, 1961
c. RBI Tax Relief Bonds.

Regular-Income Bonds, as the name suggests, are meant to provide a
stable source of income at regular, pre-determined intervals, examples are:
a. Double Your Money Bond
b. Step-Up Interest Bond
c. Retirement Bond
d. En-cash Bond
e. Education Bonds
f. Money Multiplier Bonds/Deep Discount Bond
Similar instruments issued by companies are called debentures.
62 | P a g e


Suitability
Bonds are usually not suitable for an increase in your investment. However,
in the rare situation where an investor buys bonds at a lower price just
before a decline in interest rates, the resultant drop in rates leads to an
increase in the price of the bond, thereby facilitating an increase in your
investment. This is called capital appreciation.

Bonds are suitable for regular income purposes. Depending on the type of
bond, an investor may receive interest semi-annually or even monthly, as is
the case with monthly income bonds. Depending on ones capacity to bear
risk, one can opt for bonds issued by top ranking corporate, or that of
companies with lower credit ratings. Usually, bonds of top-rated corporate
provide lower yield as compared to those issued by companies that are
lower in the ratings.

Rating
bonds are rated by specialized credit rating agencies. Credit rating
agencies include CARE, CRISIL, ICRA and Fitch. An AAA rating indicates
highest level of safety while D or FD indicates the least. The yield on a
bond varies inversely with its credit (safety) rating. As mentioned earlier,
the safer the instrument, the lower is the rate of interest offered.
63 | P a g e



Liquidity
Selling in the debt market is an obvious option.Some issues also offer what
is known as 'Put and Call option.' Under the Put option, the investor has the
option to approach the issuing entity after a specified period (say, three
years), and sell back the bond to the issuer. In the Call option, the company
has the right to recall its debt obligation after a particular time frameThe
company can now exercise the Call option and recall its debt obligation
provided it has declared so in the offer document. Similarly, an investor can
exercise his Put option if interest rates have moved up and there are better
options available in the market.

Tax Implications

There are specific tax saving bonds in the market that offer various
concessions and tax-breaks. Tax-free bonds offer tax relief under Section
88 of the Income Tax Act, 1961. Interest income from bonds, up to a limit of
Rs.12,000, is exempt under section 80L of the Income tax Act, plus
Rs.3,000 exclusively for interest from government securities.
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Deposits

Investing in bank or post-office deposits is a very common way of securing
surplus funds. These instruments are at the low end of the risk-return
spectrum. When you deposit a certain sum in a bank with a fixed rate of
interest and a specified time period, it is called a bank Fixed Deposit (FD).
At maturity, you are entitled to receive the principal amount as well as the
interest earned at the pre-specified rate during that period. The rate of
interest for Bank Fixed Deposits varies between 4 and 6 per cent,
depending on the maturity period of the FD and the amount invested. The
interest can be calculated monthly, quarterly, half-yearly, or annually, and
varies from bank to bank. They are one the most common savings avenue,
and account for a substantial portion of an average investor s savings. The
facilities vary from bank to bank. Some services offered are withdrawal
through cheques on maturity; break deposit through premature withdrawal;
and overdraft facility etc.




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TYPES OF DEPOSITS WITH BANKS
While various deposit products offered by the Bank are assigned different
names. The deposit products can be categorised broadly into the following
types. Definition of major deposits schemes is as under: -

i) Demand deposits means a deposit received by the Bank which is
withdrawable on demand;
ii) Savings deposits means a form of demand deposit which is subject to
restrictions as to the number of withdrawals as also the amounts of
withdrawals permitted by the Bank during any specified period;

iii) Term deposit means a deposit received by the Bank for a fixed period
withdrawable only after the expiry of the fixed period and includes deposits
such as Recurring / Double Benefit Deposits / Short Deposits / Fixed
Deposits /Monthly Income Certificate /Quarterly Income Certificate etc.

iv)Notice Deposit means term deposit for specific period but withdrawable
on giving atleast one complete banking days notice;

v) Current Account means a form of demand deposit wherefrom
withdrawals are allowed any number of times depending upon the balance
in the account or up to a particular agreed amount
and will also include other deposit accounts which are neither Savings
Deposit nor Term Deposit;











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Corporate fixed deposits
Corporate fixed deposits are normal fixed deposits offered by Companies.
The interest rates offered are generally higher than Bank interest rates and
can be in range from 9%-16% . Higher the interest rates offered higher are
the risks involved. Why do companies have these deposits? when
companies have cash crunch and require money, they can offer deposits at
attractive rate of interest to common public, one of the reasons for this can
be that they do not want to raise the additional capital by issuing shares.
Corporate Deposits are governed as per Section 58A of Companies Act,
however these are unsecured loans (we will talk about it).


