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Financial Market
Financial Market
Financial market is a place where various financial instruments, such as stocks, bonds,
currencies, and derivatives, are traded. These allow investors to manage their financial risk and
thus generate profits.
In this article, we will be discussing what is financial market. Financial markets have a crucial
role in the economy, enabling businesses to access funding, investors to earn investment returns,
and governments to manage their finances. Let us learn more about this market.
What is financial market
A financial market is a marketplace where buyers and sellers trade financial instruments, such as
stocks, bonds, currencies, and derivatives. Investors, companies, and governments raise capital,
manage risks, and transfer assets over here. These markets can be further classified into primary
market and secondary market. In the primary market, trades between financial institutions and
traders take place. Here, new securities such as Initial Public Offerings (IPOs), are traded.
Secondary market deals with previously issued securities, such as certificates of deposits. Some
of the largest financial markets in the world are including the New York Stock Exchange NYSE,
the London Stock Exchange, Nasdaq, and the Tokyo Stock Exchange. These markets operate in
different time zones and are interconnected through electronic trading platforms,
allowing investors in financial markets to trade around the clock.
Stock market allows access to the capital and this allows investors to get a share in profit and
growth of companies. When the stock market is performing well, it signals that investors have
confidence in the economy and businesses are thriving. Investors can invest in different types of
stocks such as growth stocks and value stocks, based on their requirements.
2. Bond market
Also known as debt market, it is a financial market where bonds are both issued and traded. It is
a debt security where an investor loans money to the government or any corporation in lieu of an
interest payment. Here the principal is returned at a future date. The government and other
entities issue bonds to raise money. Bond issuers need to pay interest to bondholders mostly on a
semi-annual basis.
The rate is determined by various factors including issuer’s creditworthiness and prevailing rate
of interest in the market. The financial securities in this market are rated by independent credit
rating agencies that indicate the creditworthiness of the issuer. To gain exposure in the bond
market, they need to invest through the bond mutual funds and ETFs. These funds invest in the
diversified bonds portfolio, which provides investors with exposure to a range of maturities and
issuers.
3. Foreign Exchange Markets
Also known as Forex or FX market, in this financial market, currencies are traded. This is one of
the most liquid financial markets in the world. Trading in Forex takes place 24 hours a day, 5
days a week. Here, trading sessions in major financial centres around the world, including New
York, London, Tokyo, and Sydney.
Forex market is decentralized so it has no central exchange or clearinghouse. Instead,
forex trading takes place through a network of banks, brokers, and other financial institutions. In
addition to traditional forex trading, investors can also gain exposure to currency movements
through currency ETFs and currency mutual funds. These investment vehicles provide investors
with exposure to currencies instead of just one or two currencies.
4. Commodity markets
Commodity markets are the trading markets for raw materials and primary products. Through
this market, the exchange of these goods between producers, traders, and end-users is facilitated.
Factors including weather patterns, geographical events, economic growth as well as supply and
demand influence the prices in this market.
Such a market can be physical, where buyers and sellers trade physical
goods. Commodity markets can also be virtual, including Intercontinental Exchange and the
Chicago Mercantile Exchange. Such markets have a significant role in global trade. These are
crucial for producers, consumers of commodities and investors who want to diversify their
portfolios.
5. Derivative Market
The derivative market is a financial market where investors can buy and sell financial
instruments. The financial instruments include futures contracts, options contracts, and swaps.
Value of these instruments is derived from the underlying asset.
The underlying asset could be either a stock, commodity, currency, or even an
index. Derivatives allow investors to manage risk by hedging against the price movements in
underlying asset or to speculate on future price movements. Alternatively, options may be used
for speculating the potential increase or decrease in the price of the underlying asset.
It is more complex and sophisticated than other financial markets, and requires a higher level of
expertise and risk management. Some of the largest derivative markets include Chicago Board
Options Exchange, and New York Mercantile Exchange.
