Definition of 'Financial Market'

Broad term describing any marketplace where buyers and sellers participate in the trade of assets such
as equities, bonds, currencies and derivatives. Financial markets are typically defined by having
transparent pricing, basic regulations on trading, costs and fees and market forces determining the
prices of securities that trade .Some financial markets only allow participants that meet certain criteria,
which can be based on factors like the amount of money held, the investor's geographical location,
knowledge of the markets or the profession of the participant.
Most financial markets have periods of heavy trading and demand for securities; in these periods, prices
may rise above historical norms. The converse is also true downturns may cause prices to fall past
levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates,
national production or employment levels.
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 MARKET
Capital market is regulated by the Securities Exchange Board of India (SEBI). Capital market comprises of
two sections :

1.EQUITY
There is no tax implication while making an investment in shares. There are tax benefits to investing in
some pre-approved companies as mentioned in the third point below. The tax implication arises only at
the time of sale of shares as under:

If certain eligible equity shares are purchased on or after March 1, 2003 but before March 1, 2004
and are transferred after 12 months, then the gain on the sale of such shares will be entitled for
exemption under Section 10(36) of the Income Tax Act, 1961 by eligible equity shares. This applies to
any equity shares, which form part of the BSE 500 index of the Mumbai Stock Exchange, the transaction
of purchase and sale of which have been entered into through a recognised stock exchange in India and
any equity shares, allotted through a public issue on or after March 1, 2003 and listed in a recognised
stock exchange in India before March 1, 2004 and the transaction of such shares, if entered into through
a recognised stock exchange in India.

After October 1, 2004, any equity share, which has been sold through a recognised stock exchange
and on which STT (Securities Transaction Tax) has been paid would be entitled to exemption from Long
Term Capital Gains under Section 10 (38) of the Act. Similarly, in case of Short Term Capital Gain of such
shares, the gains shall be taxed only at 10%, plus surcharge and education cess.


Under Section 80C, any subscription to equity shares or debentures forming part of any eligible
issue of capital, approved by the Court or an application made by a public company or subscription to
such eligible issue by a public finance institution in a prescribed form, would be eligible to deduction
subject to the condition of this Section. Also, subscription to any unit of a mutual fund, approved by the
board in respect of any mutual fund, referred to in Clause (23D) of Section 10, would also be entitled.

a. Primary Market
Initial Public Issue: An initial public offering (IPO) or stock market launch is a type of public offering
where shares of stock in a company are sold to the general public, on a securities exchange, for the first
time. Through this process, a private company transforms into a public company. Initial public offerings
are used by companies to raise expansion capital, to possibly monetize the investments of early private
investors, and to become publicly traded enterprises. A company selling shares is never required to
repay the capital to its public investors. After the IPO, when shares trade freely in the open market,
money passes between public investors. Although an IPO offers many advantages, there are also
significant disadvantages. Chief among these are the costs associated with the process, and the
requirement to disclose certain information that could prove helpful to competitors, or create
difficulties with vendors
Private Placement: The sale of securities to a relatively small number of select investors as a way of
raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance
companies and pension funds. Private placement is the opposite of a public issue, in which securities are
made available for sale on the open market. Once a private placement is offered to a few, select
individuals, the placement does not have to be registered with the Securities and Exchange Commission.
In many cases, detailed financial information is not disclosed and the need for a prospectus is waived.
Finally, since the placements are private rather than public, the average investor is only made aware of
the placement after it has occurred.

b.Secondary market
The secondary market is what people are talking about when they refer to the "stock market". This
includes the New York Stock Exchange (NYSE), NASDAQ and all major exchanges around the world. The
defining characteristic of the secondary market is that investors trade among themselves. That is, in the
secondary market, investors trade in previously issued securities without the issuing companies'
involvement. In India secondary markets include the National Stock Exchange of India (NSE) , Bombay
Stock Exchange of India (BSE), and many other regional stock exchanges.

c.Derivatives
Security whose price is dependent upon or derived from one or more underlying assets. The derivative
itself is merely a contract between two or more parties. Its value is determined by fluctuations in the
underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies,
interest rates and market indexes. Most derivatives are characterized by high leverage. Futures
contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives

are contracts and can be used as an underlying asset. There are even derivatives based on weather data.
Some of the common variants of derivative contracts are as follows:
Forwards: A tailored contract between two parties, where payment takes place at a specific time in the
future at today's pre-determined price.
Futures: are contracts to buy or sell an asset on or before a future date at a price specified today. A
futures contract differs from a forward contract in that the futures contract is a standardized contract
written by a clearing house that operates an exchange where the contract can be bought and sold; the
forward contract is a non-standardized contract written by the parties themselves.
Options: are contracts that give the owner the right, but not the obligation, to buy (in the case of a call
option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as
the strike price, and is specified at the time the parties enter into the option. The option contract also
specifies a maturity date. In the case of a European option, the owner has the right to require the sale to
take place on (but not before) the maturity date; in the case of an American option, the owner can
require the sale to take place at any time up to the maturity date. If the owner of the contract exercises
this right, the counter-party has the obligation to carry out the transaction. Options are of two types:
call option and put option. The buyer of a Call option has a right to buy a certain quantity of the
underlying asset, at a specified price on or before a given date in the future, he however has no
obligation whatsoever to carry out this right. Similarly, the buyer of a Put option has the right to sell a
certain quantity of an underlying asset, at a specified price on or before a given date in the future, he
however has no obligation whatsoever to carry out this right.
Swaps are contracts to exchange cash (flows) on or before a specified future date based on the
underlying value of currencies exchange rates, bonds/interest rates, commodities exchange, stocks or
other assets. Another term which is commonly associated to Swap is Swaption which is basically an
option on the forward Swap. Similar to a Call and Put option, a Swaption is of two kinds: a receiver
Swaption and a payer Swaption. While on one hand, in case of a receiver Swaption there is an option
wherein you can receive fixed and pay floating, a payer swaption on the other hand is an option to pay
fixed and receive floating.
Salaried individuals if involved in F&O trading should be all the more cautious while filing the return and
for the same selecting the Income Tax Return Form. Any earnings realized on account of F&O trading
can be classified as either income from business or capital gains income based on some of the facts.
For the purpose of determining whether the accruing income from F&O trading is business income or
capital gains incomes, a couple a factors come to play. Some of such factors are trading in commodity
derivative being linked to the main business; holding period and frequency of transaction; motive per se
such a transaction; and volume of the transaction. For instance : For an individual for whom trading in
shares encompasses his main work area, F&O income shall also be regarded as income from business.
The Finance Act 2005 further with regard to derivatives trading clarified that trading of derivative with
underlying being either shares, commodities or some other allowed financial instrument on recognized