Risk with company fix deposits
There are two main risks associated with Company Deposits , they are
:
A) Default Risk: These Company deposits carry a risk called Default
Risk, which means, at maturity they might not be able to return your
maturity amount and default in the payment. It can happen that
company is out of cash at that time or does not have sufficient money
in their hand to pay back , this can happen for many reasons like their
business might not be going good that time or because of recession .

B) Unsecured Deposits: Bank Deposits are secured by RBI up to 1
lacs rupees per branch, which means that if bank does not return you
the money or goes bankrupt, RBI will pay you up to 1 lacs of deposits.
There is no such Insurance on Company Deposits, hence they are
totally unsecured.


Suitability
There is nothing good or bad, some companies which offer Fixed Deposits
are very established and are highly reputed, however you cant take it at
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face value and ignore the risks involved. If you want to park money for
short-term and are comfortable with the risks which come with corporate
fixed deposits, these corporate fixed deposits can be a good products for
you. The point here is awareness. Its not recommended that you put a big
sum in same company. If you want to invest 2 lacs in company fixed
deposits, then better invest 1 lacs in 2 different company, that
would diversify your risk to some extent. Also if you are investing for some
very important goal, then better settle with Bank Fixed Deposits and not
Corporate deposits, its better to settle with 2-3% less returns then take
unneccessary risk . Here are some words of caution while choosing
Company deposits.


Company Fixed Deposits you should Avoid
Companies which offer interest higher than 15%.
Companies which are not paying regular dividends to the shareholder
Companies whose Balance Sheet shows losses
Companies which are below investment grade (A or under) rating.
Pvt limited Companies and Partnership firms as its very difficult to judge
their performance.










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Cash Equivalents
These are relatively safe and highly liquid investment options. Treasury
bills and money market funds are cash equivalents.

