FINANCIAL MARKETS

IntroductionAfinancial marketis a market in which people and entities cantradefinancialsecurities,commodities, and otherfungibleitems of value at lowtransaction costsand at prices that reflectsupply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as amarket economyin contrast either to acommand economyor to anon-market economysuch as agift economy.

Functions of financial markets

Intermediary Functions: The intermediary functions of financial markets include the following: Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.

Financial Functions Providing the borrower with funds so as to enable them to carry out their investment plans. Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. Providing liquidity in the market so as to facilitate trading of funds. it provides liquidity to commercial bank it facilitate credit creation it promotes savings it promotes investment it facilitates balance economic growth it improves trading floors

Infinance, financial markets facilitate: The raising ofcapital(in thecapital markets) The transfer ofrisk(in thederivatives markets) Price discovery Global transactions with integration of financial markets The transfer ofliquidity(in themoney markets) International trade(in thecurrency markets)

Role of financial marketsOne of the important requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the following manner. Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets. Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same. National Growth: An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible. Entrepreneurship growth: Financial market contributes to the development of the entrepreneurial claw by making available the necessary financial resources. Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.

Types of financial marketsWithin the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance: for long term finance, theCapital markets; for short term finance, theMoney markets. Another common use of the term is as a catchall for all the markets in the financial sector, as per examples in the breakdown below. Capital marketswhich consist of: Stock markets, which provide financing through the issuance of shares orcommon stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance ofbonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management offinancialrisk. Futures markets, which provide standardizedforward contractsfor trading products at some future date; see alsoforward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading offoreign exchange.Thecapital marketsmay also be divided intoprimary marketsandsecondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as duringinitial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors.Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value. Securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit fromliquid securitiesbecause they can sell their assets whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount.The financial market is broadly divided into 2 types: 1) Capital Market. 2) Money market.

The Capital market is subdivided into 1) Primary market. 2) Secondary market.

Capital markets

Capital marketsarefinancial marketsfor the buying and selling of long-termdebt- orequity-backedsecurities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.Financial regulators, such as the UK'sBank of England(BoE) or theU.S. Securities and Exchange Commission(SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties.Modern capital markets are almost invariably hosted on computer-basedelectronic tradingsystems; most can be accessed only by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public.There are many thousands of such systems, most serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated infinancial centreslike London, New York, and Hong Kong. Capital markets are defined as markets in which money is provided for periods longer than a year. A key division within the capital markets is between theprimary marketsandsecondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known asunderwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock includepension funds,hedge funds,sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf. In the secondary markets, existing securities are sold and bought among investors or traders, usually on anexchange,over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. A second important division falls between thestock markets(for equity securities, also known as shares, where investors acquire ownership of companies) and thebond markets(where investors become creditors).

DEFINITION:A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.

Functions of capital market1. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments.2. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation.3. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.4. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.5. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.6. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.

Capital markets can be further classified into:The Securities Market, however, refers to the markets for those financial instruments/claims/obligations that are commonly and readily transferable by sale.The Securities Market has two interdependent and inseparable segments, the new issues Primary Market The stock (secondary) market.

Primary marketTheprimary marketis that part of thecapital marketsthat deals with the issuance of newsecurities. Companies, governments or public sector institutions can obtainbondsthrough the sale of a new stockorbond issue. This is typically done through asyndicate of securities dealers. The process of selling new issues to investors is calledunderwriting. In the case of a newstock issue, this sale is aninitial public offering(IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in theprospectus. Primary markets create long term instruments through which corporate entities borrow from capital market.Features of primary markets are: This is the market for new long termequity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for convertingprivate capitalintopublic capital; this is known as "going public." Thefinancial assetssold can only be redeemed by the original holder.Methods of issuing securities in the primary market are: Public issuance, includinginitial public offering; Rights issue(for existing companies); Preferential issue.

Secondary market (After market)Thesecondary market, also calledaftermarket, is thefinancial marketin which previously issuedfinancial instrumentssuchasstock,bonds,options, andfuturesare bought and sold.With primary issuances of securities or financial instruments, or theprimary market, investors purchase these securities directly fromissuerssuch ascorporationsissuingsharesin anIPOorprivate placement, or directly from the federal government in the case oftreasuries. After the initial issuance, investors can purchase from other investors in the secondary market.The secondary market for a variety of assets can vary fromloansto stocks, from fragmented to centralized, and fromilliquidto very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as theNew York Stock Exchange,London Stock ExchangeandNasdaqprovide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade over the counter, or by phoning the bond desk of ones broker-dealer. Loans sometimes trade online using aLoan Exchange.

Money market

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

Functions of money marketThe money market functions are: Transfer of large sums of money Transfer from parties with surplus funds to parties with a deficit Allow governments to raise funds Help to implement monetary policy Determine short-term interest rates

Participants in money marketThe money market consists offinancial institutionsand dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-termfinancial instrumentscommonly called "paper." This contrasts with thecapital marketfor longer-term funding, which is supplied bybondsandequity.The core of the money market consists ofinterbank lending--banks borrowing and lending to each other usingcommercial paper,repurchase agreementsand similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) theLondon Interbank Offered Rate(LIBOR) for the appropriate term and currency.Finance companies typically fund themselves by issuing large amounts ofasset-backed commercial paper(ABCP) which is secured by thepledgeof eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans,mortgage-backed securitiesand similar financial assets. Certain large corporations with strongcredit ratings, such asGeneral Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issuemunicipal paper, while theUS TreasuryissuesTreasury billsto fund theUS public debt: Trading companies often purchasebankers' acceptancesto be tendered for payment to overseas suppliers. Retail and institutional money market funds Banks Central banks Cash management programs Merchant banks

Money market instruments Certificate of deposit- Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. Repurchase agreements- Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Commercial paper- short term promissory notes issued by company at discount to face value and redeemed at face value Treasury bills- Short-term debt obligations of a national government that are issued to mature in three to twelve months. Money funds- Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. Foreign Exchange Swaps- Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future. Call Money Market The call money market is a mechanism whereby temporary surplus of some banks is made available to others who have temporary deficit. In India, the call money market is located mainly in Mumbai, Kolkata and Chennai.

