FINANCE AND SECURITIES MARKET

Financial market
Introduction:
A financial market is a market in which
people trade financial securities and derivatives
at low transaction costs. Some of the securities
include stocks and bonds, raw materials
and precious metals, which are known in the
financial markets as commodities.
The term "market" is sometimes used for what
are more strictly exchanges, organizations that
facilitate the trade in financial securities, e.g.,
a stock exchange or commodity exchange. This
may be a physical location (such as the New
York Stock Exchange (NYSE), London Stock
Exchange (LSE), JSE Limited (JSE), Bombay Stock
Exchange (BSE) or an electronic system such
as NASDAQ. Much trading of stocks takes place
on an exchange; still, corporate actions (merger,
spinoff) are outside an exchange, while any two
companies or people, for whatever reason, may
agree to sell the stock from the one to the other
without using an exchange.
Trading of currencies and bonds is largely on a
bilateral basis, although some bonds trade on a
stock exchange, and people are building
electronic systems for these as well, to stock
exchanges. There are also global initiatives such
as the United Nations Sustainable Development
Goal 10 which has a target to improve
regulation and monitoring of global financial
markets.

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 finances. For long
term finance, they are usually called the capital
markets; for short term finance, they are usually
called money markets. The money market deals
in short-term loans, generally for a period of a
year or less. 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:
o Stock markets, which provide financing

through the issuance of shares

or common stock, and enable the
subsequent trading thereof.
o Bond markets, which provide financing

through the issuance of bonds, and

enable the subsequent trading thereof.
• Commodity markets, The commodity market
is a market that trades in the primary
economic sector rather than manufactured
products, Soft commodities is a term
generally referred as to commodities that are
grown, rather than mined such as crops
(corn, wheat, soybean, fruit and vegetable),
livestock, cocoa, coffee and sugar and Hard
commodities is a term generally referred as
to commodities that are mined such as gold,
gemstones and other metals and generally
drilled such as oil and gas.
 • 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.
• Foreign exchange markets, which facilitate
the trading of foreign exchange.
• Cryptocurrency market which facilitate the
trading of digital assets and financial
technologies.
• Spot market
• Interbank lending market
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 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 they want; an illiquid security may
force the seller to get rid of their asset at a
large discount.

Raising capital
Financial markets attract funds from investors
and channels them to corporations—they thus
allow corporations to finance their operations
and achieve growth. Money markets allow firms
to borrow funds on a short-term basis, while
capital markets allow corporations to gain long-
term funding to support expansion (known as
maturity transformation).
Without financial markets, borrowers would
have difficulty finding lenders themselves.
Intermediaries such as banks, Investment Banks,
and Boutique Investment Banks can help in this
process. Banks take deposits from those who
have money to save on the form of savings a/c.
They can then lend money from this pool of
deposited money to those who seek to borrow.
Banks popularly lend money in the form
of loans and mortgages.
More complex transactions than a simple bank
deposit require markets where lenders and their
agents can meet borrowers and their agents,
and where existing borrowing or lending
commitments can be sold on to other parties. A
good example of a financial market is a stock
exchange. A company can raise money by
selling shares to investors and its existing shares
can be bought or sold.

Lenders
The lender temporarily gives money to
somebody else, on the condition of getting
back the principal amount together with some
interest or profit or charge.
Individuals and doublesEdit
Many individuals are not aware that they are
lenders, but almost everybody does lend money
in many ways. A person lends money when he
or she:
• Puts money in a savings account at a
bank
• Contributes to a pension plan
• Pays premiums to an insurance
company
• Invests in government bonds

CompaniesEdit
Companies tend to be lenders of capital. When
companies have surplus cash that is not needed
for a short period of time, they may seek to
make money from their cash surplus by lending
it via short term markets called money markets.
Alternatively, such companies may decide to
return the cash surplus to their shareholders
(e.g. via a share
repurchase or dividend payment).
BanksEdit
Banks can be lenders themselves as they are
able to create new debt money in the form of
deposits.
BorrowersEdit
• Individuals borrow money via
bankers' loans for short term needs or
longer term mortgages to help finance
a house purchase.
• Companies borrow money to aid short
term or long term cash flows. They also
borrow to fund modernization or
future business expansion. It is
common for companies to use mixed
packages of different types of funding
for different purposes – especially
where large complex projects such as
company management buyouts are
concerned.[3]
• Governments often find their spending
requirements exceed their tax
revenues. To make up this difference,
 they need to borrow. Governments
also borrow on behalf of nationalized
industries, municipalities, local
authorities and other public sector
bodies. In the UK, the total borrowing
requirement is often referred to as
the Public sector net cash
requirement (PSNCR).

