shivam gupta

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A SEMINAR REPORT

ON

FINANCIAL MARKET

IN PARTIAL FULLFILLMENT FOR

SEMINAR ON CONTEMPORARY MANAGEMENT ISSUES

(PAPER NO.)

IN

B.B.A. PROGRAMME

OF

RAJASTHAN Of UNIVERSITY, Jaipur

SUBMITTED TO: SUBMITTED BY:

Shivam gupta

B.B.A. IV sem.


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1. ABSTRACT

Title: Financial Market & its Instrument

Problem or issue: Identification and definition

Problem Identification: In the present environment where the scope for the investmentis very wide and various fields are available for the investment to an individual so Findout the various instrument & tools available in thefinancial market.

Definitions:

Financial Market:A financial market is a mechanism that allows people to easily buy andsell (trade) financial securities (such as stocks and bonds),commodities (such as preciousmetals or agricultural goods), and other fungible items of value at low transaction costs andat prices that reflect the efficient-market hypothesis.

in finance, financial markets facilitate

The raising of capital (in the capital markets)

The transfer of risk (in the derivatives markets)

International trade (in the currency markets)

Types of Market:

Capital markets

Commodity markets

Money markets

Derivatives markets

Insurance markets


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Instruments: In terms of finance, the financial instruments are those through which wecan invest the money in the market to increase the wealth.

Types of Instruments: There are various instruments available of financial market but itsdepend on nature of the market. Following are the some example of the instruments.

Shares Bonds Debenture T-Bill Fixed deposit Foreign exchange

Interbank participation certificate Commercial paper Certificate Deposit, etc.

Impact/ Relevance of issue: Financial Market & its Instrument this topic is relevant tothe present environment because in this global recession period many investors has lostthere money, so improve the market analysis skill to earn the money in this flop market it iscompulsory to have the knowledge of the available various instrument.

Objective/ aim of study:

To improve the market analysis skill.

To get the knowledge of various type of markets(Financial) & thats instrument.


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2. RESEARCH METHODOLOGY

2.1 Title of the study

Financial Market & its Tools (instruments)

2.2 Duration of the project

Total time: 29days

Time allocation

Preparation & finalization of blue print and abstract : 6 days

Collection of secondary data : 10days

Finalization & compilation of secondary data : 6 days

Preliminary preparation of Final Report : 5 days

Finalization of the Report : 2 days

2.3 Objectives of the study

The project study on a particular contemporary issue is the compulsory paper for MBA IIndsemester student instructed by Rajasthan Technical University, Kota (RTU). The mainobjectives of this project study to make prepare the future managers for the project study,group dynamic and the preparation of the report after a long study. This project study willalso increase the knowledge of the students of his own specialization subject. (i.e.marketing, finance, HR).


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2.4 Type of Research

Descriptive research

Descriptive research:Descriptive research includes surveys and fact findings enquiriesof different kinds. The major purpose of the descriptive research is description of the stateof affairs as it exists at present. In social science and business research we quite often usethe term ex post facto research for descriptive research studies. The main characteristics ofthis method are that the researcher has no control over the variables; he can only reportwhat has happened or what is happening.

2.5 Scope of Study

The scope of this project study is very broad it covers all the type of financial instrumentsunder various markets of financial market. It covered the following sector.

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets)

It also covered the

Money market

Stock market

Currency market

Derivative market.

Capital market

Foreign


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2.6 limitations of Study

The following are the some limitations or problems which arised at the time of the

research study.

1. Secondary data:this project study was totally based on the secondary datacollected by the various sources like books, websites, magazines etc. but by thehelp of data we can analyze the topic only theoretically, not practically .

2. By this method we can only get the searched information but we cant get thecustomer feedback or latest trend.

3. We learnt only the basic of financial market but we didnt learn the new trends,tools, and the investors behavior about the financial market after the great crashin the financial market.


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3. CORE STUDY

3.1 FINANCIAL MARKET: AN INTRODUCTION

3.1.1 Introduction

In economics, a financial market is a mechanism that allows people toeasily buy and sell (trade) financial securities (such as stocks and bonds), commodities(such as precious metals or agricultural goods), and other fungible items of value at lowtransaction costs and at prices that reflect the efficient-market hypothesis.

Financial markets have evolved significantly over several hundred years and areundergoing constant innovation to improve liquidity.

Both general markets (where many commodities are traded) and specialized markets(where only one commodity is traded) exist. Markets work by placing many interestedbuyers and sellers in one "place", thus making it easier for them to find each other. Aneconomy which relies primarily on interactions between buyers and sellers to allocateresources is known as a market economy in contrast either to a command economy or to anon-market economy such as a gift economy.

In finance, financial markets facilitate:

The raising of capital (in the capital markets);

The transfer of risk (in the derivatives markets);

International trade (in the currency markets)


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And are used to match those who wantcapital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. Thesereceipts are securities which may be freely bought or sold. In return for lending money tothe borrower, the lender will expect some compensation in the form of interest or dividends.

3.1.2 Definition

In economics, typically, the term marketmeans the aggregate of possiblebuyers and sellers of a thing and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges, organizationsthat facilitate the trade in financial securities, e.g., a stock exchange or commodityexchange. This may be a physical location (like the NYSE) or an electronic system (likeNASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions

(merger, spinoff) are outside an exchange, while any two companies or people, forwhatever reason, may agree to sell stock from the one to the other without using anexchange.