6. Futures Market
Futures market is a type of financial market where investors can trade futures contracts. These
are the agreements for buying and selling underlying assets such as commodities, currencies, or
financial instruments, at a specified price and time in the future. Futures markets are highly
regulated and operate through centralized exchanges, such as the Chicago Mercantile Exchange
and the Intercontinental Exchange.
These exchanges provide a platform for buyers and sellers to trade futures contracts, ensuring
transparency and efficiency in the trading process. By trading futures contracts, investors can
manage exposure to price movements in the underlying asset, as well as take advantage of
potential price changes in the future.
Futures markets are also important for price discovery, as the price of a futures contract reflects
the market’s expectation of the future price of the underlying asset. This information can be used
by investors, producers, and consumers to make informed decisions about buying, selling, and
producing the underlying asset.
7. Over-the-counter (OTC) Market
Over-the-counter (OTC) or off-exchange trading is performed directly between two parties,
without any exchange supervision. OTC trading occurs with commodities, financial instruments
and derivatives of such products.
In the OTC market, parties may agree on an unusual quantity. In OTC, market contracts are
bilateral, thus, the contract is between two parties only. Each party may have credit risk concerns
related to the other party. The OTC market is significant in asset classes including interest rate,
foreign exchange, stocks, and commodities.
An over-the-counter is a bilateral contract where two parties agree on how a trade or agreement
will be settled in future. It is from an investment bank directly to its clients. Forward contracts
and swaps are examples of such contracts. It is usually done either online or on telephone.
Regulations in Financial Markets
These are highly regulated to ensure transparency, fairness, and stability in trading. The
regulations governing financial markets vary by country and region, but generally fall into the
following categories:
Securities and Exchange Commission (SEC): This regulatory body in the US
oversees the securities industry, including the stock and bond market. It enforces
laws requiring companies to disclose financial information to the public, and
regulates trading of securities to ensure transparency.
Commodity Futures Trading Commission (CFTC): This regulatory body in the
US oversees the futures market, including futures contracts on commodities,
currencies, and financial instruments. The CFTC enforces laws that require fair
trading practices and prevents fraud and manipulation in the futures market.
European Securities and Markets Authority (ESMA): This regulatory body in the
European Union oversees financial markets, including the stock and bond market. It
enforces laws to promote transparency and protect investors. ESMA also coordinates
the regulation of financial markets across the EU.
Financial Conduct Authority (FCA): This regulatory body in the UK oversees
financial markets, including the stock and forex market. FCA enforces laws that
promote fair competition and protect consumers while maintaining the integrity of
financial markets.
International Organization of Securities Commissions (IOSCO): This global
association of regulatory bodies oversees financial markets around the world. It sets
standards for the regulation of financial markets, promotes international cooperation,
and works to ensure the stability of global financial markets.
A financial market is a word that describes a marketplace where bonds, equity, securities,
currencies are traded. Few financial markets do a security business of trillions of dollars daily,
and some are small-scale with less activity. These are markets where businesses grow their cash,
companies decrease risks, and investors make more cash.
Meaning of Financial Markets
A Financial Market is referred to space, where selling and buying of financial assets and
securities take place. It allocates limited resources in the nation’s economy. It serves as an agent
between the investors and collector by mobilising capital between them.
In a financial market, the stock market allows investors to purchase and trade publicly companies
share. The issue of new stocks are first offered in the primary stock market, and stock securities
trading happens in the secondary market.
Over the Counter (OTC) Market – They manage public stock exchange, which is not
listed on the NASDAQ, American Stock Exchange, and New York Stock Exchange. The
OTC market dealing with companies are usually small companies that can be traded in
cheap and has less regulation.
Bond Market – A financial market is a place where investors loan money on bond as
security for a set if time at a predefined rate of interest. Bonds are issued by corporations,
states, municipalities, and federal governments across the world.
Money Markets – They trade high liquid and short maturities, and lending of securities
that matures in less than a year.
Derivatives Market –They trades securities that determine its value from its primary
asset. The derivative contract value is regulated by the market price of the primary item
— the derivatives market securities, including futures, options, contracts-for-difference,
forward contracts, and swaps.