Governments borrow by issuing bonds. In the

UK, the government also borrows from
individuals by offering bank accounts
and Premium Bonds. Government debt seems
to be permanent. Indeed, the debt seemingly
expands rather than being paid off. One
strategy used by governments to reduce
the value of the debt is to influence inflation.
Municipalities and local authorities may borrow
in their own name as well as receiving funding
from national governments. In the UK, this
would cover an authority like Hampshire County
Council.
Public Corporations typically
include nationalized industries. These may
include the postal services, railway companies
and utility companies.
Many borrowers have difficulty raising money
locally. They need to borrow internationally with
the aid of Foreign exchange markets.
Borrowers having similar needs can form into a
group of borrowers. They can also take an
organizational form like Mutual Funds. They can
provide mortgage on weight basis. The main
advantage is that this lowers the cost of their
borrowings.

Derivative products
During the 1980s and 1990s, a major growth
sector in financial markets was the trade in so
called derivatives.
In the financial markets, stock prices, share
prices, bond prices, currency rates, interest rates
and dividends go up and down, creating risk.
Derivative products are financial products that
are used to control risk or
paradoxically exploit risk.[4] It is also called
financial economics.
Derivative products or instruments help the
issuers to gain an unusual profit from issuing
the instruments. For using the help of these
products a contract has to be made. Derivative
contracts are mainly 4 types:[5]
• Future
• Forward
• Option
• Swap

Seemingly, the most obvious buyers and sellers

of currency are importers and exporters of
goods. While this may have been true in the
distant past,[when?] when international trade
created the demand for currency markets,
importers and exporters now represent only
1/32 of foreign exchange dealing, according to
the Bank for International Settlements.[6]
The picture of foreign currency transactions
today shows:
1. Banks/Institutions
2. Speculators
3. Government spending (for
example, military bases
abroad)
4. Importers/Exporters
5. Tourists

Analysis of financial markets

Much effort has gone into the study of
financial markets and how prices vary with
time. Charles Dow, one of the founders
of Dow Jones & Company and The Wall
Street Journal, enunciated a set of ideas on
the subject which are now called Dow
theory. This is the basis of the so-
called technical analysis method of
attempting to predict future changes. One
of the tenets of "technical analysis" is
that market trends give an indication of the
future, at least in the short term. The claims
of the technical analysts are disputed by
many academics, who claim that the
evidence points rather to the random walk
hypothesis, which states that the next
change is not correlated to the last change.
The role of human psychology in price
variations also plays a significant factor.
Large amounts of volatility often indicate
the presence of strong emotional factors
playing into the price. Fear can cause
excessive drops in price and greed can
create bubbles. In recent years the rise of
algorithmic and high-frequency program
trading has seen the adoption of
momentum, ultra-short term moving
average and other similar strategies which
are based on technical as opposed to
fundamental or theoretical concepts of
market behaviour. For instance, according
to a study published by the European
Central Bank,[7] high frequency trading has
a substantial correlation with news
announcements and other relevant public
information that are able to create wide
price movements (e.g., interest rates
decisions, trade of balances etc.)
The scale of changes in price over some
unit of time is called the volatility. It was
discovered by Benoit Mandelbrot that
changes in prices do not follow a normal
distribution, but are rather modeled better
by Lévy stable distributions. The scale of
change, or volatility, depends on the length
of the time unit to a power a bit more than
1/2. Large changes up or down are more
likely than what one would calculate using a
normal distribution with an
estimated standard deviation.

