Financial Market, Participants, and Instruments
A financial system can be defined at the global, regional or firm-specific level. The firm’s financial system is the set of implemented procedures that track the financial activities of the company. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. The global financial system is basically a broader regional system that encompasses all financial institutions, borrowers, and lenders within the global economy.
Financial Markets
Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.
Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor’s geographical location, knowledge of the markets or the profession of the participant.
Types of Financial Markets
Organized Markets: The Indian diamond market is growing at a healthy pace of 30 per cent with rising incomes and fashion consciousness among the people being the main driving force. ”India already figures among the top 10 nations in terms of annual retail diamond consumption,”
He said the introduction of low value diamonds and the recent duty cuts by the government have only given the much needed impetus to the sector.
”Even established brands have diamond jewellery priced upwards of Rs 1,500 and people are slowly graduating to this sector from gold ornaments…this is a positive signal, at the current diamond jewellery market in the country stood at Rs 2,500 crore. Commenting on the burgeoning Uttar Pradesh market, the D’Damas official claimed that it was posting a blistering growth at almost 85 per cent.
“In the 2007 fiscal at a growth of almost 25% ” the demand for diamond was stronger in West and North India, while South still has an inclination towards gold. However, he underlined that the organized sector still accounted for a minority share of only 6-9% in India.
“Diamond is slowly moving to being a safe asset class just like gold, due to branded diamond jewellery retail growth and hallmarking,
Unorganized Markets: Within the Gems and Jewelry Industry, the Indian CPD (cut and polished diamond) sector contributes more than 80% to the Gems and Jewelry industry and is comprised of a large unorganized sector in excess of 100,000 small to medium-sized family-run firms, which rely on the craftsmanship of their mostly uneducated employees to produce the lion’s share of the world’s market in cut and polished diamonds (personal conversation, 2006).
This industry and this sector provide an ideal setting to study the criteria for success for such new organizational forms.
That these unorganized, globally dispersed companies appear to gel or ‘fit’ into a more ‘organized’ framework later in the value include global upply chains,global software development, offshore business and knowledge process outsourcing, and global R&D (Mohrman, Klein, & Finegold, 2003).
There is very little explanation of the labor-intensive emerging markets moving up the value chain in the globalized economy, and even less so of the unorganized sectors becoming more organized and capturing a global market share such as we’ve documented above for the diamond industry in India. Our intent then, is to study these new organizational forms, as represented by the CPD sector in India.
Accordingly, the influence of work design through collaboration intensity, use of skilled manpower and technology support for work and the cultural context all play a role in understanding the activities of the globally-distributed, highly labor-intensive CPD trade.
Money Markets: As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers’ acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure.
Capital Markets: Capital markets are financial markets for the buying and selling of long-term debt- or equity-backed securities. 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’s Bank of England (BoE) or the U.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-based electronic trading systems; 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 only 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 in financial centres like London, New York, and Hong Kong. Capital markets are defined as markets in which money is provided for periods longer than a year.
Primary Markets: The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain bonds through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. 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 term equity 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 converting private capital into public capital; this is known as “going public.”
- The financial assets sold can only be redeemed by the original holder.
Secondary Markets: The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. Another frequent usage of “secondary market” is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie Mac.
The term “secondary market” is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a “second” or “third” market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market.