Trading of currencies and bonds is largely on a bilateral basis, although some bonds tradeon a stock exchange, and people are building electronic systems for these as well, similarto stock exchanges. Financial markets can be domestic or they can be international.

3.2 NEED OF FINANCIAL MARKET

We all know that it is the nature of the human being to increase its wealthor money. He want that whatever he has invested that should be increased. So to provide asafe or good place forinvestment financial market is required.


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3.2.1 What is Investment?

The money you earn is partly spent and the rest saved for meeting futureexpenses. Instead of keeping the savings idle you may like to use savings in order to getreturn on it in the future. This is called Investment.

3.2.2 Why should one invest?

One needs to invest to: earn return on your idle resources generate a specified sum ofmoney for a specific goal in life make a provision for an uncertain future One of the

important reasons why one needs to invest wisely is to meet the cost ofInflation. Inflation isthe rate at which the cost of living increases. The cost of living is simply what it costs to buythe goods and services you need to live. Inflation causes money to lose value because itwill not buy the same amount of a good or a service in the future as it does now or did inthe past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100purchase today would cost Rs. 321 in 20 years. This is

why it is important to consider inflation as a factor in any longterm investment strategy.Remember to look at an investment's 'real' rate of return, which is the return after inflation.The aim of investments should be to provide a return above the inflation rate to ensure that

the investment does not decrease in value. For example, if the annual inflation rate is 6%,then the investment will need to earn more than 6% to ensure it increases in value. If theafter-tax return on your investment is less than the inflation rate, then your assets haveactually decreased in value; that is, they won't buy as much today as they did last year.

3.2.3 What are various options available for investment?

One may invest in:

Physical assets like real estate, gold/ jewellery, commodities etc. and/or

Financial assets such as fixed deposits with banks, small saving instruments with postoffices, insurance/provident/pension fund etc. or securities market related instruments likeshares, bonds, Debentures etc.

Short Term investment option


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Broadly speaking, savings bank account, money market/liquid funds andfixed deposits with banks may be considered as short -term financial investment options:

i. Savings Bank Account is often the first banking product people use, which offers lowinterest (4%-5% p.a.), making them only marginally better than fixed deposits.

ii. Money Market or Liquid Funds are a specialized form of mutual funds that invest inextremely short -term fixed income instruments and thereby provide easy liquidity. Unlikemost mutual funds, money market funds are primarily oriented towards protecting yourcapital and then, aim to maximise returns. Money market funds usually better returns thansavings accounts, but lower than bank fixed deposits.

iii. Fixed Deposits with Banks are also referred to as term deposits and minimuminvestment period for bank FDs is 30 days. Fixed Deposits with banks are for investors withlow risk appetite, and may be considered for 6-12 months investment period as normallyinterest on less than 6 months bank FDs is likely to be lower than money market fund

returns.

Long Term investment option

Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits,Bonds and Debentures, Mutual Funds etc.

i. Post Office Savings: Post Office Monthly Income Scheme is a low risk savinginstrument, which can be availed through any post office. It provides an interest rate of 8%

per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/-and additional investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (ifSingle) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years.Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5%is levied from the principal amount if withdrawn prematurely.

ii. Public Provident Fund:A long term savings instrument with a maturity of 15 years andinterest payable at 8% per annum compounded annually. A PPF account can be openedthrough a nationalized bank at anytime during the year and is open all through the year fordepositing money. Tax benefits can be availed for the amount invested and interestaccrued is tax-free. A withdrawal is permissible every year from the seventh financial yearof the date of opening of the account and the amount of withdrawal will be limited to 50% ofthe balance at credit at the end of the 4th year immediately preceding the year in which theamount is withdrawn or at the end of the preceding year whichever is lower the amount ofloan if any.

iii. Company Fixed Deposits: These are short -term (six months) to medium- term (threeto five years) borrowings by companies at a fixed rate of interest which is payable monthly,quarterly, semi-annually or annually. They can also be cumulative fixed deposits where the


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entire principal along with the interest is paid at the end of the loan period. The rate ofinterest varies between 6-9% per annum for company FDs. The interest received is afterdeduction of taxes.

iv. Bonds: It is a fixed income (debt) instrument issued for a period of more then one yearwith the purpose of raising capital. The central or state government, corporations andsimilar institutions sell bonds. A bond is generally a promise to repay the principal alongwith a fixed rate of interest on a specified date, called the Maturity Date .

v. Mutual Funds: These are funds operated by an investment company which raisesmoney from the public and invests in a group of assets (shares, debentures etc.), inaccordance with a stated set of objectives. It is a substitute for those who are unable toinvest directly in equities or debt because of resource, time or knowledge constraints.Benefits include professional money management, buying min small amounts anddiversification. Mutual fund units are issued and redeemed by the Fund ManagementCompanybased on the fund's net asset value (NAV), which is determined at the end ofeach trading session.

3.3 VARIOUS MARKETS UNDER FINANCIAL MARKET

Financial market has a very broad scope. It is divided in mainly two categories

Capital Market

Money Market

3.3.1 Capital Market:

The capital market is the market for securities, where companies and governments canraise longterm funds. It is a market in which money is lent for periods longer than a year.

The capital market includes the stock market and the bond market. Financial regulators,such as the U.S. Securities and Exchange Commission (SEC), oversee the capital marketsin their designated countries to ensure that investors are protected against fraud.

3.3.2 Money Market:

As RBI definitions A market for short terms financial assets that are close substitute formoney, facilitates the exchange of money in primary and secondary market.