Financial market slang

• Poison pill, when a company
issues more shares to prevent being
bought out by another company,
thereby increasing the number of
outstanding shares to be bought by
 the hostile company making the bid
to establish majority.
Bips, meaning "bps" or basis points. A
basis point is a financial unit of
measurement used to describe the
magnitude of percent change in a
variable. One basis point is the
equivalent of one hundredth of a
percent. For example, if a stock price
were to rise 100bit/s, it means it would
increase 1%.
• Quant, a quantitative analyst with
advanced training
in mathematics and statistical meth
ods.
• Rocket scientist, a financial
consultant at the zenith of
mathematical and computer
programming skill. They are able to
invent derivatives of high
 complexity and construct
sophisticated pricing models. They
generally handle the most advanced
computing techniques adopted by
the financial markets since the
early 1980s. Typically, they are
physicists and engineers by
training.
• IPO, stands for initial public
offering, which is the process a new
private company goes through to
"go public" or become a publicly
traded company on some index.
• White Knight, a friendly party in
a takeover bid. Used to describe a
party that buys the shares of one
organization to help prevent
against a hostile takeover of that
organization by another party.
• Round-tripping
• Smurfing, a deliberate structuring
of payments or transactions to
conceal it from regulators or other
parties, a type of money
laundering that is often illegal.
• Bid–ask spread, the difference
between the highest bid and the
lowest offer.
• Pip, smallest price move that a
given exchange rate makes based
on market convention.[8]
• Pegging, when a country wants to
obtain price stability, it can use
pegging to fix their exchange rate
relative to another currency.[9]
• Bearish, this phrase is used to refer
to the fact that the market has a
downward trend.
 Bullish, this term is used to refer to the
fact that the market has an upward
trend.

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 to the 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.

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.
 • Providing liquidity to commercial bank
• Facilitating credit creation
• Promoting savings
• Promoting investment
• Facilitating balanced economic growth
• Improving trading floors

Components of financial market

Based on market levels

• Primary market: A primary market is a
market for new issues or new financial
claims. Therefore, it is also called new issue
market. The primary market deals with those
securities which are issued to the public for
the first time.
• Secondary market: A market for secondary
sale of securities. In other words, securities
which have already passed through the new
 issue market are traded in this market.
Generally, such securities are quoted in the
stock exchange and it provides a continuous
and regular market for buying and selling of
securities.
Simply put, primary market is the market where
the newly started company issued shares to the
public for the first time through IPO (initial
public offering). Secondary market is the market
where the second hand securities are sold
(security Commodity Markets).

Based on security types

• Money market: Money market is a market
for dealing with the financial assets and
securities which have a maturity period of up
to one year. In other words, it's a market for
purely short-term funds.
• Capital market: A capital market is a market
for financial assets that have a long or
indefinite maturity. Generally, it deals with
long-term securities that have a maturity
 period of above one year. The capital market
may be further divided into (a) industrial
securities market (b) Govt. securities market
and (c) long-term loans market.
o Equity markets: A market where

ownership of securities are issued and

subscribed is known as equity market.
An example of a secondary equity
market for shares is the New York
(NYSE) stock exchange.
o Debt market: The market where funds

are borrowed and lent is known as debt

market. Arrangements are made in such
a way that the borrowers agree to pay
the lender the original amount of the
loan plus some specified amount of
interest.
• Derivative markets: A market where
financial instruments are derived and traded
based on an underlying asset such as
commodities or stocks.
• Financial service market: A market that
comprises participants such as commercial
banks that provide various financial services
like ATM. Credit cards. Credit rating, stock
 broking etc. is known as financial service
market. Individuals and firms use financial
services markets, to purchase services that
enhance the workings of debt and equity
markets.
• Depository markets: A depository market
consists of depository institutions (such as
banks) that accept deposits from individuals
and firms and uses these funds to participate
in the debt market, by giving loans or
purchasing other debt instruments such as
treasury bills.
• Non-depository market: Non-depository
market carry out various functions in
financial markets ranging from financial
intermediary to selling, insurance etc. The
various constituencies in non-depositary
markets are mutual funds, insurance
companies, pension funds, brokerage firms
etc.
• Relation between Bonds and Commodity
Prices: With the increase in commodity
prices, the cost of goods for companies
increases. This increase in commodity
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ices level causes a rise in inflation.
• Relation between Commodities and
Equities: Due to the production cost
remaining same, and revenues rising (due to
high commodity prices), the operating profit
(revenue minus cost) increases, which in turn
drives up equity prices.
Securities market

