Segments of Financial Markets explained

Financial Market is a type of Market in which bonds and securities are traded. Price discovery is a process that determines market prices, mostly through interactions between buyers and sellers. Price discovery is a method for determining the spot price of a commodity through interactions between sellers and buyers – often referred to as a price discovery process or price discovery mechanism.

There are many types of Financial Markets. This includes Money Market, capital market, fixed income market (debt/Bond market), and stock exchange (Primary market and secondary market), Forex Market, Derivatives Markets. Financial Markets help in mobilizing savings, determining and settling the prices of various securities, providing liquidity to assets, and easing access to all types of traders.

Capital Market

Capital market is a market for long-term debt and equity shares. The Debt Market is the market where fixed-income securities of various types and features are issued and traded. Debt Markets are, therefore, markets for fixed-income securities issued by the Central and State Governments, Municipal Corporations, banks, and financial institutions. A share may be bought or sold only once listed on the stock exchange.

The capital market is further divided into Primary Market and Secondary Market. The primary market is where securities are created, while the secondary market is where those securities are traded by investors. In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).

To know more read: Capital Market;

Stock Exchange

A stock exchange is an organized and regulated financial market where securities (bonds, derivatives, shares) are bought and sold on behalf of the investors at prices governed by the demand and supply for the specific stock. The Stock exchanges provide clearing house facilities for netting payments and securities delivery. The Clearinghouse guarantees all payments and deliveries. SEBI is the regulator of stock exchanges.

The shares and stocks listed in a stock exchange are traded at a certain price for a specific stock based on demand and supply on a given day.

To know more read: Stock Exchange

 Money Market:

The money market instrument is a marketplace for trading in short-term debt investments considered low-risk investments with high safety. It is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit. The money market ensures a balance between the demand for short-term funds and their supply.

A money market is a place where banks and other financial institutions trade in short-term debt securities such as commercial paper (CP), certificate of deposits CDs repo market (ready forward contracts), treasury bills (TBs), Collateralized Borrowing and Lending Obligations (CBLO), etc. The money market provides a platform for financial institutions to borrow and lend money for a short term of up to one year.

To learn more read: Money market

 Fixed-income securities:

Fixed-income securities are loans made by an investor to a government or corporate borrower unlike holders of equity that represents a share in the ownership of the issuer.

Getting the targeted amount at the exact time is a possibility of an investment in a fixed-income product. Fixed interest rate securities are those in which the interest payable is fixed in advance, distinct from floating interest rate securities where the interest payable is reset from pre-determined intervals according to a pre-determined benchmark.

To know more read: Fixed-income securities

Debt Market:

A tradable form of loan is normally termed a Debt Instrument. They are obligations of the issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument.

Debt Instruments are of various types. The distinctive types of the Debt Instruments are as follows: –

• Government securities,
• Corporate bonds,
• Commercial paper,
• Treasury bills,
• Strips 
• Debentures,

 For an individual investor Government Securities (G-secs) are one of the best investment options as there is zero default risk and lower volatility in the case of G-secs.

To learn more read: Debt Market

Foreign Exchange Market:

Foreign exchange is associated with the 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. There are three fundamental aspects of the foreign exchange mechanism.

1. Every country has its currency (legal tender).
2. The rate of exchange of currency of one country to currency of another country (like a barter system) depends upon the demand and supply of specific currency at the place of conversion.
3. Almost all exchange transactions currencies are routed through banks, which will convert the currency of one country into its equivalent in the currency of another country and transfer the funds from one country to another. Normally currency of the buyer’s country is converted into the currency of the seller’s country. However many times the funds may be converted into the permitted currency of a third country ( like USD, Euro, Sterling Pound, etc. which are accepted in almost all the countries) acceptable to the buyer and the seller/service provider.

To learn more read: Foreign Exchange

Derivative market:

The financial derivative market has been in existence in India in some form or the other for the long term. The financial derivative gained prominence in India after 1970 in some unorganized form.  The National Stock Exchange of India Limited (NSE) started trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark index — Nifty 50. The NSE introduced trading in Index Options (also based on Nifty 50) on June 4, 2001.

To learn more read: Derivative Market

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