Forex Market – It is a financial market where investors trade in currencies. In the entire
world, this is the most liquid financial market.
1. By Nature of Claim
1. Debt Market – It is a market where fixed bonds and debentures or bonds are exchanged
between investors.
2. Equity Market – It is a place for investors to deal with equity.
2. By Maturity of Claim
1. Money Market – It deals with monetary assets and short-term funds such as a certificate
of deposits, treasury bills, and commercial paper, etc. which mature within twelve
months.
2. Capital Market – It trades medium and long term financial assets.
3. By Timing of Delivery
Financial markets dispense efficiently flow of investments and savings in the economy and
facilitate the growth of funds for producing goods and services. The right blend of financial
products and instruments and financial markets and institutions fuels the demands of investors,
receiver and the overall economy of a country.
Financial markets (bonds and stocks), instruments (derivatives, bank CDs, and futures), and
institutions (banks, pension funds, insurance companies, and mutual funds) give the investors the
opportunities to specialize in specific services and markets. As quoted by Demirgcc-Kunt and
Levine “Financial markets and financial institutions together contribute to economic growth and
not the relative mix of these two factors”.
The Indian money market is an essential element of India’s financial system, facilitating short-
term borrowing and lending among financial institutions and individuals. Its primary function
is to ensure efficient fund allocation and provide liquidity to participants, contributing to the
smooth functioning of the economy. The Indian money market serves as a platform for
liquidity management and price discovery.
The Indian money market is an essential element of India’s financial system, facilitating short-
term borrowing and lending among financial institutions and individuals. Its primary function
is to ensure efficient fund allocation and provide liquidity to participants, contributing to the
smooth functioning of the economy. The Indian money market serves as a platform for
liquidity management and price discovery.
The Indian money market has been associated with several defects that hinder its efficient
functioning. Some of the defects of the Indian money market are as follows:
1. Existence of Unorganised Money Market: The Indian money market consists of both
organised and unorganised sectors. The unorganised sector, which includes indigenous bankers
and moneylenders, lacks proper regulations and operates outside the purview of RBI. This
leads to issues such as lack of transparency, high-interest rates, and exploitation of borrowers.
Borrowers may face difficulties in accessing fair and transparent lending practices, affecting
the overall efficiency of the market.
2. Absence of Cooperation amongst the Members of the Money Market: The lack of
cooperation and coordination among the various participants in the money market, including
banks, financial institutions, and the government, hampers the smooth functioning of the
market. Without effective collaboration, the market may experience inefficiencies, liquidity
problems, and a fragmented structure. Cooperative efforts are necessary to ensure the stability
and optimal functioning of the money market.
3. Lack of Uniformity in Interest Rates in the Money Market: In the Indian money market,
interest rates are not uniform across different segments and participants. This lack of
uniformity creates disparities and uncertainties, making it difficult for market participants to
make informed decisions. It also affects the transmission of monetary policy and the overall
stability of the market. Transparent and consistent interest rate mechanisms are essential for an
efficient money market.
4. Absence of Organised Bill Market: A well-developed bill market is crucial for the
functioning of the money market. However, in India, the bill market is not adequately
organised. This absence of an organised bill market limits the availability of short-term credit
instruments, such as treasury bills and commercial bills, which are essential for liquidity
management and financing trade transactions. A well-regulated bill market is necessary to
facilitate efficient short-term financing.
5. Seasonal Financial Stringency: The Indian money market experiences seasonal
fluctuations in liquidity and financial stringency. This is primarily due to factors like
agricultural cycles, festive seasons, and government borrowing patterns. These fluctuations can
lead to volatility in interest rates and create uncertainties for market participants. Strategies to
manage these seasonal fluctuations are necessary for maintaining stability.
6. Shortage of Capital in the Money Market: The Indian money market faces a shortage of
capital to meet trade and industry requirements. The limited availability of capital hampers the
development of various sectors and restricts the growth potential of the overall economy.
Adequate availability of capital is crucial for sustaining economic growth and meeting the
funding needs of businesses and individuals.