Treasury Bills (T-Bills): Treasury Bills, one of the safest money market
instruments, are short term borrowing instruments of the Central
Government of the Country issued through the Central Bank (RBI in India).
They are zero risk instruments, and hence the returns are not so attractive.
It is available both in primary market as well as secondary market. It is a
promise to pay a said sum after a specified period. T-bills are short-term
securities that mature in one year or less from their issue date. They are
issued with three-month, six-month and one-year maturity periods. The
Central Government issues T- Bills at a price less than their face value (par
value). They are issued with a promise to pay full face value on maturity.
So, when the T-Bills mature, the government pays the holder its face value.
The difference between the purchase price and the maturity value is the
interest income earned by the purchaser of the instrument. T-Bills are
issued through a bidding process at auctions. The bidcan be prepared
either competitively or non-competitively. In the second type of bidding,
return required is not specified and the one determined at the auction is
received on maturity. Whereas, in case of competitive bidding, the return
required on maturity is specified in the bid. In case the return specified is
too high then the T-Bill might not be issued to the bidder. At present, the
Government of India issues three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day. There are no treasury bills issued
by State Governments. Treasury bills are available for a minimum amount
of Rs.25K and in its multiples. While 91-day T-bills are auctioned every
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week on Wednesdays, 182-day and 364- day T-bills are auctioned every
alternate week on Wednesdays. The Reserve Bank of India issues a
quarterly calendar of T-bill auctions which is available at the Banks
website. It also announces the exact dates of auction, the amount to be
auctioned and payment dates by issuing press releases prior to every
auction. Payment by allottees at the auction is required to be made by debit
to their/ custodians current account. T-bills auctions are held on the
Negotiated Dealing System (NDS) and the members electronically submit
their bids on the system. NDS is an electronic platform for facilitating
dealing in Government Securities and Money Market Instruments. RBI
issues these instruments to absorb liquidity from the market by contracting
the money supply. In banking terms, this is called Reverse Repurchase
(Reverse Repo). On the other hand, when RBI purchases back these
instruments at a specified date mentioned at the time of transaction,
liquidity is infused in the market. This is called Repo (Repurchase)
transaction.
Repurchase Agreements: Repurchase transactions, called Repo or
Reverse Repo are transactions or short term loans in which two parties
agree to sell and repurchase the same security. They are usually used for
overnight borrowing. Repo/Reverse Repo transactions can be done only
between the parties approved by RBI and in RBI approved securities viz.
GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate
Bonds etc. Under repurchase agreement the seller sells specified securities
with an agreement to repurchase the same at a mutually decided future
date and price. Similarly, the buyer purchases the securities with an
agreement to resell the same to the seller on an agreed date at a
predetermined price. Such a transaction is called a Repo when viewed
from the perspective of the seller of the securities and Reverse Repo when
viewed from the perspective of the buyer of the securities. Thus, whether a
given agreement is termed as a Repo or Reverse Repo depends on which
party initiated the transaction. The lender or buyer in a Repo is entitled to
receive compensation for use of funds provided to the counterparty.
Effectively the seller of the security borrows money for a period of time
(Repo period) at a particular rate of interest mutually agreed with the buyer
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of the security who has lent the funds to the seller. The rate of interest
agreed upon is called the Repo rate. The Repo rate is negotiated by the
counterparties independently of the coupon rate or rates of the underlying
securities and is influenced by overall money market conditions.
Commercial Papers: Commercial paper is a low-cost alternative to bank
loans. It is a short term unsecured promissory note issued by corporates
and financial institutions at a discounted value on face value. They are
usually issued with fixed maturity between one to 270 days and for
financing of accounts receivables, inventories and meeting short term
liabilities. Say, for example, a company has receivables of Rs 1 lacs with
credit period 6 months. It will not be able to liquidate its receivables before
6 months. The company is in need of funds. It can issue commercial
papers in form of unsecured promissory notes at discount of 10% on face
value of Rs 1 lacs to be matured after 6 months. The company has strong
credit rating and finds buyers easily. The company is able to liquidate its
receivables immediately and the buyer is able to earn interest of Rs 10K
over a period of 6 months. They yield higher returns as compared to T-Bills
as they are less secure in comparison to these bills; however chances of
default are almost negligible but are not zero risk instruments. Commercial
paper being an instrument not backed by any collateral, only firms with
highquality credit ratings will find buyers easily without offering any
substantial discounts. They are issued by corporates to impart flexibility in
raising working capital resources at market determined rates. Commercial
Papers are actively traded in the secondary market since they are issued in
the form of promissory notes and are freely transferable in demat form.
Certificate of Deposit: It is a short term borrowing more like a bank term
deposit account. It is a promissory note issued by a bank in form of a
certificate entitling the bearer to receive interest. The certificate bears the
maturity date, the fixed rate of interest and the value. It can be issued in
any denomination. They are stamped and transferred by endorsement. Its
term generally ranges from three months to five years and restricts the
holders to withdraw funds on demand. However, on payment of certain
penalty the money can be withdrawn on demand also. The returns on
certificate of deposits are higher than T-Bills because it assumes higher
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level of risk. While buying Certificate of Deposit, return method should be
seen. Returns can be based on Annual Percentage Yield (APY) or Annual
Percentage Rate (APR). In APY, interest earned is based on compounded
interest calculation. However, in APR method, simple interest calculation is
done to generate the return. Accordingly, if the interest is paid annually,
equal return is generated by both APY and APR methods. However, if
interest is paid more than once in a year, it is beneficial to opt APY over
APR.
Bankers Acceptance: It is a short term credit investment created by a non
financial firm and guaranteed by a bank to make payment. It is simply a bill
of exchange drawn by a person and accepted by a bank. It is a buyers
promise to pay to the seller a certain specified amount at certain date. The
same is guaranteed by the banker of the buyer in exchange for a claim on
the goods as collateral. The person drawing the bill must have a good
credit rating otherwise the Bankers Acceptance will not be tradable. The
most common term for these instruments
is 90 days. However, they can very from 30 days to180 days. For
corporations, it acts as a negotiable time draft for financing imports, exports
and other transactions in goods and is highly useful when the credit
worthiness of the foreign trade party is unknown. The seller need not hold it
until maturity and can sell off the same in secondary market at discount
from the face value to liquidate its receivables.