Money Market Index To decide how much and where to invest in money market an investor will refer to the Money Market Index. It provides information about the prevailing market rates. There are various methods of identifying Money Market Index like: Smart Money Market Index- It is a composite index based on intra day price pattern of the money market instruments. Salomon Smith Barneys World Money Market Index- Money market instruments are evaluated in various world currencies and a weighted average is calculated. This helps in determining the index. Bankers Acceptance Rate- As discussed above, Bankers Acceptance is a money market instrument. The prevailing market rate of this instrument i.e. the rate at which the bankers acceptance is traded in secondary market, is also used as a money market index. LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also serves as good money market index. This is the interest rate at which banks borrow funds from other banks.

Difference between money market and capital market

Unorganized marketPlayers in unorganized market are money lenders, indigenous bankers, traders etc. who lend money to the public. Indigenous bankers even collect money from public in the form of deposits. There are also private finance companies, chit funds etc.However,activities of these players are not controlled by RBI.Directions were issued in 1998 to bring finance companies and chit funds under strict control of RBI.Steps have also been taken to bring the unorganized sector under organized fold. But these regulations are inadequate and did not have much success.therefore,financial instruments in unorganized markets are not standardized.

2013: Changing Scenario of Indian Equity2012 finally gave investors a year many wished for. The year brought faith in investors and traders with higher interest like change in interest rate, constant flow of FII, stability in growth rate, decline in inflation, decrease in petrol prices and most importantly government reforms in Indian equities markets. Most importantly, the Indian markets performed better compared to other emerging markets. Year 2011 came with disappointment for investors and traders but year 2012 came with opportunities and looking ahead, 2013 is expected to be a promising year with more aggressive reforms from the government and changing scenario of Indian equities.

Nifty Return 27.9% vs -25% and Sensex Return 25.7% vs -15.7%

The enormous growth and improvement of Indian equitiesdefended some groundbreaking developments in the Indianmarkets. In 2011 nifty gave a 25% negative return but in 2012 reversal effect with 27.9% positive return proved the strength in the Indian markets.

While sensex gave a negative return of 15.7% in 2011, in 2012 recovery was seen with 25.7% positive return. The Indian economy will improve in 2013 with lower interest rate, drop in inflation and aggressive steps by the government on reforms might change the overall scenario.

Year 2012 came with more flow of FII inIndian equities. With changes in policy and attractive government reforms shower the flow from foreign markets to Indian markets. Last year in 2011 FII sell 26595 cr and DII buy 29206 cr but this year in 2012 scenario changing with FII buy 101167 cr and DII sell 55800 cr which clearly indicate Indian equities more attractive with highest return compared to other markets. With another round of improvement in Indian equities come in year 2013 will help further inflows with strong case of investment.

In year 2012 rate cut from RBI, decline in inflation, stability in growthrate, Improvement in IIP and still in the deficit mood of export-importmixed year indicate recovery in Indian economy. The way Indiangovernment promoting reforms with taking bold decision mightchanging the picture of Indian economy with important player on thestage of world.

With the economic uncertainty, political deadlock in Europe, worry ofGreece, quantitative easing from ECB, reelecting of Obama in US,strength in Asian markets with austerity plans and stimulus packages overall world market tremble between gains and losses with the volatile microeconomic scenario. Shanghai top loser with 3.2% while DAX top gainer with 29.1%. in 2013 world market faces many challenges like Fiscal cliff issue in US, decision of Greece and Spain in Europe markets, new Chinese leadership in the emerging markets.

Rising commodity prices, uncertain exchange rates, fall in demand due to higher interest rates, overall price hikes and government reforms in different sectors directly or indirectly affected all the sectors. With the robust growth in consumer durables, banking and reality sectors and on other hands consumer goods, IT sectors posted disappointing numbers. With interest rate event by RBI, FDI policy in retail, Raising FDI cap in broadcasting etc. factors Auto, Banking, FMCG, Media, Reality, Capital goods likely to remain in lime light in 2013.

2013 is expected to be a year of hope with government magic and domestic business confidence. Year 2012 passed with scams and government reforms. With also confidence of global investors in Indian markets, the markets may make long journey towards new highs. The government is expected to work aggressively in 2013 on the issue of DTC, GST and land reforms which are still in the queue to clear. On the other side forecast of GDP, interest rates, inflation and fiscal deficit etc factors will be a signal that the worst may be behind us. From a fundamental point of view, there will be positive build up in the environment with domestic growth and global confidence.

Commodity market

Commodity marketrefers to physical or virtual transactions of buying and selling involving raw or primary commodities. Asoft commoditygenerally refers to commodities harvested as products likecoffee,cocoa,sugar,corn,wheat,soybean, andfruittraded in thecommodity market. Hard commodities usually refer tocommoditiesthat are extracted such as (gold,rubber,oil). While commodities may be grouped for regulation purposes etc., in large classes such as energy, agricultural including livestock, precious metals, industrial metals, other commodity markets, these are broken down into about a hundred primary commodities (soybean oil,recycled steel). Investors access about 50 major commodity markets worldwide uses growing numbers of exchanges with virtual transactions increasingly replacing physical trades.

Types of commoditiesWorld-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following:Precious Metals: Gold, Silver, Platinum etc Other Metals: Nickel, Aluminum, Copper etc Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc. Soft Commodities: Coffee, Cocoa, Sugar etc Live-Stock: Live Cattle, Pork Bellies etc Energy: Crude Oil, Natural Gas, Gasoline etc

Segments in commodity marketsThe commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Majority of the derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

History of commodity marketsIndia, being an agro-based economy, has markets for most of the agro-based commodities. India is the largest consumer of Gold in the world, which implies a huge market for the yellow metal. India has huge spot markets for all these commodities. E.g. Indore has a huge market for soya, Ahmedabad for castor seeds and Surendranagar for Cotton etc.

During the pre-independence era India also had a thriving futures market for commodities such as gold, silver, cotton, edible oils etc. In mid 1960s, due to wars, natural calamities and the consequent shortages, futures trading in most commodities were banned.Currently, the futures markets that exist in India are localized for specific commodities. For example, Kerala has an exchange for pepper; Ahmedabad for castor seeds and Mumbai is the major center for Gold etc. These exchanges, however, have only a regional presence and are dominated by people who are involved with the physical trade of that commodity.

Current development in commodity markets

The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.