Introduction:
Security market is a component of the
wider financial market where securities can be
bought and sold between subjects of
the economy, on the basis of demand and
supply. Security markets encompasses stock
markets, bond markets and derivatives
markets where prices can be determined and
participants both professional and non
professional can meet.
Securities markets can be split into two levels:
primary markets, where new securities are
issued, and secondary markets where existing
securities can be bought and sold. Secondary
markets can further be split into organised
exchanges, such as stock exchanges and over-
the-counter, where individual parties come
together and buy or sell securities directly. For
securities holders knowing that a secondary
market exists in which their securities may be
sold and converted into cash increases the
willingness of people to hold stocks and bonds
and thus increases the ability of firms to issue
securities.
There are a number of professional participants
of a securities market and these
include; brokerages, broker-dealers, market
makers, investment managers, speculators as
well as those providing the infrastructure, such
as clearing houses and securities depositories.
A securities market is used in an economy to
attract new capital, transfer real assets in
financial assets, determine prices which will
balance demand and supply and provide a
means to invest money both short and long
term.
Conditions
A securities market is a system of
interconnection between all participants
(professional and nonprofessional) that
provides effective conditions:
• to attract new capital by means of
issuing new security (securitization of
debt)
• to transfer real asset into financial
asset
• to invest money for short or long term
periods with the aim of deriving
profitability
• commercial function (to derive profit
from operation on this market)
• price determination (demand and
supply balancing, the continuous
process of prices movements
guarantees to state correct price for
each security so the market corrects
mispriced securities)
 • informative function (market provides
all participants with market
information about participants and
traded instruments)
• regulation function (securities market
creates the rules of trade, contention
regulation, priorities determination)
• Transfer of ownership (securities
markets transfer existing stocks and
bonds from owners who no longer
desire to maintain their investments to
buyers who wish to increase those
specific investments
Insurance (hedging) of operations
though securities market (options,
futures, etc.)

Levels of securities market

Primary market
The primary market is that part of the capital
markets that deals with the issue of new
securities. Companies, governments or public
sector institutions can obtain funding 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 a public offering.
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."

Secondary market
The secondary market, also known as the
aftermarket, is the financial market where
previously issued securities and financial
instruments such as stock, bonds, options, and
futures are bought and sold. The term
"secondary market" is also used to refer to the
market for any used goods or assets, or an
alternative use for an existing product or asset
where the customer base is the second market
(for example, corn has been traditionally used
primarily for food production and feedstock,
but a "second" or "third" market has developed
for use in ethanol production). Stock exchange
and over the counter markets.
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, Nasdaq and the American Stock
Exchange 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 one’s
broker-dealer. Loans sometimes trade online
using a Loan Exchange.
There exists a private secondary market for
shares who have not yet went through the IPO
process. This market is also known as
'secondaries' because it is a secondary market,
although shares are traded privately, typically
through registered broker-dealers or between
counterparties directly
Over-the-counter market
Over-the-counter (OTC) or off-exchange
trading is to trade financial instruments such as
stocks, bonds, commodities or derivatives
directly between two parties. It is contrasted
with exchange trading, which occurs via
facilities constructed for the purpose of trading
(i.e., exchanges), such as futures exchanges or
stock exchanges. In the U.S., over-the-counter
trading in stock is carried out by market makers
that make markets in OTCBB and Pink Sheets
securities using inter-dealer quotation services
such as Pink Quote (operated by Pink OTC
Markets) and the OTC Bulletin Board (OTCBB).
OTC stocks are not usually listed nor traded on
any stock exchanges, though exchange listed
stocks can be traded OTC on the third market.
Although stocks quoted on the OTCBB must
comply with United States Securities and
Exchange Commission (SEC) reporting
requirements, other OTC stocks, such as those
stocks categorized as Pink Sheet securities, have
no reporting requirements, while those stocks
categorized as OTCQX have met alternative
disclosure guidelines through Pink OTC
Markets. An over-the-counter contract is a
bilateral contract in which two parties agree on
how a particular trade or agreement is to be
settled in the future. It is usually from an
investment bank to its clients directly. Forwards
and swaps are prime examples of such
contracts. It is mostly done via the computer or
the telephone. For derivatives, these
agreements are usually governed by
an International Swaps and Derivatives
Association agreement.
This segment of the OTC market is occasionally
referred to as the "Fourth Market."
The NYMEX has created a clearing mechanism
for a slate of commonly traded OTC energy
derivatives which allows counterparties of many
bilateral OTC transactions to mutually agree to
transfer the trade to ClearPort, the exchange's
clearing house, thus eliminating credit and
performance risk of the initial OTC transaction
counterparts..
Main financial instruments
Bond, Promissory note, Cheque – a security
contains requirement to make full payment to
the bearer of cheque, Certificate of deposit, Bill
of Lading (a Bill of Lading is a “document
evidencing the receipt of goods for shipment
issued by a person engaged in the business of
transporting or forwarding goods." ), Stock.

Promissory note