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The money market is a mechanism that deals with the lending and borrowing of shortterm funds (less than one year).

A segment of the financial market in which financial instruments with high liquidity andvery short maturities are traded.

3.4 CAPITAL MARKET

3.4.1 Introduction:

The capital market is the market for securities, where companies and governments canraise long term funds. It is a market in which money is lent for periods longer than a year.The capital market includes the stock market and the bond market. Financial regulators,such as the U.S. Securities and Exchange Commission (SEC), oversee the capital marketsin their designated countries to ensure that investors are protected against fraud.Thecapital markets consist of the primary market and the secondary market. The primary

markets are where new stock and bonds issues are sold (underwriting) toinvestors. Thesecondary markets are where existing securities are sold and bought from one investor orspeculator to another, usually on an exchange (e.g. the New York Stock Exchange)

A capital market is a market where both government and companies raise long term fundsto trade securities on the bond and the stock market. It consists of both the primary marketwhere new issues are distributed among investors, and the secondary markets wherealready existent securities are traded and sold. In the capital market, mortgages, bonds,equities and other such investment funds are traded. The capital market also facilitates theprocedure whereby investors with Excess funds can channel them to investors in deficit.

3.4.2 Tools under Capital Market:

The capital market provides both overnight and long term funds and uses financialinstruments with long maturity periods. The following financial instruments are traded in thismarket:

Foreign exchange instruments

Equity instruments

Debt instruments

Commodity instruments

Mutual funds

Derivative instruments


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3.4.3 Foreign exchange market (instruments):

The foreign exchange market (currency, forex, or FX) is where currency trading takesplace. It is where banks and other official institutions facilitate the buying and selling offoreign currencies. FX transactions typically involve one party purchasing a quantity of onecurrency in exchange for paying a quantity of another. The foreign exchange market thatwe see today started evolving during the 1970s when world over countries graduallyswitched to floating exchange rate from their erstwhile exchange rate regime, whichremained fixed as per the Bretton Woods system till 1971.

Presently, the FX market is one of the largest and most liquid financial markets in the

world and includes trading between large banks, central banks, currency speculators,corporations, governments, and other institutions. The average daily volume in the globalforeign exchange and related markets is continuously growing. Traditional daily turnoverwas reported to be over US$3.2 trillion in April 2007 by the Bank for InternationalSettlements.[2] Since then, the market has continued to grow. According to Euro moneysannual FX Poll, volumes grew a further 41% between 2007 and 2008.

The purpose of FX market is to facilitate trade and investment. The need for a foreignexchange market arises because of the presence of multifarious international currenciessuch as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.

Top 10 currency traders

1 Deutsche Bank 21.70%2 UBS AG 15.80%3 Barclays Capital 9.12%4 Citi 7.49%5 Royal Bank of Scotland 7.30%6 JPMorgan 4.19%

7 HSBC 4.10%8 Lehman Brothers 3.58%9 Goldman Sachs 3.47%10 Morgan Stanley 2.8

Market size and liquidity

The foreign exchange market is unique because of


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its trading volumes,

the extreme liquidity of the market,

its geographical dispersion,

its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sundayuntil 22:00 UTC Friday),

the variety of factors that affect exchange rates.

the low margins of profit compared with other markets of fixed income (but profits can behigh due to very large trading volumes)

the use of leverage

3.4.4 Equity/stock Market (instruments):

stock market typically refers to a financial market that handles the buying and selling ofcompany stocks, derivatives and other securities. Stock markets trade company securitiesthat are listed in the stock exchange Investors and security issuers both participate in stock

markets. Different sized entities participate in stock market activities, ranging from smallinvestors to the governments, corporations, large hedge fund traders, and banks.

Corporations, governments, and companies issue securities on the stock market to collect funds.The stock market acts as a platform for companies to raise money for their business and investorsto invest in securities.

When both the buyers and sellers in stock markets are institutions, rather than individuals, thestock market principle is more institutionalized.


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The emergence of this institutional investor concept has brought some improvements to stockmarket operations around the world. Stock markets can exist in both real and virtual arenas. Stockexchanges with physical locations carry out stock trading on trading floor.

This method of conducting trading, where the traders enter verbal bids, is called open outcry. Invirtual stock exchanges, trading is done online by traders who are connected to each other by anetwork of computers. In addition to acting as a market place for stock trading, stock markets alsoact as the clearinghouse for stock transactions.

This means that stock exchanges collect and deliver the securities and also guarantee payment tothe seller. This ensures both the buyers and sellers of securities that their counterparts will notdefault on the transaction. Stock markets in various countries around the world have performedwell due to financial sector reforms and integration. International flow of funds has raised the

expertise of stock exchanges in the respective countries.

There are a lot of jargons, terms related to market that are used as Stock Market Terms The mostimportant terms are given below:

Stock:A stock is a type of security that signifies ownership of a company and it is a representationof a claim on the part of the company's earnings and assets.

Stock Market: A stock market is a place where shares are issued and traded throughstock exchanges or over-the-counter markets. The stock market can be categorized intotwo parts, the Primary Market and the Secondary Market.

Stock Exchange:A stock exchange is an organization, which facilitates stockbrokers andtraders for trading company stocks and other securities.

Over-the-counter Markets:It is a decentralized market where securities not listed with anexchange are traded over the telephone, facsimile, or computer network. This type oftrading is not done on a physical trading floor and there is no central exchange or meetingplace for this.

IPO: Initial Public Offerings or the first sale of stock of a company to the public.

