The financial market refers to a marketplace where buyers and sellers trade financial securities, commodities, and other fungible items at low transaction costs and at prices that reflect supply and demand. It encompasses a wide range of assets, including stocks, bonds, currencies, and derivatives....
Financial markets are real and virtual marketplaces where financial instruments of varying
maturities are traded i.e., bought and sold.
Financial markets are broadly classified into:
Short Term Markets (or Money Markets) where instruments up to 180 days
maturity(sometimes up to one year maturity) are issued and traded. These include call
money market (fed funds), Treasury bills market, REPO market, commercial paper
market, market for certificate of deposits, banker's acceptance (commercial bills
market), etc.
Long Term Markets where instruments of maturity from one year to perpetuity are
issued and traded. These include government securities market, equity stock market,
corporate bond market, etc.
Please note that ‘short term’ or ‘long term’ in the context of financial markets and
instruments refers to the ‘maturity period’ of the instruments that are issued and traded, not
to the ‘holding period’ by the investor. The instrument could, for instance, have a maturity
period of ten years and hence be part of the long-term market (or capital market) but the
‘holding period’ by the investor could be for a short term.
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 1
Over The Counter (OTC)
Exchange Traded
Over the Counter (OTC) transaction, the counterparty risk (i.e. the risk arising from the
failure of the other party) in the transaction is completely borne by the two entities
participating in the transaction. In an "Exchange Traded" transaction, on the other hand, the
counterparty risk is the responsibility of the exchange where the transaction is executed.
How and Why are Financial Markets Different From Product Markets?
Markets may be distinguished in many ways.
Product Markets are the markets where Goods and services produced by firms are sold
to customers, Cost is a reality (normally within the control of the company) and Price
is driven by the market forces (supply and demand)
Factor Markets are the markets where the pre-requisites for production are bought and
sold. Example: Labour Market, Capital Market, Market for CEOs and other managerial
resources, etc.
Financial Markets are the markets where securities (such as equity shares, bonds, etc.)
and commodities (such as precious metals, agricultural commodities, etc.) are bought
and sold.
In financial markets, specially, in the stock and bond markets, price is determined not merely
by ‘supply and demand’ but by:
‘News Flows’ (Information Intermediation) – Firm-level and County-level
Exogenous variables such as change in interest rates announced by the country’s
Monetary Authority
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