Consequently four commodity exchanges have been approved to commence business in this regard. They are:

o Multi Commodity Exchange of India Ltd. (MCX) located at Mumbaio National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbaio National Board of Trade (NBOT) located at Indoreo National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Need of Commodity Derivatives for India. India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products.Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives. Trends in volume contribution on the three National Exchanges:-Pattern on Multi Commodity Exchange (MCX).MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world.Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demand-supply and hence, the price signals largely reflect international scenario.Among Agricultural commodities major volume contributors include Gur, Urad, Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to manipulations.Pattern on National Commodity & Derivatives Exchange (NCDEX).NCDEX is the second largest commodity exchange in the country after MCX. However the major volume contributors on NCDEX are agricultural commodities.But, most of them have common inherent problem of small market size, which is making them vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by FMC).Pattern on National Multi Commodity Exchange (NMCE) NMCE is third national level futures exchange that has been largely trading in Agricultural Commodities. Trade on NMCE had considerable proportion of commodities with big market size as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities with small market size or narrow commodities. Analysis of volume contributions on three major national commodity exchanges reveled the following pattern, Major volume contributors:- Majority of trade has been concentrated in few commodities that are

Non Agricultural Commodities (bullion, metals and energy) Agricultural commodities with small market size (or narrow commodities) like guar, Urad, Mentha etc.

Commodity markets across the worldAfricaExchangeAbbreviationLocationProduct Types

Africa Mercantile ExchangeAfMXNairobi,KenyaAgricultural, Energy

Nairobi Coffee ExchangeNCENairobi,KenyaCoffee

Ethiopia Commodity ExchangeECXAddis Ababa, EthiopiaAgricultural

EAST Africa Exchange RwandaEAXKigali, RwandaAgricultural

Agricultural Commodity Exchange for AfricaACELilongwe, Malawi

Auction Holding Commodity ExchangeAHCXLilongwe, MalawiAgricultural

Mercantile Exchange of MadagascarMEXAntananarivo, MadagascarAgricultural, Metals, Energy

Global Board of TradeGBOTEbene, MauritiusMetals, Forex

SAFEX (Johannesburg Securities exchange)JSESandton, South AfricaAgricultural

(Makola Agricuturals Exchange)Accra, GhanaAlternative Agricultural

AmericasExchangeAbbreviationLocationProduct Types

Brazilian Mercantile and Futures ExchangeBMFSo Paulo,BrazilAgricultural, Biofuels, Precious Metals

Chicago Board of Trade(CME Group)CBOTChicago,United StatesGrains, Ethanol, Treasuries, Equity Index, Metals

Chicago Mercantile Exchange(CME Group)CMEChicago,United StatesMeats, Currencies, Eurodollars, Equity Index

Chicago Climate ExchangeCCXChicago,United StatesEmissions

Flett ExchangeJersey City,United StatesEnvironmental

HedgeStreetExchangeCalifornia,United StatesEnergy, industrial Metals

HoustonStreetExchangeNew Hampshire,United StatesCrude Oil, Distillates

Intercontinental ExchangeICEAtlanta, Georgia,United StatesEnergy, Emissions, Agricultural, Biofuels

Kansas City Board of TradeKCBTKansas City,United StatesAgricultural

Memphis Cotton ExchangeMemphis,United StatesAgricultural

Mercado a Termino de Buenos AiresMATbaBuenos Aires,ArgentinaAgricultural

Mercado a Termino de RosarioROFEXRosario,ArgentinaFinancial, Agricultural

Minneapolis Grain ExchangeMGEXMinneapolisAgricultural

NadexExchangeChicago,United StatesEnergy, industrial Metals

New York Mercantile Exchange(CME Group)NYMEXNew York,United StatesEnergy, Precious Metals, Industrial Metals

U.S. Futures ExchangeUSFEChicago,United StatesEnergy

AsiaExchangeAbbreviationLocationProduct Types

International Commodity Exchange KazakhstanAlmatyKazakhstanIndustrial and Mineral Products, Oil By-products and Petrochemicals, Agricultural

Agricultural Futures Exchange of ThailandAFETBangkokThailandAgricultural

Bursa MalaysiaMDEXMalaysiaBiofuels

Cambodian Mercantile ExchangeCMEXPhnom Penh, CambodiaEnergy, Industrial Metals, Rubber, Precious Metals, Agricultural

Central Japan Commodity ExchangeNagoya, JapanEnergy, Industrial Metals, Rubber

Chittagong Tea AuctionChittagong,BangladeshTea

Dalian Commodity ExchangeDCEDalian, ChinaAgricultural, Plastics, Energy

Dubai Mercantile ExchangeDMEDubaiEnergy

Dubai Gold & Commodities ExchangeDGCXDubaiPrecious Metals

Hong Kong Mercantile ExchangeHKMExHong KongGold, Silver

Iran Mercantile ExchangeIMETehran,IranIndustrial and Mineral Products, Oil By-products and Petrochemicals, Agricultural

Iranian oil bourseIOBKish Island,IranOil, Gas, Petrochemicals

Kansai Commodities ExchangeKANEXOsaka, JapanAgricultural

Commodities & Metal Exchange Nepal Ltd.COMENNepalGold, Silver

National Spot Exchange Limited[NSEL]Mumbai,India

Nepal Derivative Exchange Limited[NDEX]Kathmandu,NepalAgricultural, Precious Metals, Base Metals, Energy

Mercantile Exchange Nepal LimitedMEXKathmandu,NepalAgricultural, Bullion, Base Metals, Energy

Derivative and Commodity Exchange Nepal Ltd.DCXKathmandu,NepalAgricultural, Bullion, Base Metals, Energy

Nepal Spot Exchange LimitedNSEKathmandu,NepalAgricultural, Bullion

Indian Commodity Exchange LimitedICEXIndiaEnergy, Precious Metals, Base Metals, Agricultural

Multi Commodity ExchangeMCXIndiaPrecious Metals, Base Metals, Energy, Agricultural

National Commodity and Derivatives ExchangeNCDEXIndiaPrecious Metals, Base Metals, Energy, Agricultural

National Multi-Commodity Exchange of India LtdNMCEIndiaPrecious Metals, Base Metals, Agricultural

Ace Derivatives & Commodity Exchange Ltd.ACEIndiaAgricultural

Bhatinda Om & Oil Exchange Ltd.BOOEIndiaAgricultural

UCXUCXIndiaAgricultural

Pakistan Mercantile ExchangePMEXPakistanPrecious Metals, Agricultural Products, Crude Oil, Interest Rate Future

Shanghai Futures ExchangeShanghai, ChinaIndustrial metals, Gold, Petrochemicals, Rubber

Shanghai Gold ExchangeShanghai, ChinaPrecious Metals

Singapore Commodity ExchangeSICOMSingaporeAgricultural, Rubber

Singapore Mercantile ExchangeSMXSingaporePrecious Metals, Base Metals, Agricultural, Energy

Uzbek Commodity ExchangeUZEXTashkent, UzbekistanMetals, crude oil products, chemicals, base oils, LPG and polyethylene, sugar, agricultural, etc.

