Know all about stock markets here

Know all about stock markets here

by Prasanth Menon Last Updated: Mar 30, 2022 - 11:41 am 205k Views


A financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies, and derivatives. Markets work by placing the two counterparts, buyers and sellers at one place so they can find each other easily; thus facilitating the deal between them.
There are different types of markets in which you can participate for trading securities and commodities in India:

1. Capital markets: It is a market for long term funds (generally over 1 year), where debt and equity are traded. It consists of development banks, commercial banks, and stock exchanges.The capital market can be divided into two parts:

Primary markets
It deals with new securities that are issued for the first time. It is also known as the new issue market. Generally, the investors in this market are banks, financial institutions, mutual fund companies, insurance companies and individuals. When a private company decides to become a publicly-traded entity, it issues and sells its stocks at a so-called Initial Public Offering or IPOs.  

Secondary markets
A secondary market or the so-called “aftermarket” is a place where investors purchase previously issued securities such as stocks, bonds, futures, and options from other investors, rather from issuing them from the companies themselves. It is also known as a stock market or a stock exchange. A stock exchange is an institution which provides a platform for buying and selling of existing securities.

2. Money markets: This is a market for short term funds/securities whose period of maturity is up to one year. The major participants in the money market are RBI, commercial banks, non-banking finance companies, large corporate houses, and mutual funds. One can borrow money in a short period of time via some standard instruments like:

Treasury bills

These are issued by RBI at a price lower than their face value and repaid at par on behalf of the central government for meeting its short-term requirement of funds.

Commercial paper

This is an unsecured promissory note issued by large credit worth companies to raise short term funds at a lower rate of interest than the market rate.

Call money

Call money is a short-term finance repayable at demand (with a maturity period of 1 to 15 days). It is used for interbank transactions.

Certificate of deposits

This is an unsecured instrument issued by the commercial banks and the financial institutions.

Commercial bill

This is a bill of exchange which is used to finance the working capital requirements of business firms.

3. Foreign exchange markets: This market is a platform for foreign exchange trading. It’s the largest, most liquid market in the world having an average trade value of more than $5 trillion per day. It includes all the currencies  in the world and any individual, company, or country can participate in it.  Foreign Exchange Market in India operates under the Central Government of India; the latter executes wide powers to control transactions in foreign exchange. 

4. Commodity market: A commodity market is a market that trades in the primary economic sector. Soft commodities include agricultural products such as wheat, coffee, cocoa, and sugar. Hard commodities are mined, such as gold and oil. The size of the commodities markets in India is quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries account for roughly 58 per cent of the total.

5. Derivatives market: This market facilitates the trading in financial instruments such as futures contracts and options; these are used to control financial risk. These instruments derive their value mostly from the value of an underlying asset which can come in many forms – stocks, bonds, commodities, currencies or mortgages. There are 4 types of derivatives in the derivative market:

Futures contract: A futures contract is a contract between two parties where both the parties agree to buy and sell a particular asset of a specific quantity at a pre-determined price and at a specified date in future.

Forward contract: A forward contract or simply a forward is a non-standardized contract between two parties to buy or to sell an asset at a specified future time and at a price agreed upon today.

Options contract: An options contract offers the buyer the right to buy but not the obligation to buy at the specified price or date. 

Swap contract:  A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time.

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