Financial Markets

meaning

Meaning

• Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others.
• It plays a crucial role in allocating limited resources, in the country’s economy. It acts as an intermediary between the savers and investors by mobilising funds between them.
• A financial market is a market for the creation and exchange of financial assets.

functions

Financial markets play an important role in the allocation of scare resources in an economy by performing the following four important functions:

• Mobilization of savings and channelising them into the most productive uses

• Facilitate Price Discovery

• Provide liquidity to financial assets

• Reduce the cost of transactions

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FINANCIAL INTER MEDIATION

meaning

• A business is a part of an economic system that consists of two main sectors- households which save funds and business firms which invests these funds.
• A financial market helps to link the savers and the investors by mobilising funds between them. In doing so it performs the "Allocation Function".
• It allocates or directs funds available for investments into their most productive investment opportunity.
• The process by which allocation of funds is done is called Financial Inter-mediation

Financial Intermediaries

• Financial intermediary is the organization which acts as a link between the investor and the borrower, to meet the financial objectives of both the parties. These can be seen as business entities which accept deposits from the depositors or investors (lenders) by allowing them low interest on their sum. Further, these organizations, lend this amount to the individuals and firms (borrowers) at a comparatively high rate of interest to make their margin.

• The two of the significant roles played by the financial intermediary in the economy are the creation of funds and governing the payments system.

EXAMPLE

Mrs A. is a housewife and deposits her savings into her account with the XYZ bank every month.

On the other hand, Mr B is a young entrepreneur who is seeking a loan to start his venture. Now, Mr B has two options for availing the loan:

The first is that he can find and convince the individuals who are looking for investment opportunities, or;

he can approach the XYZ bank for a loan

We can see that the first option is uncertain, and it will take a lot of time to find the investors. However, the second option is more convenient and quick.

Thus, we can say that with the financial intermediary facilitate the lending and borrowing of funds on a large scale.

There are several financial intermediaries formed to serve the different aims and objectives of the customers or members or lenders and borrowers. These entities are explained in detail below:

• Banks: Households can deposit their surplus with banks, who in turn could lend these funds to business firms

• Financial Markets: Households can but the shares and debentures offered by a business using financial markets

Types of Financial Intermediaries

MEANING OF STOCK MARKET

STOCK MARKET

• The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place.
• While both terms - stock market and stock exchange - are used interchangeably, the latter term is generally a subset of the former. If one says that she trades in the stock market, it means that she buys and sells shares/equities on one (or more) of the stock exchange(s) that are part of the overall stock market.
• First, what is an exchange?
• Put simply, an exchange is a locale where things are traded—where producers and consumers, or buyers and sellers, meet, and things are bought and sold. For financial products, these things that are traded include stocks, bonds, commodities, currencies, derivatives, and so on.

STOCK EXCHANGES IN INDIA

STOCK

EXCHANGE

IN INDIA

• A stock exchange is a place where securities, shares, bonds and other financial instruments are listed and bought and sold by traders or brokers. To be able to trade on a stock exchange, securities must be listed on it. Stock exchanges help companies to raise funds. Therefore the company needs to list themselves in the stock exchange.
• Indian stock exchange is one of the oldest markets in Asia and is a yardstick to measure the health and progress of the economy of the country. Over the course of the period, the market has transitioned into the electronic market and securities are dealt in dematerialization form.
• There are two major stock exchanges in India- National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE), National Stock Exchange was established in Mumbai in 1992 and started trading in 1994. Bombay Stock Exchange was established in 1875 in Mumbai.
• Other stock exchanges are as follows-Calcutta Stock Exchange in Kolkata, India International Exchange, Metropolitan Stock Exchange

FUNCTIONS OF STOCK EXCAHNGE

FUNCTIONS OF

STOCK EXCAHNGE

• Economic Barometer: A stock exchange is a solid barometer to gauge the economic circumstance of a country. A stock exchange is also known as a pulse of the economy or economic mirror which reflects the economic conditions of a country.
• Pricing of Securities: The stock market helps to assess the securities on the basis of demand and supply factors.
• Contributes to Economic Growth: In stock exchange securities of various organisations are traded. This method of disinvestment and reinvestment helps to invest in the most productive investment proposal and this leads to capital structure and economic growth.
• Liquidity: The principal purpose of the stock market is to present a ready market for sale and purchase of securities. The presence of the stock exchange market gives certainty to investors that their investment can be transformed into cash whenever they want.
• Better Allocation of Capital: The shares of profit-making organisations are valued at higher prices and are actively traded so such organisations can efficiently raise capital from the stock market.
• Promotes the Habits of Savings and Investment: The stock market gives attractive chances for investment in different securities. These attractive opportunities inspire people to save more and invest in securities of the corporate sector rather than investing in unfruitful assets such as gold, silver, etc.,

Regulation of Stock Exchange in India

REGULATION

• Entire stock exchange of India is regulated by the Securities and Exchange Board of India (SEBI) which was established in 1992 as an independent authority.
• Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations.