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Gold

Indians faith in GOD and GOLD dates back to the Vedic times; they
worshipped both. According to the World Gold Council Report, India stands
today as the worlds largest single market for gold consumption. In
developing countries, people have often trusted gold as a better investment
than bonds and stocks. Gold is an important and popular
investment for many reasons:

In many countries gold remains an integral part of social and religious
customs, besides being the basic form of saving. Shakespeare called it the
saint seducing gold.
Superstition about the healing powers of gold persists. Ayurvedic
medicine in India recommends gold powder and pills for many ailments.
Gold is indestructible. It does not tarnish and is also not corroded by acid
except by a mixture of nitric and hydrochloric acids.
Gold has aesthetic appeal. Its beauty recommends it for ornament making
above all other metals.
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Gold is so malleable that one ounce of the metal can be beaten into a
sheet covering nearly a hundred square feet.
Gold is so ductile that one ounce of it can be drawn into fifty miles of thin
gold wire.
Gold is an excellent conductor of electricity; a microscopic circuit of liquid
gold printed on a ceramic strip saves miles of wiring in a computer.
Gold is so highly valued that a single smuggler can carry gold worth Rs.50
lac underneath his shirt.
Gold is so dense that all the tones of gold, which has been estimated; to
be mined through history could be transported by one single modern super
tanker.
Finally, gold is scam-free. So far, there have been no Mundra type or
Mehta type scams in gold.
Apparently, gold is the only product, which has an investment as well as
ornamental value. Going beyond the narrow logic of yield and maturity
values, thus, the lure of this yellow metal continues.















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Mutual fund
A mutual fund allows a group of people to pool their money together and
have it professionally managed, in keeping with a predetermined
investment objective. This investment avenue is popular because of its
cost-efficiency, risk-diversification, professional management and sound
regulation. You can invest as little as Rs. 1,000 per month in a mutual fund.
There are various general and thematic mutual funds to choose from and
the risk and return possibilities vary accordingly.
Mutual funds are investment companies that use the funds from investors
to invest in other companies or investment alternatives. They have the
advantage of professional management, diversification, convenience and
special services such as cheque writing
and telephone account service. It is generally easy to sell mutual fund
shares/units although you run the risk of needing to sell and being forced to
take the price offered. Mutual funds come in various types, allowing you to
choose those funds with objectives, which
most closely match your own personal investment objectives. A load
mutual fund is one that has sales charge or commission attached. The fee
is a percentage of the initial investment. Generally, mutual funds sold
through brokers are load funds while funds sold directly to the public are
no-load or low-load. As an investor, you need to decide
whether you want to take the time to research prospective mutual funds
yourself or pay the commission and have a broker who will do that for you.
All funds have annual management fees attached.







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Types

Open - Ended Mutual Funds
An open-ended mutual fund is the one whose units can be freely sold and
repurchased by the investors. Such funds are not listed on bourses since
the Asset Management Companies (AMCs) provide the facility for buyback
of units from unit-holders either at the NAV, or NAV-linked prices. Instant
liquidity is the USP of open-ended funds: you can invest
in or redeem your units at will in a matter of 2-3 days. In the event of
volatile markets, open-ended funds are also suitable for investment
appreciation in the short-term. This is how they work: if you expect the
interest rates to fall, you park your money in an open-ended debt fund.
Then, when the prices of the underlying securities rise, leading to an
appreciation in your funds NAV, you make a killing by selling it off. On the
other hand, if you expect the Bombay Stock Exchange Sensitivity Index
the Sensex to gain in the short term, you can pick up the right open-
ended equity fund whose portfolio has scrips likely to gain from the rally,
and sell it off once its NAV goes up.

Close Ended Mutual Funds
Closed-ended mutual funds have a fixed number of units, and a fixed
tenure (3, 5, 10,or 15 years), after which their units are redeemed or they
are made open-ended. These funds have various objectives: generating
steady income by investing in debt instruments,
capital appreciation by investing in equities, or both by making an equal
allocation of the corpus in debt and equity instruments.

Interval Funds
Interval funds combine the features of open-ended and close-ended
schemes. They are open for sale or redemption during pre-determined
intervals at NAV related prices.