Tokyo Commodity ExchangeTOCOMTokyo, JapanEnergy, Precious Metals, Industrial Metals, Agricultural

Tokyo Grain ExchangeTGETokyo, JapanAgricultural

Zhengzhou Commodity ExchangeCZCEZhengzhou, ChinaAgricultural,PTA

Vietnam Commodity ExchangeVNXHo Chi Minh city,VietnamCoffee, Rubber, Steel

Buon Ma Thuot Coffee Exchange CenterBCECBuon Ma Thuot, VietnamCoffee

EuropeExchangeAbbreviationLocationProduct TypesLife Time

APX-ENDEXAPX-ENDEXAmsterdam,NetherlandsEnergy

Trieste Commodity ExchangeBMTSTrieste,ItalyAgricultural

Commodity Exchange Bratislava, JSCCEBBratislava,SlovakiaEmissions, Agricultural, Diamonds

ClimexCLIMEXAmsterdam,NetherlandsEmissions

NYSE LiffeLIFFEEuropeAgriculturalFounded in 1982, merged intoEuronextin 2002

European Climate ExchangeECXEuropeEmissions

Energy Exchange AustriaEXAAVienna, AustriaEnergy, Emissions

Integrated Nano-Science Commodity ExchangeINSCXUnited KingdomNanomaterials

London Commodity ExchangeLCELondon, UKAgriculturalMerged intoLIFFEin 1996

London Metal ExchangeLMELondon, UKIndustrial Metals, Plastics

European Energy ExchangeEEXLeipzig, DeutschlandEnergy, Emissions

Foreign exchange market

The market in which participants are able to buy, sell, exchange and speculate on currencies. The forex markets is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market in the world, processing trillions of dollars worth of transactions each day.Theexchange rateis just the price of one currency in terms of another currency. Currency markets are the world's largest financial market - over $1T ($1000B) is traded daily vs. $10-15B traded daily in the entire US equity market. Foreign exchange market operates daily around the clock - 24/7. There is not a physical location or exchange (like NYSE) for currency trading, it is more like NASDAQ, an over-the-counter network of currency traders, most large banks, linked by telephone and computer. Trading is usually in transactions of $1m or more per trade, at the wholesale level.Trading in the foreign exchange market is mainly to facilitate international trade and international investment - the buying and selling of foreign goods, services and financial assets. Think of the three functions of money - unit of account, medium of exchange and store of value. Foreign goods are usually priced in foreign currency - German wine/beer is priced in Euros for example. The unit of account is the euro, the medium of exchange is the euro. American liquor distributors need Euros to buy the German wine/beer. Also, American investors may consider the euro a better store of value than the US dollar. They could buy a CD from a German bank denominated in Euros, instead of putting money in a U.S. bank. Or American investors want to buy stock of a company in UK, Brazil or Turkey. They need foreign currency to buy foreign assets.Note:Exchange rates can be quoted two ways:e = / $, or theForeign Currency per U.S $. When e gets bigger (100 to 120), dollar gets stronger,appreciatesin value (and the Yen depreciates). $1 will buy more foreign currency, or it takes more Yen to buy a $1. When e gets smaller (100 to 80), dollar gets weaker,depreciatesin value (and the Yen appreciates). $1 will buy fewer Yen, or it takes fewer Yen to buy a $1. Just like a price of $2/gallon of gasoline, when the P gets bigger the value (price) of gas increases (it's in the denominator), when P gets smaller the value (price) of gas decreases.e = $ / (British pound), or theU.S. $ equivalent, or U.S. Dollars per national currency unit. When this e gets bigger, the get stronger (appreciates) and the dollar gets weaker (depreciates), because it takes more dollars to buy a . When e gets smaller, the depreciates and the dollar gets stronger. It costs less for us, in U.S. $, to buy a pound.POINT:1. When e (ex-rate) gets bigger, the currency in the DENOMINATOR gets stronger (appreciates).2. When e (ex-rate) gets smaller, the currency in the DENOMINATOR gets weaker (depreciates).3. Since the ex-rate is just a ratio of two currencies, when one ($) gets stronger, the other () gets weaker.Two Types of Exchange Rates:

1. Spot Rates (e or E)- Buyer and Seller agree on P (ex-rate) and Q for immediate delivery (within two days).

2. Forward rates (F)- Buyer and Seller agree on P (ex-rate) and Q fordelivery in the future - 1 month, 3 month, 6 months or more in the future.

Debt MarketThe debt market in India consists of mainly two categoriesthe government securities or the G-Sec markets comprising central government and state government securities, and the corporate bond market. In order to finance its fiscal deficit, the government floats fixed income instruments and borrows money by issuing G-Secs that are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The corporate bond market (also known as the non-Gsec market) consists of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures. The G-secs are the most dominant category of debt markets and form a major part of the market in terms of outstanding issues, market capitalization, and trading value. It sets a benchmark for the rest of the market. The market for debt derivatives have not yet developed appreciably, although a market for OTC derivatives in interest rate products exists. The exchange-traded interest rate derivatives that were introduced recently are debt instruments; this market is currently small, and would gradually pick up in the years to come.

History The National Stock Exchange started its trading operations in June 1994 by enabling the Wholesale Debt Market (WDM) segment of the Exchange. This segment provides a trading platform for a wide range of fixed income securities that includes central government securities, treasury bills (T-bills), state development loans (SDLs), bonds issued by public sector undertakings (PSUs), floating rate bonds (FRBs), zero coupon bonds (ZCBs), index bonds, commercial papers (CPs), certificates of deposit (CDs), corporate debentures, SLR and non-SLR bonds issued by financial institutions (FIs), bonds issued by foreign institutions and units of mutual funds (MFs). To further encourage wider participation of all classes of investors, including the retail investors, the Retail Debt Market segment (RDM) was launched on January 16, 2003.This segment provides for a nation wide, anonymous, order driven, screen based trading system in government securities. In the first phase, all outstanding and newly issuedcentral government securities were traded in the retail debt market segment. Other securities like state government securities, T-bills etc. will be added in subsequent phases. The settlement cycle is same as in the case of equity market i.e., T+2 rolling settlement cycle.