7. Lack of Development of the Indian Money Market: The Indian money market is not as
developed as other major global money markets. It lacks depth, breadth, and sophistication in
terms of financial products and instruments. This hinders the efficient allocation of funds and
impedes the overall growth and stability of the financial system. Developing a diverse range of
financial products and instruments can enhance the market’s efficiency.
8. Excessive Number of Indigenous Bankers in the Money Market: The presence of a large
number of indigenous bankers, such as moneylenders and unregulated non-banking financial
entities, creates issues of unfair practices, lack of accountability, and high-interest rates. It also
contributes to the unorganised nature of the money market. Proper regulation and oversight are
necessary to mitigate these issues and ensure fair and transparent practices.
9. Absence of Specialised Institutions in the Money Market: The Indian money market
lacks specialised institutions that can cater to specific financial needs and provide specialised
financial services. This absence limits the options available to market participants and hampers
the overall efficiency of the money market. The establishment and strengthening of specialised
institutions can enhance the market’s ability to meet diverse financial requirements.
10. Non-availability of Credit Instruments: The Indian money market suffers from a lack of
diverse and readily available credit instruments. The absence of a wide range of credit
instruments restricts the flexibility and effectiveness of financing options for borrowers and
lenders. Developing a comprehensive range of credit instruments can provide market
participants with more options for managing their financing needs.
Capital markets are those market where trading of assets such as bonds, equity and securities
take place. Capital markets deal with financial instruments that are having a lock-in period of
more than one year.
Primary market
Secondary market
A primary market is a marketplace where corporations imbibe a fresh issue of shares for being
contributed by the public for soliciting capital to meet their necessary long-term funds like
extending the current trade or buying a unique entity. It plays a motivational part in the
mobilisation of savings in the economy.
Multiple types of issues made by the establishment are – Offer for sale, public issue, issue of
Indian Depository Receipt (IDR), bonus Issue, right issue, etc.
A secondary market is a prototype of the capital market where debentures, current shares,
options, bonds, treasury bills, commercial papers, etc., of the enterprises are patronised amongst
the investors.
The secondary market can be an auction business where the business of bonds is functioned
through a dealer market or the stock exchange, usually called over the counter.
You Might Also Like to Read: Money Market vs Capital Market Statement
This article is a ready reckoner for all the students to learn the difference between a primary
market and secondary market.
Definition
Purchasing type
Buying and selling takes place between the company Buying and selling takes place between the
and the investors. investors.
It provides financing to the existing companies for It does not provide any kind of financing.
facilitating growth and expansion.
Intermediaries involved
Underwriters Brokers
Price levels
What is SEBI
SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that
was established by the Government of India in 1992 for protecting the interests of investors
investing in securities along with regulating the securities market. SEBI also regulates how the
stock market and mutual funds function.
Objectives of SEBI
2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange
3. To develop a code of conduct for the financial intermediaries such as underwriters, brokers,
etc.
Functions of SEBI
1. Protective Function
2. Regulatory Function
3. Development Function
Protective Function: The protective function implies the role that SEBI plays in protecting the
investor interest and also that of other financial participants. The protective function includes the
following activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the
insiders of a company, which includes the directors, employees and promoters. To prevent such
trading SEBI has barred the companies to purchase their own shares from the secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of
securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.
Regulatory Function: Regulatory functions involve establishment of rules and regulations for
the financial intermediaries along with corporates that helps in efficient management of the
market.
a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.
Developmental Function: Developmental function refers to the steps taken by SEBI in order to
provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.
2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.
Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.
1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.
2. Investors: It provides protection and supply of accurate information that is maintained on a
regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by arranging for proper
infrastructure.
Structure of SEBI
SEBI board comprises nine members. The Board consists of the following members.
1. One Chairman of the board who is appointed by the Central Government of India
2. One Board member who is appointed by the Central Bank, that is, the RBI
3. Two Board members who are hailing from the Union Ministry of Finance
4. Five Board members who are elected by the Central Government of India
Financial instruments
Financial instruments can also be classified based on the asset class, i.e. equity-based and
debt-based financial instruments. Equity-based financial instruments include securities, such as
stocks/shares. Also, exchange-traded derivatives, such as equity futures and stock options, fall
under the same category.