• SEBI was founded on April 12, 1992, under the SEBI Act, 1992. Headquartered in Mumbai, India, SEBI has regional offices in New Delhi, Chennai, Kolkata and Ahmedabad along with other local regional offices across prominent cities in India.

• The objective of SEBI is to ensure that the Indian capital market works in a systematic manner and provide investors with a transparent environment for their investment. To put it simply, the primary reason for setting up SEBI was to prevent malpractices in the capital market of India and promote the development of the capital markets.

STOCKS

STOCKS

• Stocks are certificates of ownership. A person who buys stock in a company becomes one of the company's owners. As an owner, the stockholder is eligible to receive a dividend, or share of the company's profits. The amount of this dividend may change from year to year depending on the company's performance. Well-established companies try to pay stockholders as high a dividend as possible.
• Stocks are simply shares of individual companies. Here’s how it works: Say a company has made it through its start-up phase and has become successful. The owners wish to expand, but they're unable to do so solely through the income they earn through their operations. As a result, they can turn to the financial markets for additional financing.
• One way to do this is to split the company up into shares, and then sell a portion of these shares on the open market in a process known as an initial public offering, or IPO.2 A person who buys a stock is, therefore, buying an actual share of the company, which makes them a partial owner—however small. It's why stock is also referred to as equity.​

BONDS

BONDS

• Bonds are certificates that promise to pay a fixed rate of interest. A person who buys a bond is not buying ownership in a company but is lending the company money.
• The bond is the company's promise to repay that money at the end of a certain time, such as ten, fifteen, or twenty years. In return for lending the company money, the bondholder is paid interest at regular intervals
• Bonds represent debt. A government, corporation, or other entity that needs to raise cash will borrow money in the public market and subsequently pay interest on that loan to investors.
• Each bond has a certain par value (say, Rs.1,000) and pays a coupon to investors. For instance, a Rs.1000 bond with a 4% coupon would pay Rs.20 to the investor twice a year (Rs.40 annually) until it matures. Upon maturity, the investor is returned the full amount of their original principal, except for the rare occasion when a bond defaults (i.e., the issuer is unable to make the payment)
• Bonds generally pay more money than preferred stocks do, and they are usually considered a safer investment. If a company goes bankrupt, bondholders are paid before both preferred and common stockholders.

Investors are always told to diversify their portfolios between stocks and bonds, but what’s the difference between the two types of investments? Here, we look at the difference between stocks and bonds on the most fundamental level.

Stocks and bonds represent two different ways for an entity to raise money to fund or expand their operations. When a company issues stock, it is selling a piece of itself in exchange for cash. When an entity issues a bond, it is issuing debt with the agreement to pay interest for the use of the money

DIFFERENCE BETWEEN

STOCKS AND BONDS

WHAT ARE RETURNS?

RETURNS

• A return, also known as a financial return, in its simplest terms, is the money made or lost on an investment over some period of time.
• A return can be expressed nominally as the change in dollar value of an investment over time. A return can also be expressed as a percentage derived from the ratio of profit to investment. Returns can also be presented as net results (after fees, taxes, and inflation) or gross returns that do not account for anything but the price change.

DIVIDENDS

DIVIDENDS

• Dividends are payments made by a company to owners of the company’s stock. They are a way for companies to distribute revenue back to investors, and one of the ways investors earn a return from investing in stock.
• A company’s dividend is decided by its board of directors and it requires the shareholders’ approval. However, it is not obligatory for a company to pay dividend. Dividend is usually a part of the profit that the company shares with its shareholders.

BOND INTEREST

INTERESTS

• Bonds represent debt. A government, corporation, or other entity that needs to raise cash will borrow money in the public market and subsequently pay interest on that loan to investors.
• Each bond has a certain par value (say, Rs.1,000) and pays a coupon to investors. For instance, a Rs.1000 bond with a 4% coupon would pay Rs.20 to the investor twice a year (Rs.40 annually) until it matures. Upon maturity, the investor is returned the full amount of their original principal, except for the rare occasion when a bond defaults (i.e., the issuer is unable to make the payment)
• The return from bonds is typically fixed and known

STOCK INDICES

• Stock Market Indices give an insight into the overall trends of the capital markets and sentiment of the investors towards a particular stock or set of stocks in an industry.
• A stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current price levels with past prices to calculate market performance. It is computed from the prices of selected stocks.
• It is basically a statistical measure which shows changes taking place in the stock market. To create an index, a few similar kinds of stocks are chosen from amongst the securities already listed on the exchange and grouped together.
• The criteria of stock selection could be the type of industry, market capitalisation or the size of the company. The value of the stock market index is computed using values of the underlying stocks. Any change taking place in the underlying stock prices impact the overall value of the index. If the prices of most of the underlying securities rise, then the index will rise and vice-versa.
• In this way, a stock index reflects overall market sentiment and direction of price movements of products in the financial, commodities or any other markets.