stock exchange shall not be deemed as speculative transaction. So, with the clarification put in place,
losses on account of such a trading activity or transaction can now be set-off against any income.
If the income from F&O is determined to be business income then following tax considerations come
into play:
1. Administrative expenses together with Securities transaction tax (STT) are deducted from the income.
2. In case of turnover of over Rs. 1 crore, tax audit compliance is required to be done.
3. Losses incurred due to derivatives trading is not allowed to be set-off against one's own
salary.However, the same can be offset against business income, income from house property and
income from other sources.
4. Also, unabsorbed losses can be set-off against business income with carry forward allowed for as
many as eight years.

In case the income accruing from derivatives trading is adjudged to be capital gains income, following
tax implications apply:
1. STT on such income is not deducted however expenses associated with the purchase and sale
including brokerage are deductible.
2. Also, deemed to be short term gains, tax on such income is charged as per applicable slab rate.

3. Short term capital losses allowed to be carried forward for 8 years can be set-off against any capital
gains income.
So, in case if the income on account of derivatives trading is determined to be business income the
income tax filing date turns out to be September 30 while in the other case the income tax return has to
be filed by the individual by July 31.

2.DEBT
Tax deductions is a huge attraction for debt financing. In most cases, the principal and interest
payments on a business loan are classified as business expenses, and thus can be deducted from your
business income taxes.
a. CORPORATE BONDS
A debt security issued by a corporation and sold to investors. The backing for the bond is usually the
payment ability of the company, which is typically money to be earned from future operations. In some
cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are

considered higher risk than government bonds. As a result, interest rates are almost always higher, even
for top-flight credit quality companies.
b.PSU SECTOR BONDS
These bonds are medium and long term obligations issued by public sector companies where the
Government shareholding is 51% and more. Most of PSU bonds are in form of promissory notes
transferable by endorsement and delivery. No stamp duty or transfer deed is required at the time of
transfer of bonds transferable by endorsement.
3.GOVERNMENT SECURITIES
A bond (or debt obligation) issued by a government authority, with a promise of repayment upon
maturity that is backed by said government. A government security may be issued by the government
itself or by one of the government agencies. These securities are considered low-risk, since they are
backed by the taxing power of the government.

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). The money market is used by a wide array of
participants, from a company raising money by selling commercial paper into the market to an investor
purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a
safe place to put money due the highly liquid nature of the securities and short maturities, but there are
risks in the market that any investor needs to be aware of including the risk of default on securities such
as commercial paper.
When an individual investor builds a portfolio of financial instruments and securities, he or she typically
allocates a certain percentage of funds towards the safest and most liquid vehicle available: cash. This
cash component may sit in his or her investment account in purely liquid funds, just as it would if
deposited into a bank savings or checking account. However, investors are much better off placing the
cash component of their portfolios into the money market, which offers interest income while still
retaining the safety and liquidity of cash. Many money market instruments are available to investors,
most simply through well-diversified money market mutual funds. Should investors be willing to go it
alone, there are other money market investment opportunities, most notably in purchasing T-bills
through Treasury Direct.
Some money market funds are tax-free because they invest in tax-free municipal securities, but most
funds pay monthly dividends that are taxable. Dividend income is the only tax liability.

COMMODITIES MARKET

Indian markets have recently thrown open a new avenue for retail investors and traders to participate:
commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real
estate, commodities is the best option. However, with the setting up of three multi-commodity
exchanges in the country, retail investors can now trade in commodity futures without having physical
stocks. Historically, pricing in commodities futures has been less volatile compared with equity and
bonds, thus providing an efficient portfolio diversification option
The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers
don't need to register themselves with the regulator. The FMC deals with exchange administration and
will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges
themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating
than stock exchanges. But this could change if retail participation in commodities grows substantially.
If the trade is squared off , no sales tax is applicable. The sales tax is applicable only in case of trade
resulting into delivery. Normally it is the seller's responsibility to collect and pay sales tax.The sales tax is
applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales
tax registration number. Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds.
The exchanges have a penalty clause in case of any default by any member. There is also a separate
arbitration panel of exchanges.
The trading in commodity can happen either with or without delivery. In normal circumstance when
delivery takes place , the income shall be taken as business income and treated accordingly.If the
contract is settled without delivery , such trading comes within the meaning of speculation business.
As the MCX is not a recognized stock exchange , profit/loss in commodity trading will be treated as
speculative profit/loss. Under sec 73 of the IT Act , speculative loss can be set off only against
speculative gain. The balance can be carried over till four assessment years.

FOREIGN EXCHANGE MARKETS

The market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign
exchange markets are made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors. The forex market is considered
to be the largest financial market in the world.