Financial Markets: UGC NET Commerce Notes and Study Material

Financial Markets comprise any location or system that offers buyers and sellers the mechanism to exchange financial instruments, such as bonds, equities, the different foreign currencies, and derivatives. A financial market is where individuals are able to sell and purchase things such as stocks, bonds, and other financial instruments. It enables companies to raise funds in order to expand by selling shares of their firm. Individuals can invest money in these markets to generate profits. Financial markets are located in such locations as stock exchanges where buyers and sellers converge. The economy expands and maintains the movement of money through these markets.

Financial Markets is a vital topic to be studied for the commerce related exam such as the UGC-NET Commerce Examination.

In this article, learners will be able to know about the following:

• What is Financial Market
• Explanation of Indian Financial Markets
• Types of Financial Markets
• Functions of Financial Markets
• Importance of Financial Markets
• Technical Analysis of the Financial Markets
• Examples of Financial Markets

What is Financial Market?

Financial Markets comprise any location or mechanism that gives buyers and sellers the vehicle to exchange financial instruments, such as bonds, equities, the different foreign currencies, and derivatives. Financial markets enable the coming together of those who require capital with those who possess capital to invest. Apart from enabling capital to be raised, financial markets enable participants to shift risk (usually via derivatives) and foster trade.

Explanation of Indian Financial Market

The Indian financial market is where individuals purchase and sell items such as stocks, bonds, and other investments. It assists companies in India with raising funds to expand by permitting individuals to invest in shares of their company. There are two primary components of the Indian financial market: the primary market and the secondary market. In the primary market, new firms offer their shares for the very first time, and in the secondary market, individuals can buy and sell existing shares. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are India's two largest stock exchanges. These exchanges provide ease to individuals in trading stocks and bonds. The Indian financial market has a significant contribution to increase the economy and assist individuals in making money via investments.

Types of Financial Markets 

There are a number of various types of markets. They all center around the kinds and classes of instruments traded on it.

Stock Markets

Some of the most prevalent of financial markets are stock markets. They are places where corporations list their stock, which traders and investors buy and sell. Stock markets, or equities markets, provide a means whereby companies can obtain capital and whereby investors can hunt for returns.

Stocks can be bought and sold on listed exchanges, including the New York Stock Exchange (NYSE), Nasdaq, or the over-the-counter (OTC) market. Trading is most often conducted through regulated exchanges, which is a vital economic function because it is yet another means by which money passes through the economy.

Usual participants in a stock market are (institutional and retail) investors, traders, market makers (MMs), and specialists who keep the market liquid and offer two-sided markets. Brokers are third parties that intermediate trades between sellers and buyers but who do not actually take a position in a stock.

Over-the-Counter Markets

An over-the-counter (OTC) market is a decentralized marketplace—i.e., it doesn't involve physical locations, and transactions are done electronically—where market participants directly trade securities (i.e., without a broker).

Although OTC markets might facilitate trading in some stocks (e.g., smaller or riskier firms that can't meet exchanges' listing requirements), most stock trading occurs through exchanges.

Some derivatives markets, though, are purely OTC, comprising a vital part of the financial markets. Generally, OTC markets and the trades that take place in them are much less regulated, less liquid, and more opaque.

Bond Markets

A bond is a security where an investor lends money for a specified time at a predetermined rate of interest. You can consider a bond as a contract between the borrower and lender with the loan terms and its repayment.

Bonds are sold by corporations, municipalities, states, and sovereign governments to fund projects and operations.

For instance, the bond market markets securities like United States Treasury notes and bills. The bond market is also referred to as the debt, credit, or fixed-income market.

Money Markets

The money markets usually trade products with highly liquid short-term maturities (less than one year) and are dominated by a high level of safety and a relatively lower interest return compared to other markets.

At the wholesale level, money markets consist of high-volume transactions between traders and institutions. At the retail level, they comprise money market mutual funds purchased by individual investors and money market accounts held by bank customers.

Individuals can also invest in money markets by investing in short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills, to name a few.

Derivatives Markets

A derivative is an agreement between two or more parties whose value depends on an underlying financial asset agreed upon (such as a security) or assets (such as an index).

Instead of trading stocks directly, a derivatives market exchanges futures and options contracts and other sophisticated financial instruments whose value depends on underlying instruments such as bonds, commodities, currencies, interest rates, market indexes, and stocks.

Futures markets are where futures contracts are traded and listed. In contrast to forwards, which are traded OTC, futures markets have standardized contract specifications, are heavily regulated, and utilize clearinghouses to confirm and settle trades.

Options markets, like the Chicago Board Options Exchange (Cboe), also list and regulate options contracts. Both futures and options exchanges can list contracts on different asset classes, including equities, fixed-income securities, commodities, etc.

Forex Market

The forex (foreign exchange) market is where participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs. The forex market is the most liquid market in the world, as cash is the most liquid of assets. The currency market handles more than $7.5 trillion in daily transactions, more than the futures and equity markets combined.1

Similar to the OTC markets, the forex market is decentralized and composed of a network of computers and brokers across the world. The forex market includes commercial companies, banks, central banks, investment management firms, hedge funds, and retail forex brokers and investors.

Commodities Markets

Commodities markets are places where buyers and sellers of physical commodities like agricultural produce (e.g., corn, livestock, soybeans), energy commodities (oil, gas, carbon credits), precious metals (gold, silver, platinum), or "soft" commodities (like cotton, coffee, and sugar) get together to buy and sell. These are spot commodity markets, where physical products are sold for cash.