• Some of the notable indices in India are as follows:

Benchmark indices like NSE Nifty and BSE Sensex

Broad-based indices like Nifty 50 and BSE 100

Indices based on market capitalization like the BSE Smallcap and BSE Midcap

Sectoral indices like Nifty FMCG Index and CNX IT

NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange (NSE) is the leading stock exchange of India, located in Mumbai, Maharashtra, India. It was started to end the monopoly of the Bombay stock exchange in the Indian market.

• NSE was established in 1992 as the first demutualized electronic exchange in the country.
• It was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered the easy trading facility to the investors spread across the length and breadth of the country.
• NSE has a total market capitalization of more than US$ 2.27 trillion, making it the world’s 11th-largest stock exchange as of April 2018.
• NSE’s index, the NIFTY 50, is used extensively by investors in India and around the world as a barometer of the Indian capital markets.

BOMBAY STOCK EXCHANGE (BSE)

Founded in 1875, Bombay Stock Exchange Ltd. (BSE), is the fastest stock exchange in the world which has the speed of 6 microseconds. It provides an efficient, integrated, transparent and secure market for trading in equity, currencies, debt instruments, derivatives, mutual funds. It provides an array of services like clearing, settlement, risk management, education and market data services. It has a global reach with overseas customers and a nation-wide presence. It provides depository services through its Central Depository Services Ltd. (CDSL) arm. The S&P BSE SENSEX is India’s most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRICS nations (Brazil, Russia, China and South Africa).

Dalal Street, in Mumbai, India is the address of the Bombay Stock Exchange, the biggest stock exchange in India and several related financial firms and institutions. When Bombay Stock Exchange was moved to this new location at the intersection of Bombay Samāchār Marg and Hammam Street, the street next to the building was renamed Dalal Street.

In Hindi Dalal means “a broker”. The term “Dalal Street” is used in the same way as “Wall Street” in the U.S., referring to the country’s major stock exchanges and overall financial system.

What is an Index?

Since there are thousands of company listed on a stock exchange, hence it’s really hard to track every single stock to evaluate the market performance at a time. Therefore, a smaller sample is taken which is the representative of the whole market. This small sample is called Index and it helps in the measurement of the value of a section of the stock market. The index is computed from the prices of selected stocks.

https://www.youtube.com/watch?v=C8wOa-0VCdw&feature=youtu.be

Sensex

• Sensex, also called BSE 30, is the market index consisting of 30 well-established and financially sound companies listed on Bombay Stock Exchange (BSE).
• The 30 companies are selected on the basis of the free-float market capitalization.
• These are different companies from the different sectors representing a sample of large, liquid and representative companies.
• The base year of Sensex is 1978-79 and the base value is 100.
• It is an indicator of market movement.
• If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE has gone down. If Sensex goes up, it means that most of the major stocks in BSE went up during the given period.
• For example, suppose the Sensex is 41,700 today. If Sensex drops to 41,450 tomorrow, it means that the majority of the 30 companies’ financial condition is not good i.e. their share price is falling.

NIFTY or Nifty 50

Nifty, also called NIFTY 50, is the market index consisting of 50 well-established and financially sound companies listed on National Stock Exchange of India (NSE).

The base year is taken as 1995 and the base value is set to 1000.

Nifty is calculated using 50 large stocks that are actively traded on the NSE.

The 50 companies are selected on the basis of the free-float market capitalization.

Here, the 50 top stocks are selected from different 24 sectors.

Nifty is owned and managed by India Index Services and Products (IISL)

Since inception in 1995, Nifty has given a return of 11.13% CAGR (till April 30, 2018).

Nifty and Sensex Movements Meaning

The Sensex and Nifty are both indicators of market movement. If the Sensex or Nifty go up, it means that most of the stocks in India went up during the given period. With respect to NIFTY and NSE, we can say that:

If Nifty goes up, this means that the stock price of most of the major stocks on NSE has gone up.

On the other hand, if nifty goes down, this tells you that the stock price of most of the major stocks on NSE has gone down.

The same is true in the case of Sensex. Moreover, when Sensex/Nifty goes high, it shows the economic growth of the country. Else if it keeps declining, it might mean a slow-down or depression.

For example, during the Indian recession of 2008-09, the Sensex fell over 12000 points (-60%). The fall in the Sensex was analogous to the recession. Meaning, people were selling their shares and an economic crisis in the country.

Importance of Market Index

• The market indexes are the barometer for market behavior. It gives a general idea about whether most of the stocks have gone up or gone down.
• Often, Market Index is used as a benchmark portfolio performance.
• It is used as a reflector of investor’s sentiments.
• Market indexes are used for sorting and comparison of the various companies.
• Indices act as an underlying for Index Funds, Index Futures, and Options.
• They are used in passive fund management by Index funds.
• The index can give a comparison of returns on investments in stock markets as opposed to asset classes such as gold or debt.