Types of securitiesTreasury Bills: Treasury bills (T-bills) are money market instruments, i.e., short-term debt instruments issued by the Government of India, and are issued in three tenors91 days, 182 days, and 364 days. The T-bills are zero coupon securities and pay no interest. They are issued at a discount and are redeemed at face value on maturity.Cash Management Bills: Cash management bills (CMBs)3 have the generic characteristics of T-bills but are issued for a maturity period less than 91 days. Like the T-bills, they are also issued at a discount, and are redeemed at face value on maturity. The tenure, noticed amount, and date of issue of the CMBs depend on the temporary cash requirement of the government. The announcement of their auction is made by the RBI through a Press Release that would be issued one day prior to the date of auction. The settlement of the auction is on a T+1 basis.Dated Government Securities: Dated government securities are long-term securities that carry a xed or oating coupon (interest rate), which is paid on the face value, payable at xed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years.State Development Loans: State governments also raise loans from the market. State Development Loans (SDLs) are dated securities issued through an auction similar to the auctions conducted for the dated securities issued by the central government. Interest is serviced at half-yearly intervals, and the principal is repaid on the maturity date. Like the dated securities issued by the central government, the SDLs issued by the state governments qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility.

Fixed Rate Bonds: These are bonds on which the coupon rate is xed for the entire life of the bond. Most government bonds are issued as xed rate bonds.Floating Rate Bonds: Floating rate bonds are securities that do not have a xed coupon rate. The coupon is re-set at pre-announced intervals (say, every 6 months, or 1 year) by adding a spread over a base rate. In the case of most oating rate bonds issued by the Government of India so far, the base rate is the weighted average cut-off yield of the last three 364-day Treasury Bill auctions preceding the coupon re-set date, and the spread is decided through the auction. Floating rate bonds were rst issued in India in September 1995.Zero Coupon Bonds: Zero coupon bonds are bonds with no coupon payments. Like T-Bills, they are issued at a discount to the face value. The Government of India issued such securities in the 90s; it has not issued zero coupon bonds after that.Capital Indexed Bonds: These are bonds, the principal of which is linked to an accepted index of ination with a view to protecting the holder from ination. Capital indexed bonds, with the principal hedged against in ation, were rst issued in December 1997. These bonds matured in 2002. The government is currently working on a fresh issuance of Ination Indexed Bonds wherein the payment of both the coupon as well as the principal on the bonds would be linked to an Ination Index (Wholesale Price Index). In the proposed structure, the principal will be indexed and the coupon will be calculated on the indexed principal. In order to provide the holders protection against actual in ation, the nal WPI will be used for indexation.Bonds with Call/Put Options: Bonds can also be issued with features of optionality, wherein the issuer can have the option to buy back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond.The optionality on the bond could be exercised after the completion of ve years from the date of issue on any coupon date falling thereafter. The government has the right to buy-back the bond.

Derivatives market

Derivative 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 contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example,wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying.In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines derivative to include

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. A contract, which derives its value from the prices, or index of prices, of underlying securities.

Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A.

Products, Participants and FunctionsDerivative contracts have several variants. The most common variants are forwards, futures, options and swaps. The following three broad categories of participants - hedgers, speculators, and arbitrageurs trade in the derivatives market. Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. First, prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices. Second, the derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Third, derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. Fourth, speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kind of mixed markets. Fifth, an important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment opportunities, the benefit of which are immense. Finally, derivatives markets help increase savings and investment in the long run.

Types of derivatives

The most commonly used derivatives contracts are forwards, futures and options.

Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange traded contracts.

Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are:

1. Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency and

2. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Regulators in financial market

SEBIThe Securities and Exchange Board of India (SEBI) emerged as a non-statutory body in 1988 and became an autonomous body on April 12, 1992, under Securities and Exchange Board of India Act, 1992. The present Chairman of SEBI is Upendra Kumar Sinha. The board protects the interests of investors in securities and promotes the development of, and to regulate, the securities market and for matters connected with them.

SEBI has adopted many rules and regulations for enhancing the Indian capital market regularly. SEBI made it mandatory for every broker or sub broker to get registered with the body or any stock exchange in India before getting into the business. An asset limit of 20 lakhs has been fixed for working as an underwriter. All Indian companies are free to determine their respective share prices and premiums on the share prices. SEBI have direct control on all mutual funds of both public and private sector through SEBI (Mutual Funds) Regulation in 1993.

RBIReserve Bank of Indiais the apex monetary institution of India which is responsible for the regulation ofcurrency, printing ofbanknotesand mintingcoins. It is also called as the central bank of the country.The bankwas established on April1, 1935 in Kolkata according to the Reserve Bank of India act 1934 but was later shifted to Mumbai in 1937. RBI was initially privately owned but since nationalization in 1949, the Reserve Bank is owned by theGovernmentof India. The Governor sits in Central Office where policies are formulated.

ConclusionThe contours of the nancial markets are expanding with the advent of new technology, innovations in products and fast changing customer expectations. The Indian nancial services sector comprises a good blend of domestic and foreign participants. Opening up of the nancial markets has resulted in competition and greater eciency; however, foreign participation could also bring in the baggage of increased risk and exposure as recent events have shown. Stability is therefore a critical need for nancial markets for which safeguarding mechanisms need to be established, to prevent systemic risks and absorb shocks.The equity market in India is extremely vibrant, but equity based funding solely, cannot lead the economy to growth. The debt market remains underdeveloped, with a huge potential for increased activity. A strong bond market is required to drive long term nancing of infrastructure, housing and private sector development. The role of capital markets is vital for enhancing growth in wealth distribution and increasing availability of funds for infrastructure development. One of the underlying challenges that the banking and nancial services sector is dealing with is the issue of increasing the out-reach & enhancing nancial inclusion. The huge scale of the drive towards inclusive growth is intimidating, as various stakeholders like banks, insurance companies and asset management companies struggle to move a step closer to the untapped areas and newer target consumers. The challenge lies in devising a cost eective delivery model to reach out to the low income group of society, penetrating the remote areas. A debate on new banking licenses, banks developing and formulating strategies for inclusive banking and an increasing thrust on infrastructure nancing, have been some of the initiatives which have been taken to give an added impetus to nancial inclusion. The road ahead for deepening the nancial markets needs to be paved by the formulation of a strong linkage between the development of the economy and the capacity of the nancial system. The global nancial environment is moving towards an integrated nancial system, and will serve in good stead to standardise compliance norms and procedures. A greater measure of transparency is also required to be built into regulatory procedures, to bring in a new dimension to nancial markets, and take it to the next level.