Sensex: The word Sensex is derived from Sensitive Index. The Sensex is an index thatdescribes the direction of the companies that are traded on the Bombay StockExchange(BSE).

NIFTY: NIFTY is the counterpart of Sensex on the National Stock Exchange (NSE).


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Bull: The bull is a person who has an optimistic thinking and purchases shares in the beliefthat the market price of that particular company's shares will rise. They try to profit from therise in share prices.

Bull Market: The Bull Market is a financial market, which consists of a specific group ofsecurities in which prices are going up or are expected to go up. A Bull Market is

accompanied with growing investor confidence and it inspires the investors to buy stocks inanticipation of more capital gains.

Bear: The counterpart of Bull is the bear. If a person has a pessimistic thinking that stockprices are bound to go down, he is termed as a bear. Bears try to profit from a downfall inshare prices.

Bear Market: It is a condition where the prices of securities are going down or areexpected to go down. A Bear Market is always associated with far-reaching pessimism.Investors panicked by anticipation of further losses are provoked to sell stocks..

Shares/Securities

The definition of Securities as per the Securities Contracts Regulation Act (SCRA), 1956,includes instruments such as shares, bonds, scrips, stocks or other marketable securitiesof similar nature in or of any incorporate company or body corporate, governmentsecurities, derivatives of securities, units of collective investment scheme, interest andrights in securities, security receipt or any other instruments so declared by the CentralGovernment.Function of security market

Securities Markets is a place where buyers and sellers of securities can enter intotransactions to purchase and sell shares, bonds, debentures etc. Further, it performs animportant role of enabling corporates, entrepreneurs to raise resources for their companiesand business ventures through public issues. Transfer of resources from those having idleresources (investors) to others who have a need for them (corporates) is most efficientlyachieved through the securities market. Stated formally, securities markets providechannels for reallocation of savings to investments and entrepreneurship. Savings arelinked to investments by a variety of intermediaries, through a range of financial products,called Securities.

Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s).However, the promoterscapital and the borrowings from banks and financial institutions may not be sufficient forsetting up or running the business over a long term. So companies invite the public tocontribute towards the equity and issue shares to individual investors. The way to inviteshare capital from the public is through a Public Issue. Simply stated, a public issue is an


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offer to the public to subscribe to the share capital of a company. Once this is done, thecompany allots shares to the applicants as per the prescribed rules and regulations laiddown by SEBI.

Various way of issuing new shares

Initial Public Offering (IPO ) is when an unlisted company makes either a fresh issue ofsecurities or an offer for sale of its existing securities or both for the first time to the public.This paves way for listing and trading of the issuers securities.

A follow on public offering (Further Issue) is when an already listed company makeseither a fresh issue of securities to the public or an offer for sale to the public, through anoffer document.

Rights Issue is when a listed company which proposes to issue fresh securities to itsexisting shareholders as on a record date. The rights are normally offered in a particularratio to the number of securities held prior to the issue. This route is best suited forcompanies who would like to raise capital without diluting stake of its existingshareholders.

A Preferential issue is an issue of shares or of convertible securities by listed companiesto a select group of persons under Section 81 of the Companie s Act, 1956 which is neithera rights issue nor a public issue. This is a faster way for a company to raise equity capital.The issuer company has to comply with the Companies Act and the requirementscontained in the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.

Segments of stock market

Primary Market

The primary market, also called the new issue market, is the market for issuing newsecurities. Many companies, especially small and medium scale, enter the primary marketto raise money from the public to expand their businesses. They sell their securities to thepublic through an initial public offering. The securities can be directly bought from theshareholders, which is not the case for the secondary market.

Secondary Market

All the securities are first created in the primary market and then, they enter into thesecondary market. In the New York Stock Exchange, all the stocks belong to theseacondary. Secondary Market is the market where, unlike the primary market, an investorcan buy a security directly from another investor in lieu of the issuer. It is also referred as"after market". The securities initially are issued in the primary market, then they enter intothe secondary.


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In other words, secondary market is a place where any type of used goods areavailable. In the secondary market shares are maneuvered from one investor to other, thatis, one investor buys an asset from another investor instead of an issuing corporation. So,the secondary market should be liquid.

3.4.5 Debt / Bond Market (instruments)

A paper or electronic obligation that enables the issuing party to raise funds by promising to

repay a lender in accordance with terms of a contract. Types of debt instruments includenotes, bonds, certificates, mortgages, leases or other agreements between a lender and aborrower. Debt instruments are a way for markets and participants to easily transfer theownership of debt obligations from one party to another. Debt obligation transferabilityincreases liquidity and gives creditors a means of trading debt obligations on the market.Without debt instruments acting as a means to facilitate trading, debt is an obligation fromone party to another. When a debt instrument is used as a medium to facilitate debttrading, debt obligations can be moved from one party to another quickly and efficiently.

Types of Bonds

1. Classification on the basis of Variability of Coupon

I. Zero Coupon BondsII. Treasury Strips

. III. Floating Rate Bonds

2. Classification on the Basis of Variability of Maturity


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I. Callable BondsII. Puttable Bonds

. III. Convertible Bonds

.

3. Classification on the basis of Principal Repayment

I. Amortizing BondsII. Bonds with Sinking Fund Provisions

Investing in Bonds

Many people invest in bonds with an objective of earning certain amount of interest on theirdeposits and/or to save tax. Bonds are considered to be a less risky investment option and

are generally preferred by risk-averse investors. Though investors should not get overtlyconfident of investing in bonds as bond prices are also subject to market risk. For example,bond prices have a negative correlation with interest rates due to which any increase ininterest rates can lead to a fall in bond prices and vice-versa. Thus, it is recommended thatinvestors should consider the risk-return factor (i.e. the expected return for the given levelof risk) before investing.