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Growth Funds
The aim of growth funds is to provide capital appreciation over the medium
to longterm. Such schemes normally invest a majority of their corpus in
equities. It has been proven that returns from stocks, have outperformed
most other kind of investments held over the long term. Growth schemes
are ideal for investors having a long-term
outlook seeking growth over a period of time.


Income Funds
The aim of income funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities such
as bonds, corporate debentures and Government securities. Income Funds
are ideal for capital stability and regular income.

Balanced Funds
The aim of balanced funds is to provide both growth and regular income.
Such schemes periodically distribute a part of their earning and invest both
in equities and fixed income securities in the proportion indicated in their
offer documents. In a rising stock market,
the NAV of these schemes may not normally keep pace, or fall equally
when the market falls. These are ideal for investors looking for a
combination of income and moderate growth.

Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer
short-term instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money. Returns on these schemes
may fluctuate depending upon the interest rates prevailing in the market.
These are ideal for Corporate and individual investors as a means to park
their surplus funds for short periods.



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Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries
like InfoTech, FMCG, Pharmaceuticals etc.


Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or
a group of industries or various segments such as 'A' Group shares or
initial public offerings.


















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Financial market summary

A financial instrument is any contract that gives rise to a financial asset
of one entity and a financial liability or equity instrument of another
entity. Investments in equity shares are a form of financial asset.
An equity instrument is any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities.
A derivative is a financial instrument or other contract with all three of
the following characteristics:
Its value changes in response to the change in an underlying.
It requires no initial net investment or an initial net investment that is
smaller than would be required for other types of contracts.
It is settled at a future date.
Financial instruments are categorized into the following four types: fair
value through profit and loss (FVPL), held-to-maturity (HTM), available-
for-sale (AFS), and loans and receivables (LAR).
Investments in equity shares, futures, and equity options are classified
only as either fair value through profit and loss or as available-for-sale
securities.
The fair value of a financial asset or liability is the amount for which the
financial asset could be exchanged, or the financial liability settled,
between knowledgeable, willing parties in an arms-length transaction.
When determining the fair value of a financial instrument, the accounting
standards set out a hierarchy to be applied to the valuation.
An entity should recognize a financial asset on its balance sheet when,
and only when, the entity becomes a party to the contractual provisions
of the instrument.
De-recognition of a financial asset or a portion of a financial asset
occurs under the current standards when, and only when, the entity
loses control of the contractual rights that comprise the financial asset.
Investments can be in any of three types: physical assets, intangible
assets, or financial assets. This book covers accounting concepts
involved in investments in financial assets comprising equity, equity
futures, and equity options.
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Speculation is the assumption of the risk of loss, in return for the
uncertain possibility of a reward. If a particular position involves no risk,
the position represents an investment.
Two major accounting standards are U.S. GAAP and IFRS.
The United States generally accepted accounting principles (U.S.
GAAP) literature is rule-based.
The International Financial Reporting Standards (IFRS) are principle-
based.
Because U.S. GAAP is rule-based and also because it has been around
for a longer period of time than IFRS, U.S. GAAP literature is more
voluminous than IFRS literature.
The International Accounting Standards Board (IASB) and the U.S.
Financial Accounting Standards Board (FASB) have been committed to
converging IFRS and U.S. GAAP since the Norwalk Accord of 2002.
According to the American Institute of Certified Public Accountants
(AICPA) , as of November 2008, nearly 100 countries require or allow
the use of IFRS for the preparation of financial statements by publicly
held companies.
In the United States, the Securities and Exchange Commission (SEC) is
considering taking steps to set a date to allow U.S. public companies to
use IFRS, and perhaps make its adoption mandatory.













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Sources of information

Books
Equity markets 1 and 2 by Anita bobade
Commodity market by S.P.Das
Debt markets by Sandeep Gupta and Sachin bandarkar
Introduction to financial markets part 1 class 11 of Central board of
secondary education (Delhi)

Websites

http://en.wikipedia.org/wiki/Capital_market
http://www.investopedia.com/walkthrough/corporate-
finance/1/financial-markets.aspx
http://economictimes.indiatimes.com/topic/financial-market
http://www.businessdictionary.com/definition/financial-instrument.html
http://www.wisegeek.org/what-is-a-financial-
instrument.htm#didyouknowout
http://www.rbi.org.in/scripts/bs_viewmmo.aspx
http://www.caalley.com/art/Money_Market_and_Money_Market_Instr
uments.pdf