Financial instruments

IntroductionA real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity.

Financial instruments are legal documents that embody monetary value. There are a number of different types of documents that are properly identified as a financial instrument, including cash instruments and derivatives.When most people think in terms of financial instruments, they tend to identify what is commonly known as a cash instrument. This is simply those documents that are recognized as cash that can be utilized for various transactions. Currency is the most easily identified of all cash instruments, although such documents as checks or funds transfers from bank accounts are also seen as cash instruments.Derivative instrumentsare another example of the financial instrument. This classification would include such instruments asfutures, options, and swaps. Some analysts also prefer to include stocks, bonds, and currency futures within this category as well, while others tend to think of these ascash equivalents, since it is possible to settle debts by transferring ownership of stocks and bonds. In broad terms, a derivative instrument is some type of contract that has value based on the current status of the underlying assets.Other types of documents are often understood to function as a financial instrument. In the world or realestatefunding, themortgagequalifies as a financial instrument. A commercial paper or stock index also meets the basic definition, as do bills of exchange.

Characteristics of financial instruments Most of these instruments are freely transferable from one person to another. They are mostly liquid in nature i.e. they can be easily converted into cash. Most of the instruments can be offered as security for obtaining loan. Risk is involved in the investment in financial instruments as there is uncertainty about payment of principal or interest or dividend. The return on these instruments is directly proportional to the risk involved. They are generally classified into short term, medium term and loan based on the maturity period.

Types of financial instruments

Equities

Equities are a type of security that represents the ownership in a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. However, along with the possibility of greater returns comes greater risk.Equity, also called shares or scrips, is the basic building blocks of a company. A company's ownership is determined on the basis of its shareholding. Shares are, by far, the most glamorous financial instruments for investment for the simple reason that, over the long term, they offer the highest returns. Predictably, they're also the riskiest investment option. The BSE Sensex is the most popular index that tracks the movements of shares of 30 blue-chip companies on a weighted average basis. The rise and fall in the value of the Sensex, measured in points, broadly indicates the price-movement of the value of shares. Of late, technology has played a major role in enhancing the efficiency, safety, and transparency of the markets. The introduction of online trading has made it possible for an investor to trade in equities at the click of a mouse.

SuitabilityShares are meant to be long-term investments. Three golden rules for investment in equity - Diversify, Average out & most importantly stay invested. Shares do generate income from dividend aswell as capital appreciation and have a strong potential to increase value of investment. But shares are risky - share prices are affected by factors beyond anyone's control and hence one needs to have an appetite for that kind of risk. if the company earns good profits and pays dividends regularly, shares are ideal for income purposes. But not all good companies regularly pay dividends as they may chose to employ the profits for investments and growth purposes.

liquidityShares are the most liquid financial instruments as long as there is a buyer for your shares on the stock exchange. Most shares belonging to the A Group on the BSE are among the most liquid. However, shares of some companies may not witness any trading for many days altogether. In such a case, you will not be able to sell your shares. So, the liquidity factor varies to a large extent.

Tax ImplicationsWhile dividend is not taxable at the hands of the investor, capital gains are. When you sell your shares at a profit, it attracts a capital gains tax. Gains realized within one year of purchase of shares come under the short-term capital gains tax, and are included in gross taxable income. If the duration is more than one year, it is termed as long-term

BondsBonds are fixed income instruments which are issued for the purpose of raising capital. Both private entities, such as companies, financial institutions, and the central or state government and other government institutions use this instrument as a means of garnering funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair returns. A Bond is a loan given by the buyer to the issuer of the instrument. Companies, financial institutions, or even the government can issue bonds. Over and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date.

Bonds can be broadly classified into: Tax-Saving Bonds Regular Income Bonds

Tax-Saving Bonds offer tax exemption up to a specified amount of investment, examples are:a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961b. REC Bonds under Section 54EC of the Income Tax Act, 1961c. RBI Tax Relief Bonds.

Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals, examples are:a. Double Your Money Bondb. Step-Up Interest Bondc. Retirement Bondd. En-cash Bonde. Education Bondsf. Money Multiplier Bonds/Deep Discount BondSimilar instruments issued by companies are called debentures.

SuitabilityBonds are usually not suitable for an increase in your investment. However, in the rare situation where an investor buys bonds at a lower price just before a decline in interest rates, the resultant drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your investment. This is called capital appreciation.

Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may receive interest semi-annually or even monthly, as is the case with monthly income bonds. Depending on ones capacity to bear risk, one can opt for bonds issued by top ranking corporate, or that of companies with lower credit ratings. Usually, bonds of top-rated corporate provide lower yield as compared to those issued by companies that are lower in the ratings.

Ratingbonds are rated by specialized credit rating agencies. Credit rating agencies include CARE, CRISIL, ICRA and Fitch. An AAA rating indicates highest level of safety while D or FD indicates the least. The yield on a bond varies inversely with its credit (safety) rating. As mentioned earlier, the safer the instrument, the lower is the rate of interest offered.

LiquiditySelling in the debt market is an obvious option.Some issues also offer what is known as 'Put and Call option.' Under the Put option, the investor has the option to approach the issuing entity after a specified period (say, three years), and sell back the bond to the issuer. In the Call option, the company has the right to recall its debt obligation after a particular time frameThe company can now exercise the Call option and recall its debt obligation provided it has declared so in the offer document. Similarly, an investor can exercise his Put option if interest rates have moved up and there are better options available in the market.