3.4.6 Commodity market (instruments):

INTRODUCTION

India, a commodity based economy where two-third of the one billion population dependson agricultural commodities, surprisingly has an under developed commodity market.


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Unlike the physical market, futures markets trades in commodity are largely used as riskmanagement (hedging) mechanism on either physical commodity itself or open positions incommodity stock. For instance, a jeweler can hedge his inventory against perceived short-term downturn in gold prices by going short in the future markets. The article aims at knowhow of the commodities market and how the commodities traded on the exchange. Theidea is to understand the importance of commodity derivatives and learn about the market

from Indian point of view. In fact it was one of the most vibrant markets till early 70s. Itsdevelopment and growth was shunted due to numerous restrictions earlier. Now, with mostof these restrictions being removed, there is tremendous potential for growth of this marketin the country.

COMMODITY

A commodity may be defined as an article, a product or material that is bought and sold. It

can be classified as every kind of movable property, except Actionable Claims, Money &Securities. Commodities actually offer immense potential to become a separate asset classfor market-savvy investors, arbitrageurs and speculators. Retail investors, who claim tounderstand the equity markets, may find commodities an unfathomable market. Butcommodities are easy to understand as far as fundamentals of demand and supply areconcerned. Retail investors should understand the risks and advantages of trading incommodities futures before taking a leap. Historically, pricing in commodities futures hasbeen less volatile compared with equity and bonds, thus providing an efficient portfoliodiversification option. In fact, the size of the commodities markets in India is also quitesignificant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commoditiesrelated (and dependent) industries constitute about 58 per cent.

COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any country. It isthe market where a wide range of products, viz., precious metals, base metals, crude oil,energy and soft commodities like palm oil, coffee etc. are traded. It is important to developa vibrant, active and liquid commodity market. This would help investors hedge theircommodity risk, take speculative positions in commodities and exploit arbitrageopportunities in the market.

Different types of commodities traded

World-over one will find that a market exits for almost all the commodities known to us.There commodities can be broadly classified into the following:

Precious Metals : Gold, Silver, Platinum etc


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Other Metals: Nickel, Aluminum, Copper etc

Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds.

Soft Commodities: Coffee, Cocoa, Sugar etc

Live-Stock: Live Cattle, Pork Bellies etc

Energy: Crude Oil, Natural Gas, Gasoline etc

3.4.7 Mutual Funds market

Introduction

A mutual fund is a professionally managed type of collective investment scheme that poolsmoney from many investors and invests it in stocks, bonds, short-term money marketinstruments, and/or other securities.[1] The mutual fund will have a fund manager thattrades the pooled money on a regular basis. As of early 2008, the worldwide value of allmutual funds totals more than $26 trillion. Since 1940, there have been three basic types ofinvestment companies in the United States: open-end funds, also known in the US asmutual funds; unit investment trusts (UITs); and closed-end funds. Similar funds alsooperate in Canada. However, in the rest of the world, mutual fundis used as a generic term

for various types of collective investment vehicles, such as unit trusts, open-endedinvestment companies (OEICs), unitized insurance funds, and undertakings for collectiveinvestments in transferable securities (UCITS).

What are the benefits of investing in Mutual Funds?

There are several benefits from investing in a Mutual Fund:

Small investments


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Professional Fund Management

Spreading Risk

Transparency

Choice

Regulations

Mutual funds are classified in the following manner:

(a) On the basis of Objective

Equity Funds/ Growth Funds

.Diversified funds

Sector funds.

Index funds

Tax Saving Funds

Debt/Income Funds

Liquid Funds/Money Market Funds

Gilt Funds

Balanced Funds.

b) On the basis of Flexibility

Open-ended Funds

Close-ended Funds

What are the different investment plans that Mutual Funds offer?

The term investment plans generally refers to the services that the funds provide toinvestors offering different ways to invest or reinvest. The different investment plans are animportant consideration in the investment decision, because they determine the flexibilityavailable to the investor. Some of the investment pla ns offered by mutual funds in Indiaare:


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Growth Plan and Dividend PlanA growth plan is a plan under a scheme wherein the returns from investments

are reinvested and very few income distributions, if any, are made. The investor thus onlyrealizes capital appreciation on the investment. Under the dividend plan, income isdistributed from time to time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment PlanDividend plans of schemes carry an additional option for reinvestment of

income distribution. This is referred to as the dividend reinvestment plan. Under this plan,dividends declared by a fund are reinvested in the scheme on behalf of the investor, thusincreasing the number of units held by the investors.

Are there any risks involved in investing in Mutual Funds?

Mutual Funds do not provide assured returns. Their returns are linked to theirvperformance. They invest in shares, debentures, bonds etc. All these investments involvean element of risk. The unit value may vary depending upon the performance of thecompany and if a company defaults in payment of interest/principal on theirdebentures/bonds the performance of the fund may get affected. Besides incase there is asudden downturn in an industry or the government comes up with new a re gulation whichaffects a particular industry or company the fund can again be adversely affected. All thesefactors influence the performance of Mutual Funds.

Some of the Risk to which Mutual Funds are exposed to is given below:

Market riskIf the overall stock or bond markets fall on account of overall economic factors, the

value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fundperformance.

