Explained: Financial Markets and functions of Financial Market

A financial market is a marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives.

Stock market: The stock market trades shares of ownership of public companies.  (To know more read: Stock exchange)

Bond market/debt market: The bond market offers companies and the government opportunities to secure money to finance a project or investment. (To know more read bond/debt market)

Foreign Exchange Market: Foreign exchange is associated with foreign trade. The traders in the foreign exchange market (Authorized Dealers/brokers) rely on the two basic forms of analysis viz. fundamental analysis and technical analysis. (To know more read: Foreign Exchange Market)

Credit Market: Broadly, a credit market is a market for borrowing money in the form of bank loans, bonds, etc. The credit market deals in fixed-income instruments like bonds, treasury bills, commercial paper, and debt offerings such as notes and securitized obligations, collateralized debt obligations (CDOs)/(mortgage-backed securities), and credit default swaps (CDS). These fixed-income instruments are issued by central and state governments, other government bodies, and municipal corporations. Banks, financial institutions, corporates, etc. also can issue fixed-income instruments. Credit market equilibrium occurs at the real interest rate where the quantity of loans supplied equals the quantity of loans demanded. At this equilibrium real interest rate, lenders lend as much as they wish, and borrowers can borrow as much as they wish.

Commodities market: A commodity market is where investors trade several commodities like spices, energy, precious metals, and crude oil within a country. Recently, the Forward Market of Commissions allowed around 120 commodities to perform future trading within India.

India has 22 different commodity exchanges that have been formed under the Forward Markets Commission. There are 4 popular commodity exchanges for trading in India:

1) Indian Commodity Exchange (ICEX)

2) National Multi Commodity Exchange of India (NMCE)

3) Multi Commodity Exchange of India (MCX)

4) National Commodity and Derivative Exchange (NCDEX)

Derivatives market: The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, namely, exchange-traded derivatives and over-the-counter derivatives. Derivatives act as powerful risk management tools, allowing investors to hedge against price fluctuations and uncertainties. (To know more read ‘derivative market’)

The transformations of the following financial markets have created a robust ecosystem for financial transformation in India.

Transformation of the banking sector in India

Transformation of the Money market in India

Transformation of Government securities market

Transformation of the Foreign exchange market in India

Transformation of the Capital market in India

Transformation of the Credit market in India

The Financial Market Division of the Government of India is responsible for the administration of the SEBI Act, Securities Contracts Regulation (SCRA) Act 1956, Depositories Act, 1996, and Section 20 of the Indian Trust Act, 1882 and related regulations and notifications thereunder. Issues related to the erstwhile Forward Contracts (Regulation) Act, of 1952 are also handled in the FM Division. The Financial Markets Division is primarily responsible for policy issues related to the development of the securities markets and matters incidental thereto like, External Commercial Borrowings and Foreign Portfolio flows under the Foreign Exchange Management Act (FEMA), 1999. Since 2013, the Division has been entrusted with the development of commodity derivative markets. The division facilitates the sovereign credit rating by various credit rating agencies and financial dialogues with the USA, UK, and Japan.