Tax Implications

There are specific tax saving bonds in the market that offer various concessions and tax-breaks. Tax-free bonds offer tax relief under Section 88 of the Income Tax Act, 1961. Interest income from bonds, up to a limit of Rs.12,000, is exempt under section 80L of the Income tax Act, plus Rs.3,000 exclusively for interest from government securities.

Deposits

Investing in bank or post-office deposits is a very common way of securing surplus funds. These instruments are at the low end of the risk-return spectrum. When you deposit a certain sum in a bank with a fixed rate of interest and a specified time period, it is called a bank Fixed Deposit (FD). At maturity, you are entitled to receive the principal amount as well as the interest earned at the pre-specified rate during that period. The rate of interest for Bank Fixed Deposits varies between 4 and 6 per cent, depending on the maturity period of the FD and the amount invested. The interest can be calculated monthly, quarterly, half-yearly, or annually, and varies from bank to bank. They are one the most common savings avenue, and account for a substantial portion of an average investor s savings. The facilities vary from bank to bank. Some services offered are withdrawal through cheques on maturity; break deposit through premature withdrawal; and overdraft facility etc.

TYPES OF DEPOSITS WITH BANKSWhile various deposit products offered by the Bank are assigned different names. The deposit products can be categorised broadly into the following types. Definition of major deposits schemes is as under: -

i) Demand deposits means a deposit received by the Bank which is withdrawable on demand; ii) Savings deposits means a form of demand deposit which is subject to restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the Bank during any specified period;

iii) Term deposit means a deposit received by the Bank for a fixed period withdrawable only after the expiry of the fixed period and includes deposits such as Recurring / Double Benefit Deposits / Short Deposits / Fixed Deposits /Monthly Income Certificate /Quarterly Income Certificate etc.

iv)Notice Deposit means term deposit for specific period but withdrawable on giving atleast one complete banking days notice;

v) Current Account means a form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amountand will also include other deposit accounts which are neither Savings Deposit nor Term Deposit;

Corporate fixed depositsCorporate fixed deposits are normal fixed deposits offered by Companies. The interest rates offered are generally higher than Bank interest rates and can be in range from 9%-16% . Higher the interest rates offered higher are the risks involved. Why do companies have these deposits? when companies have cash crunch and require money, they can offer deposits at attractive rate of interest to common public, one of the reasons for this can be that they do not want to raise the additional capital by issuing shares. Corporate Deposits are governed as per Section 58A of Companies Act, however these are unsecured loans (we will talk about it).

Risk with company fix depositsThere are two main risks associated with Company Deposits , they are :A) Default Risk:These Company deposits carry a risk called Default Risk, which means, at maturity they might not be able to return your maturity amount and default in the payment. It can happen that company is out of cash at that time or does not have sufficient money in their hand to pay back , this can happen for many reasons like their business might not be going good that time or because of recession .

B) Unsecured Deposits: Bank Deposits are secured by RBI up to 1 lacs rupees per branch, which means that if bank does not return you the money or goes bankrupt, RBI will pay you up to 1 lacs of deposits. There is no such Insurance on Company Deposits, hence they are totally unsecured.

SuitabilityThere is nothing good or bad, some companies which offer Fixed Deposits are very established and are highly reputed, however you cant take it at face value and ignore therisksinvolved. If you want to park money for short-term and are comfortable with the risks which come with corporate fixed deposits, these corporate fixed deposits can be a good products for you. The point here is awareness. Its not recommended that you put a big sum in same company. If you want to invest 2 lacs in company fixed deposits, then better invest 1 lacs in 2 different company, that woulddiversifyyour risk to some extent. Also if you are investing for some veryimportant goal, then better settle with Bank Fixed Deposits and not Corporate deposits,its better to settle with 2-3% less returns then take unneccessary risk . Here are some words of caution while choosing Company deposits.

Company Fixed Deposits you should Avoid Companies which offer interest higher than 15%. Companies which are not paying regular dividends to the shareholder Companies whose Balance Sheet shows losses Companies which are below investment grade (A or under) rating. Pvt limited Companies and Partnership firms as its very difficult to judge their performance.

Cash EquivalentsThese are relatively safe and highly liquid investment options. Treasury bills and money market funds are cash equivalents.

Treasury Bills (T-Bills): Treasury Bills, one of the safest money market instruments, are short term borrowing instruments of the Central Government of the Country issued through the Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so attractive. It is available both in primary market as well as secondary market. It is a promise to pay a said sum after a specified period. T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturity periods. The Central Government issues T- Bills at a price less than their face value (par value). They are issued with a promise to pay full face value on maturity. So, when the T-Bills mature, the government pays the holder its face value. The difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument. T-Bills are issued through a bidding process at auctions. The bidcan be prepared either competitively or non-competitively. In the second type of bidding, return required is not specified and the one determined at the auction is received on maturity. Whereas, in case of competitive bidding, the return required on maturity is specified in the bid. In case the return specified is too high then the T-Bill might not be issued to the bidder. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of Rs.25K and in its multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364- day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is available at the Banks website. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction. Payment by allottees at the auction is required to be made by debit to their/ custodians current account. T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. NDS is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments. RBI issues these instruments to absorb liquidity from the market by contracting the money supply. In banking terms, this is called Reverse Repurchase (Reverse Repo). On the other hand, when RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market. This is called Repo (Repurchase) transaction.Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions. Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills; however chances of default are almost negligible but are not zero risk instruments. Commercial paper being an instrument not backed by any collateral, only firms with highquality credit ratings will find buyers easily without offering any substantial discounts. They are issued by corporates to impart flexibility in raising working capital resources at market determined rates. Commercial Papers are actively traded in the secondary market since they are issued in the form of promissory notes and are freely transferable in demat form.Certificate of Deposit: It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also. The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded interest calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods. However, if interest is paid more than once in a year, it is beneficial to opt APY over APR.Bankers Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyers promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person drawing the bill must have a good credit rating otherwise the Bankers Acceptance will not be tradable. The most common term for these instrumentsis 90 days. However, they can very from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.