Non-market riskBad news about an individual company can pull down its stock price, which can

negatively affect fund holdings. This risk can be reduced by having a diversified portfoliothat consists of a wide variety of stocks drawn from different industries.

Interest rate riskBond prices and interest rates move in opposite directions. When interest rates rise,

bond prices fall and this decline in underlying securities affects the fund negatively.

Credit riskBonds are debt obligations. So when the funds invest in corporate bonds, they run

the risk of the corporate defaulting on their interest and principal payment obligations and


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when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of thefund to take a beating.

3.4.8 Derivative market

IntroductionThe emergence of the market for derivative products, most notably forwards,

futures and options, can be traced back to the willingness of risk-averse economic agentsto guard themselves against uncertainties arising out of fluctuations in asset prices. By theirvery nature, the financial markets are marked by a very high degree of volatility. Throughthe use of derivative products, it is possible to partially or fully transfer price risks by lockingin asset prices. As instruments of risk management, these generally do not influence thefluctuations in the underlying asset prices. However, by locking in asset prices, derivative

products minimize the impact of fluctuations in asset prices on the profitability and cashflow situation of risk-averse investors.

DERIVATIVESDerivative 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 contractualmanner. The underlying asset can be equity, forex, commodity or any other asset. Forexample, wheat farmers may wish to sell their harvest at a future date to eliminate the riskof a change in prices by that date. Such a transaction is an example of a derivative Theprice of this derivative is driven by the spot price of wheat which is the "underling". In the

Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines"derivative" to include-

1. 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.

2. A contract which derives its value from the prices, or index of prices, of underlyingsecurities. Derivatives are securities under the SC(R) A and hence the trading ofderivatives is governed by the regulatory framework under the SC(R)A. Derivative products


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initially emerged as hedging devices against fluctuations in commodity prices, andcommodity-linked derivatives remained the sole form of such products for almost threehundred years. Financial derivatives came into spotlight in the post-1970 period due togrowing instability in the financial markets. However, since their emergence, these productshave become very popular and by 1990s, they accounted for about two thirds of total transactionsin derivative products. In recent years, the market for financial derivatives has grown tremendouslyin terms of variety of instruments available, their complexity and also turnover. In the class ofequity derivatives the world over, futuresand options on stock indices have gained more popularitythan on individual stocks,especially among institutional investors, who are major users of indexlinked derivatives. Even small investors find these useful due to high correlation of the popularindexeswith various portfolios and ease of use.

3.5 MONEY MARKET

3.5.1 Introduction:

The international financial market where short term trading take place is called themoney market. The money market is meant to make available the liquid funding to thefinancial system of the world and this liquid funding is provided for a short period. Thetrading of the money market consists of the Treasury Bills, Commercial Paper etc .

As a financial market, money market is very much secured in comparison to the othermarkets. The main participants or the borrowers and lenders of this market are the financialorganizations, huge corporations and the governments of various countries. Theparticipants of the market take part in the proceedings to make sure that their moneyresources are in a good condition. It may have many similarity .with the bond market butthe primary difference is between the participants of both the market. Again the moneymarket is, as described, a short term market but the bond market is usually a long term


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market. The money market deals in the 'paper', which is an financial instrument for a shortspan of time. The term generally consists of 12-13 months.

When national governments or the giant corporations borrow money, it is a moneymarket. The proceedings of the money market and the stock market is very close to eachother but both are not the same thing. The main difference is the huge funds that are dealt

by the money market. Again, the stock market is meant for the individuals but the moneymarket has some different trends and the individual investor has very little to do in this market.

Although the returns of this market is comparatively low, the security factor of the marketprompts the investor to put his or her money in this market. According to the trend, any individualinvestor cannot enter the market directly simply because of the giant size of the participants. Butthrough the money market mutual funds, an individual can take part in the proceedings. Thetreasury bills are another portion provided to theindividual.

3.5.2 Tools under Money Market

Certificate of Deposit

Bankers' Acceptance

Federal Agency Short-Term Securities

Commercial Paper

Repurchase Agreement

Treasury Bills

Money Market Mutual Funds

Municipal Notes

Euro Dollar Deposit

Repos

Treasury Bills:The Treasury bills are short-term money market instrument that maturein a year or less than that. The purchase price is less than the face value. At maturity thegovernment pays the Treasury Bill holder the full face value. The Treasury Bills are


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marketable, affordable and risk free. The security attached to the treasury bills comes atthe cost of very low returns.

Certificate of Deposit: The certificates of deposit are basically time deposits that areissued by the commercial banks with maturity periods ranging from 3 months to five years.The return on the certificate of deposit is higher than the Treasury Bills because it assumes

a higher level of risk.

Commercial Paper: Commercial Paper is short-term loan that is issued by a corporationuse for financing accounts receivable and inventories. Commercial Papers have higherdenominations as compared to the Treasury Bills and the Certificate of Deposit. Thematurity period of Commercial Papers are a maximum of 9 months. They are very safesince the financial situation of the corporation can be anticipated over a few months.

Bankers Acceptance: It is a short-term credit investment. It is guaranteed by a bank tomake payments. The Banker's Acceptance is traded in the Secondary market. Thebanker's acceptance is mostly used to finance exports, imports and other transactions ingoods. The banker's acceptance need not be held till the maturity date but the holder hasthe option to sell it off in the secondary market whenever he finds it suitable.

Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held inbanks outside the United States. Since the Eurodollar market is free from any stringentregulations, the banks can operate at narrower margins as compared to the banks in U.S.The Eurodollars are traded at very high denominations and mature before six months. TheEurodollar market is within the reach of large institutions only and individual investors canaccess it only through money market funds.

Repos: The Repo or the repurchase agreement is used by the government security holderwhen he sells the security to a lender and promises to repurchase from him overnight.Hence the Repos have terms raging from 1 night to 30 days. They are very safe duegovernment backing.

3.6 FINANCIAL MARKET OVERVIEWThe financial markets have indicators in place that reflect the performance of

companies whose securities are traded in those markets. Financial markets are a vital partof an economy making it possible for industry, trade and commerce to flourish without any

obstacle in terms of resources. Today most economies around the world are judged by theperformance of their financial markets.

The financial markets serve a vital purpose in the growth and development of a companythat wants to expand. Such companies with expansion plans and new projects are in needof funding and the financial market serves as the best platform from which a company candetermine the feasibility of such possibilities.


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3.7 INDIAN FINANCIAL MARKET

India Financial market is one of the oldest in the world and is considered to be the fastestgrowing and best among all the markets of the emerging economies.

The history of Indian capital markets dates back 200 years toward the end of the 18th

century when India was under the rule of the East India Company. The development of thecapital market in India concentrated around Mumbai where no less than 200 to 250securities brokers were active during the second half of the 19th century.

The financial market in India today is more developed than many other sectorsbecause it was organized long before with the securities exchanges of Mumbai,

Ahmedabad and Kolkata were established as early as the 19th century. By the early 1960sthe total number of securities exchanges in India rose to eight, including Mumbai,

Ahmedabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today

there are 21 regional securities exchanges in India in addition to the centralized NSE(National Stock Exchange) and OTCEI (Over the Counter Exchange of India).

However the stock markets in India remained stagnant due to stringent controls on themarket economy that allowed only a handful of monopolies to dominate their respectivesectors. The corporate sector wasnt allowed into many industry segments, which weredominated by the state controlled public sector resulting in stagnation of the economy rightup to the early 1990s. Thereafter when the Indian economy began liberalizing and thecontrols began to be dismantled or eased out, the securities markets witnessed a flurry ofIPOs that were launched. This resulted in many new companies across different industrysegments to come up with newer products and services.

A remarkable feature of the growth of the Indian economy in recent years has been the roleplayed by its securities markets in assisting and fuelling that growth with money rose withinthe economy. This was in marked contrast to the initial phase of growth in many of the fastgrowing economies of East Asia that witnessed huge doses of FDI (Foreign DirectInvestment) spurring growth in their initial days of market decontrol. During this phase inIndia much of the organized sector has been affected by high growth as the financialmarkets played an all-inclusive role in sustaining financial resource mobilization. ManyPSUs (Public Sector Undertakings) that decided to offload part of their equity were alsohelped by the well-organized securities market in India.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the CounterExchange of India) during the mid 1990s by the government of India was meant to usher inan easier and more transparent form of trading in securities. The NSE was conceived asthe market for trading in the securities of companies from the large-scale sector and theOTCEI for those from the small-scale sector. While the NSE has not just done well to growand evolve into the virtual backbone of capital markets in India the OTCEI struggled and isyet to show any sign of growth and development. The integration of IT into the capital


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market infrastructure has been particularly smooth in India due to the countrys world classIT industry. This has pushed up the operational efficiency of the Indian stock market toglobal standards and as a result the country has been able to capitalize on its high growthand attract foreign capital like never before.

The regulating authority for capital markets in India is the SEBI (Securities and Exchange

Board of India). SEBI came into prominence in the 1990s after the capital marketsexperienced some turbulence. It had to take drastic measures to plug many loopholes thatwere exploited by certain market forces to advance their vested interests. After this initialphase of struggle SEBI has grown in strength as the regulator of Indias capital marketsand as one of the countrys most important institutions.

3.9 GLOBAL FINANCIAL MARKET

As all the Financial Markets in India together form the Indian Financial Markets, all

the Financial Markets of Asia together form the Asian Financial Markets; likewise all theFinancial Markets of all the countries of the world together form the Global FinancialMarkets.

Financial Markets can be domestic or international. The Global Financial Markets work as asignificant instrument for improved liquidity. Financial Markets can be categorized into sixtypes:

Capital Markets: Stock markets and Bond markets


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Commodity Markets

Money Markets

Derivatives Markets: Futures Markets

Insurance Markets

Foreign Exchange Markets

The Financial Markets play a major role in the Global Economy because it helpsbusinesses to raise capital (in capital markets), they facilitate transferring of risk (inderivative markets), and they help international trade (in currency markets) to prosper.

The International Stock Markets form a major part of the Global Financial Markets .The

Amsterdam Stock Exchange (or Amsterdam Beurs) is the oldest stock exchange, whichstarted operating in continuous trade in the earlier part of the 17th Century.Some of the Important Stock Exchanges of the world are:

The New York Stock Exchange (merged with Euronext): The New York StockExchange (NYSE) is a stock exchange based in New York City, USA that was incorporatedin 1817. In terms of dollar volume, it is the largest stock exchange in the world, and interms of the number of companies listed it is the second largest stock exchange in theworld. The NYSE is also known as the Big Board. The indexes used in the NYSE are theNYSE Composite Index and the Dow Jones industrial Average Index. The NYSE functions

under NYSE Euronext, the formation of which was the result of NYSE's merger withArchipelago Holdings and Euronext.

