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Types of Financial market

Types of Financial market:


Financial markets are also classified as primary market and secondary market.

     A primary market is a market where an initial public offer (IPO) is made or in other words, the financial instruments are issued for the first time to the public at large. Primary markets facilitate the channelization of savings into investment, leading to the capital formation in the economy.

     A secondary market facilitates sale and purchase of already issued financial instruments. The market provides liquidity to investors, i.e. investors can convert the financial instrument held by them into cash in the shortest possible duration and with minimal cost.

     Stock exchanges are part of the secondary market. These exchanges facilitate trading of financial instruments. These exchanges act as medium to bring sellers and buyers across India together. The popular stock exchanges in India are as follows:

  • The Bombay Stock Exchange (BSE) is the largest stock exchange in India in terms of volume of trade. The number of listed companies on BSE was 5163 (as of 2012). BSE has an indicative index, called the BSE Sensitive Index (popularly called Sensex). Sensex was constituted in 1978­79 with the value of 100. The value of the index is based on the market value of top 30 companies listed on BSE. As the performance of these companies is dependent on the performance of overall economy, BSE Sensex reflects the overall performance of the Indian economy.
  • The National Stock Exchange (NSE) is another important stock exchange in India. The number of listed companies on NSE was 1635 (as of July 2013). Like Sensex, Nifty is the popular index in NSE. It was constituted in 1992-93 with the value of 100. Nifty (National Index of Fifty) is based on the market value of the top 50 companies listed on the NSE.

Apart from stock exchanges, there are exchanges for currency trading and commodities as well. The Multi Commodity Stock Exchange (MCX) is the largest commodity exchange in India.

Regulation of Exchanges under financial market

The Securities and Exchange Board of India (SEBI) is the regulator of the securities market (stock exchange) in India. It was established in 1988 and given statutory powers on 30 January 1992 through the SEBI Act, 1992.

SEBI is managed by its members, which consists of the following:

  • The chairman who is nominated by the Government of India
  • Two members, i.e. officers from the union Finance Ministry
  • One member from the Reserve Bank of India
  • The remaining five members are nominated by the Government of India, and out of them at least three should be whole-time members.

SEBI has the objective to protect the interests of investors in securities and to promote development regulate the securities market. It has to be responsive to the needs of three groups and protect their interests, which constitute the market:

  1. Issuers of securities
  2. Investors
  3. Market intermediaries

Earlier, SEBI used to regulate stock exchanges, and the Forwards Market Commission used to regulate commodities markets. However, the Forwards Market Commission was abolished in 2015. The powers to regulate commodities markets were also vested in SEBI.

List of Approved Stock Exchanges in India

  1. Ahmedabad Stock Exchange
  2. Bombay Stock Exchange
  3. Calcutta Stock Exchange
  4. India International Exchange (India INX)
  5. Metropolitan Stock Exchange of India
  6. National Stock Exchange of India
  7. NSE IFSC Ltd.

Earlier, there were numerous regional stock exchanges in India. However, these stock exchanges have been closed due to their passive working.

India International Exchange (INX)

The India International Exchange (INX) is located in the country’s first International Financial Services Centre (IFSC), which is located in GIFT City, Gujarat. It was opened in 2017. The India INX is a wholly owned subsidiary of BSE Ltd.

Important Facts About India INX

  • World’s fastest international exchange: India INX will be the fastest international exchange in the world in terms of order response time, with a median trade speed of four microseconds. This is better than BSE’s domestic exchange in Mumbai, which has an order response time of six microseconds. In comparison, the second fastest international exchange in Singapore has an order response time of 60 microseconds.
  • In step with the rest of the world: India INX will be open for trading for 22 hours every day. The exchange will open for trading activity daily at 4 am when exchanges in Japan open, and close at 2 am when exchanges in the United States close.
  • What will be traded in it? The exchange can trade securities and products other than Indian rupees. The securities and products that could be traded on the India INX are equity shares of companies incorporated outside India, depository receipts, debt securities, currency and interest rate derivatives, index-based derivatives, commodity derivatives, and such other securities that may be allowed.
  • Only derivative products presently: It will offer only derivative products—in equity, currency, and commodities.
  • More instruments to follow in financial market: During the second phase, it shall offer depository receipts and bonds.

DERIVATIVES under financial market

Derivatives refer to those financial instruments whose value is derived on the basis of underlying asset or security. Derivatives are of three types: forwards, futures, and options.

Forwards refer to an agreement between two parties to exchange a particular commodity or financial Instrument at a particular price on a certain future date. For instance, two parties decide to exchange 100 Kg mangoes at ₹40/kg on some fixed future date.

Futures refer to the standardized forwards agreements that are undertaken through stock exchanges. The standardized agreements are in nature of pre-decided lot sizes. For instance, the lot size for a share of a particular company can be 400 shares. Parties can trade in one lot or more but not less than that.

 Options are further of two types:

  1. Call option is an option to purchase a particular commodity or share at a pre-decided price on a future date, on payment of a premium to enter into an agreement. The purchaser of a call option has the option to purchase. The purchaser will exercise the option only if he/she can purchase the asset at a lower price than the prevalent market price on the pre-decided future date.
  2. 2. Put option is an option to sell the commodity or share at a pre-determined price on a future date, on payment of a premium. The purchaser of put option has the option to sell. The purchaser will exercise the option only if he/she can sell the asset at a higher price than the prevalent market price on the pre-decided future date.

Futures and options are traded in stock exchanges under the Futures & Options (F&O) segment. As mentioned earlier, forwards are not traded in stock exchanges.

Read more about financial market:

Indian Economy

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