Gold

Indians faith in GOD and GOLD dates back to the Vedic times; they worshipped both. According to the World Gold Council Report, India stands today as the worlds largest single market for gold consumption. In developing countries, people have often trusted gold as a better investment than bonds and stocks. Gold is an important and popularinvestment for many reasons:

In many countries gold remains an integral part of social and religious customs, besides being the basic form of saving. Shakespeare called it the saint seducing gold. Superstition about the healing powers of gold persists. Ayurvedic medicine in India recommends gold powder and pills for many ailments. Gold is indestructible. It does not tarnish and is also not corroded by acid except by a mixture of nitric and hydrochloric acids. Gold has aesthetic appeal. Its beauty recommends it for ornament making above all other metals. Gold is so malleable that one ounce of the metal can be beaten into a sheet covering nearly a hundred square feet. Gold is so ductile that one ounce of it can be drawn into fifty miles of thin gold wire. Gold is an excellent conductor of electricity; a microscopic circuit of liquid gold printed on a ceramic strip saves miles of wiring in a computer. Gold is so highly valued that a single smuggler can carry gold worth Rs.50 lac underneath his shirt. Gold is so dense that all the tones of gold, which has been estimated; to be mined through history could be transported by one single modern super tanker. Finally, gold is scam-free. So far, there have been no Mundra type or Mehta type scams in gold.Apparently, gold is the only product, which has an investment as well as ornamental value. Going beyond the narrow logic of yield and maturity values, thus, the lure of this yellow metal continues.

Mutual fundA mutual fund allows a group of people to pool their money together and have it professionally managed, in keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional management and sound regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. There are various general and thematic mutual funds to choose from and the risk and return possibilities vary accordingly.Mutual funds are investment companies that use the funds from investors to invest in other companies or investment alternatives. They have the advantage of professional management, diversification, convenience and special services such as cheque writingand telephone account service. It is generally easy to sell mutual fund shares/units although you run the risk of needing to sell and being forced to take the price offered. Mutual funds come in various types, allowing you to choose those funds with objectives, whichmost closely match your own personal investment objectives. A load mutual fund is one that has sales charge or commission attached. The fee is a percentage of the initial investment. Generally, mutual funds sold through brokers are load funds while funds sold directly to the public are no-load or low-load. As an investor, you need to decidewhether you want to take the time to research prospective mutual funds yourself or pay the commission and have a broker who will do that for you. All funds have annual management fees attached.

Types

Open - Ended Mutual FundsAn open-ended mutual fund is the one whose units can be freely sold and repurchased by the investors. Such funds are not listed on bourses since the Asset Management Companies (AMCs) provide the facility for buyback of units from unit-holders either at the NAV, or NAV-linked prices. Instant liquidity is the USP of open-ended funds: you can investin or redeem your units at will in a matter of 2-3 days. In the event of volatile markets, open-ended funds are also suitable for investment appreciation in the short-term. This is how they work: if you expect the interest rates to fall, you park your money in an open-ended debt fund. Then, when the prices of the underlying securities rise, leading to an appreciation in your funds NAV, you make a killing by selling it off. On the other hand, if you expect the Bombay Stock Exchange Sensitivity Index the Sensex to gain in the short term, you can pick up the right open-ended equity fund whose portfolio has scrips likely to gain from the rally, and sell it off once its NAV goes up.

Close Ended Mutual FundsClosed-ended mutual funds have a fixed number of units, and a fixed tenure (3, 5, 10,or 15 years), after which their units are redeemed or they are made open-ended. These funds have various objectives: generating steady income by investing in debt instruments,capital appreciation by investing in equities, or both by making an equal allocation of the corpus in debt and equity instruments.

Interval Funds Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

Growth FundsThe aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-termoutlook seeking growth over a period of time.

Income FundsThe aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

Balanced FundsThe aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market,the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

Money Market FundsThe aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods.

Industry Specific SchemesIndustry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, Pharmaceuticals etc.

Sectoral SchemesSectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.

Financial market summary

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Investments in equity shares are a form of financial asset. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. A derivative is a financial instrument or other contract with all three of the following characteristics:Its value changes in response to the change in an underlying.It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts.It is settled at a future date. Financial instruments are categorized into the following four types: fair value through profit and loss (FVPL), held-to-maturity (HTM), available-for-sale (AFS), and loans and receivables (LAR). Investments in equity shares, futures, and equity options are classified only as either fair value through profit and loss or as available-for-sale securities. The fair value of a financial asset or liability is the amount for which the financial asset could be exchanged, or the financial liability settled, between knowledgeable, willing parties in an arms-length transaction. When determining the fair value of a financial instrument, the accounting standards set out a hierarchy to be applied to the valuation. An entity should recognize a financial asset on its balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument. De-recognition of a financial asset or a portion of a financial asset occurs under the current standards when, and only when, the entity loses control of the contractual rights that comprise the financial asset. Investments can be in any of three types: physical assets, intangible assets, or financial assets. This book covers accounting concepts involved in investments in financial assets comprising equity, equity futures, and equity options. Speculation is the assumption of the risk of loss, in return for the uncertain possibility of a reward. If a particular position involves no risk, the position represents an investment.Two major accounting standards are U.S. GAAP and IFRS. The United States generally accepted accounting principles (U.S. GAAP) literature is rule-based. The International Financial Reporting Standards (IFRS) are principle-based. Because U.S. GAAP is rule-based and also because it has been around for a longer period of time than IFRS, U.S. GAAP literature is more voluminous than IFRS literature. The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have been committed to converging IFRS and U.S. GAAP since the Norwalk Accord of 2002. According to the American Institute of Certified Public Accountants (AICPA) , as of November 2008, nearly 100 countries require or allow the use of IFRS for the preparation of financial statements by publicly held companies. In the United States, the Securities and Exchange Commission (SEC) is considering taking steps to set a date to allow U.S. public companies to use IFRS, and perhaps make its adoption mandatory.

Sources of information

Books Equity markets 1 and 2 by Anita bobade Commodity market by S.P.Das Debt markets by Sandeep Gupta and Sachin bandarkar Introduction to financial markets part 1 class 11 of Central board of secondary education (Delhi)

Websites

http://en.wikipedia.org/wiki/Capital_market http://www.investopedia.com/walkthrough/corporate-finance/1/financial-markets.aspx http://economictimes.indiatimes.com/topic/financial-market http://www.businessdictionary.com/definition/financial-instrument.html http://www.wisegeek.org/what-is-a-financial-instrument.htm#didyouknowout http://www.rbi.org.in/scripts/bs_viewmmo.aspx http://www.caalley.com/art/Money_Market_and_Money_Market_Instruments.pdf

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