Nevertheless, the majority of buying and selling these commodities occurs in derivatives markets, which use the spot commodities as the underlying reference. Forwards, futures, and commodity options are traded OTC as well as on organized exchanges globally, including the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).

Cryptocurrency Markets

There are thousands of cryptocurrency tokens and they are traded all over the world on a patchwork of stand-alone online crypto exchanges. These exchanges have digital wallets for traders to exchange one cryptocurrency for another or for fiat currencies like dollars or euros.

Since most crypto exchanges are centralized platforms, users are at risk of being hacked or defrauded. There are also decentralized exchanges that do not have any central authority. These platforms provide direct peer-to-peer (P2P) trading without having a real exchange authority to support the transactions. Futures and options trading are also provided on large cryptocurrencies.

Functions of Financial Markets

Financial markets are where individuals purchase and sell items such as stocks, bonds, and other financial instruments. One significant role of these markets is to enable businesses to raise funds by issuing stocks or bonds to investors. When businesses receive funds in this manner, they can utilize them to expand their business or develop new products. Financial markets also assist individuals to save and invest their funds so that they may grow their money over time. Investors are able to purchase and sell shares, which provides an opportunity for them to earn a profit if the price increases. Financial markets also assist individuals in borrowing money, such as when the government or companies require funds for large-scale projects. One of the other roles of financial markets is to act as prices, depending on how much individuals will pay for something. The markets enable everyone to be aware of the value of items, such as the value of a firm's stock. The markets also enable the dispersion of risks since individuals are able to invest in numerous different things so that they don't lose all their money if one of the investments fails. Lastly, financial markets assist the economy by ensuring that money circulates freely among buyers, sellers, and investors.

Importance of Financial Markets

Financial markets are significant as they enable companies to expand by supplying them with money and provide individuals with an opportunity to invest and make profits. Financial markets also maintain the economy stable by facilitating money to move freely between companies and investors.

Facilitates Businesses to Raise Money

Financial markets enable companies to raise capital by issuing stocks or bonds to the public. This capital can be utilized to develop new products, establish additional stores, or increase their services. Without these markets, companies would be more difficult to grow. Through investment in these companies, individuals receive a return on their investment.

Provides Investment Opportunities

Financial markets allow individuals to invest money in stocks, bonds, and other items. Investing enables individuals to make money in the long run, particularly if they invest in good investments. Investing enables individuals to save money for the future, such as for their school or retirement. Individuals can make informed decisions and increase their savings through financial markets.

Strengthens the Economy

Financial markets assist in strengthening the economy by ensuring money goes into businesses and industries. When companies expand, they employ additional people, creating employment. More employment means more income for families, strengthening the economy. This strengthens the nation and benefits all.

Encourages Savings

Financial markets motivate individuals to save their money and invest it in a manner that causes it to increase. Through investment in such things as stocks or bonds, individuals are able to earn more money than they would have if they were simply saving in a bank. This enables individuals to prepare for the future and become more financially stable. Savings and investments result in greater wealth for individuals and the nation.

Examples of Financial Markets

By studying the examples of the financial markets there will be better understanding of the topic and the aspirants will be able to better judge the questions.

Example 1: Stock Market

The stock market is where individuals trade shares in corporations. When you purchase a share, you have a portion of the corporation. If the corporation profits and does well, the value of the share increases, and you can sell it at a profit. The stock market enables firms to raise funds to expand by selling shares to the general public. Well-known stock exchanges such as India's Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) make buying and selling shares simple.

Example 2: Bond Market

The bond market is where individuals sell and purchase bonds, which are similar to loans. When you purchase a bond, you loan money to a business or government, and they agree to pay you back with additional money (interest) after a while. Bonds are more secure investments because you will definitely be able to receive your money back, unlike stocks where the value goes up and down. The government tends to sell bonds to fund valuable projects, such as road construction or schools. Individuals buy bonds in order to earn interest while having their money preserved.

Technical Analysis of the Financial Markets

Technical analysis is one method of analyzing the prices of stocks, bonds, or other financial items in an attempt to forecast what will occur in the future. Individuals utilize charts and graphs to examine previous price movements, such as the price of a stock yesterday or last week. This assists individuals in perceiving patterns or trends, such as whether the price has been increasing or decreasing over time. With an understanding of these trends, the traders believe that they can make an educated estimate whether the price will continue moving in the same direction or turn. Technical analysis also employs mechanisms such as moving averages, which assist in revealing whether a stock is performing or not in the long run. Other traders use such mechanisms to determine when to sell or purchase. It's sort of a puzzle, where the numbers and the movements are the pieces, and the objective is to determine the best time to make a move. But nobody can know what's going to happen, so it's always somewhat of a guess.

Conclusion 

Financial markets matter as they enable companies to grow and offer a means for individuals to invest. They provide businesses with a means to raise capital, and investors with an opportunity to earn money. Through purchasing and selling in financial markets, individuals contribute to maintaining the economy robust. Financial markets can be thrilling, yet require thoughtfulness in making investments. Knowing how financial markets function allows us to make sound choices about money.

Financial Markets is a vital topic for the UGC NET Philosophy examination. It would help if you learn similar topics with the Testbook App.

Financial Market Previous Year Questions

1. The volatility in the Indian share market is due to-

Options. A. Inflow and outflow of foreign funds.

1. Fluctuations in foreign capital markets.
2. Changes in monetary policy.

Which of the above-mentioned causes are correct?

Options. A. A and B

1. A and C
2. A, B and C
3. More than one of the above
4. None of the above

Ans. C. A, B and C