Tokyo Stock Exchange: The Tokyo Stock Exchange (TSE), incorporated in 1949,islocated in Tokyo, Japan. In terms of monetary volume, The Tokyo Stock Exchange is thesecond largest stock exchange in the world, only next to New York Stock Exchange. Theindexes used in the TSE are Nikkei 225, Topix, and J30.

NASDAQ: The National Association of Securities Dealers Automated Quotations, orNASDAQ, is an electronic stock market based in New York City, USA that wasincorporated in 1971. The NASDAQ Stock Market, Inc. is the owner and regulator ofNASDAQ. The main index used in NASDAQ is the NASDAQ Composite.

London Stock Exchange: Established in 1801, the London Stock Exchange (LSE) isone of the oldest and largest stock exchanges in the world. In terms of marketcapitalization, the London Stock Exchange was ranked 4th among all the other important


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stock exchanges in the world in March 2007. The London Stock Exchange is located inPaternoster Square near St. Paul's Cathedral, London. The stock market index of LondonStock Exchange is the Footsie (FTSE).

4. SWOT analysis

The SWOT analysis of financial market is as below:

Strength The base of the economy of any country .

Able to provide strong financial support to the country.

Barometer of the countrys growth.

To provide a safe & healthy market to the investors for investment.

Weakness

Most of the instruments are based on speculative activities.

High rate risk

Opportunity


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To make the investors more strongafter the global financial crisis

People will take more interest to invest in financial securities due to healthy rate of returnand safety & security.

Threats

High rate risk

If investor are not rational in that case he may loss his entire invested amount

4.1 SWOT analysis of Indian stock market

Strengths:Sensex and Nifty scrips are top made up of top performing scrips that should capture much

of India's growth ove the next 10 years. Companies that stand to gain the most as Indianeconomy gallops at 8-9% pa.

Weakness: Illiquidity outside the scrips in futures and options may lead to large scaleprice manipulation in illiquid scrips and lower price realisations in such counters. PoorIndian Accounting disclosures may lead to large scale manipulation of figures by publiclytraded companies.

Opportunities:A large domestic market that is still into traditional fixed income and othergovernment savings is all buy bound to enter the market sooner if not later.

Threats:Global Economic slowdown, Currency mismanagement, High global commodityprices, Over valuation in Index scrips, Non liquidity in non derivatives related scrip, Changein government focus on controlling inflation, the attitude ofgovernment relating to FII's taxation etc.


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5. Conclusion

The financial markets serve a vital purpose in the growth and development ofa company that wants to expand. Such companies with expansion plans and new projects

are in need of funding and the financial market serves as the best platform from which acompany can determine the feasibility of such possibilities.

In finance, financial markets facilitate :

The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); International trade (in the currency markets)

and are used to match those who wantcapital to those who have it. Typically a borrower

issues a receipt to the lender promising to pay back the capital. These receipts aresecurities which may be freely bought or sold. In return for lending money to the borrower,the lender will expect some compensation in the form of interest or dividends.

The capital market is the market for securities, where companies and governments canraise long-term funds. It is a market in which money is lent for periods longer than a year.The capital market includes the stock market and the bond market. Financial regulators,such as the U.S. Securities and Exchange Commission (SEC), oversee the capital marketsin their designated countries to ensure that investors are protected against fraud.The


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capital market provides both overnight and long term funds and uses financial instrumentswith long maturity periods. The following financial instruments are traded inthis market:

Foreign exchange instruments Equity instruments

Debt instruments Commodity instruments Mutual funds Derivative instruments

As per RBI definitions money market is A market for short terms financial assets that areclose substitute for money, facilitates the exchange of money in primary and secondarymarket.

The money market is a mechanism that deals with the lending and borrowing of short

term funds (less than one year). A segment of the financial market in which financial instruments with high liquidity andvery short maturities are traded.

Certificate of Deposit Bankers' Acceptance Federal Agency Short-Term Securities Commercial Paper Repurchase Agreement

Treasury Bills Money Market Mutual Funds Municipal Notes Euro Dollar Deposit Repos

The financial markets have indicators in place that reflect the performance of companieswhose securities are traded in those markets. Financial markets are a vital part of aneconomy making it possible for industry, trade and commerce to flourish without anyobstacle in terms of resources. Today most economies around the world are judged by the

performance of their financial markets.

The financial markets serve a vital purpose in the growth and development of a companythat wants to expand. Such companies with expansion plans and new projects are in needof funding and the financial market serves as the best platform from which a company candetermine the feasibility of such possibilities.

Everyone should know the concept of financial market because its a tool whichprovides the safe place of the money with certain return.


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6. Bibliography

Text Books

Financial Management (Text, Problem and Cases)

Author : M Y Khan & P K Jain Publication : Tata McGraw-Hill Publishing Company Limited

Understanding of Financial Market(e-book)

Author : Braamvan den Berg Website : www.eagletraders.com

Financial Institution and Market

Author : Meir Kohn Publication : Oxford University Press


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Security Analysis

Publication : ICFAI University

Indian Financial Market

Publication : ICFAI University Page No. : according to chapter

Websites

www.wikipedia.com

Link: http://www.wikipedia.com/financial market/

www.nseindia.com

Link: http://www.nseindia.com/content/ncfm/curriculam.htm

www.economywatch.com

Link: http://www.economywatch.com/market/money-marketinstruments.htm

www.investopedia.com

Link: http://www.investopedia.com/university/moneymarket/

www.investopedia.com

Link: http://www.eagletraders.com/books/afm/htm

shivam gupta

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