Types of Security
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What are the Types of Security?
There are four main types of security: debt securities, equity securities, derivative securities, and
hybrid securities, which are a combination of debt and equity.
Fig.
1. Types of Securities
Let’s first define security. Security relates to a financial instrument or financial asset that can be
traded in the open market, e.g., a stock, bond, options contract, or shares of a mutual fund, etc.
All the examples mentioned belong to a particular class or type of security.
Summary
Security is a financial instrument that can be traded between parties in the open market.
The four types of security are debt, equity, derivative, and hybrid securities.
Holders of equity securities (e.g., shares) can benefit from capital gains by selling stocks.
Debt Securities
Debt securities, or fixed-income securities, represent money that is borrowed and must be repaid
with terms outlining the amount of the borrowed funds, interest rate, and maturity date. In other
words, debt securities are debt instruments, such as bonds (e.g., a government or municipal
bond) or a certificate of deposit (CD) that can be traded between parties.
Debt securities, such as bonds and certificates of deposit, as a rule, require the holder to make the
regular interest payments, as well as repayment of the principal amount alongside any other
stipulated contractual rights. Such securities are usually issued for a fixed term, and, in the end,
the issuer redeems them.
A debt security’s interest rate on a debt security is determined based on a borrower’s credit
history, track record, and solvency – the ability to repay the loan in the future. The higher the
risk of the borrower’s default on the loan, the higher the interest rate a lender would require to
compensate for the amount of risk taken.
It is important to mention that the dollar value of the daily trading volume of debt securities is
significantly larger than stocks. The reason is that debt securities are largely held by institutional
investors, alongside governments and not-for-profit organizations.
Equity Securities
Equity securities represent ownership interest held by shareholders in a company. In other words,
it is an investment in an organization’s equity stock to become a shareholder of the organization.
The difference between holders of equity securities and holders of debt securities is that the
former is not entitled to a regular payment, but they can profit from capital gains by selling the
stocks. Another difference is that equity securities provide ownership rights to the holder so that
he becomes one of the owners of the company, owning a stake proportionate to the number of
acquired shares.
In the event a business faces bankruptcy, the equity holders can only share the residual interest
that remains after all obligations have been paid out to debt security holders. Companies
regularly distribute dividends to shareholders sharing the earned profits coming from the core
business operations, whereas it is not the case for the debtholders.
Derivative Securities
Derivative securities are financial instruments whose value depends on basic variables. The
variables can be assets, such as stocks, bonds, currencies, interest rates, market indices, and
goods. The main purpose of using derivatives is to consider and minimize risk. It is achieved by
insuring against price movements, creating favorable conditions for speculations and getting
access to hard-to-reach assets or markets.
Formerly, derivatives were used to ensure balanced exchange rates for goods traded
internationally. International traders needed an accounting system to lock their different national
currencies at a specific exchange rate.
1. Futures
Futures, also called futures contracts, are an agreement between two parties for the purchase and
delivery of an asset at an agreed-upon price at a future date. Futures are traded on an exchange,
with the contracts already standardized. In a futures transaction, the parties involved must buy or
sell the underlying asset.
2. Forwards
Forwards, or forward contracts, are similar to futures, but do not trade on an exchange, only
retailing. When creating a forward contract, the buyer and seller must determine the terms, size,
and settlement process for the derivative.
Another difference from futures is the risk for both sellers and buyers. The risks arise when one
party becomes bankrupt, and the other party may not able to protect its rights and, as a result,
loses the value of its position.
3. Options
Options, or options contracts, are similar to a futures contract, as it involves the purchase or sale
of an asset between two parties at a predetermined date in the future for a specific price. The key
difference between the two types of contracts is that, with an option, the buyer is not required to
complete the action of buying or selling.
4. Swaps
Swaps involve the exchange of one kind of cash flow with another. For example, an interest rate
swap enables a trader to switch to a variable interest rate loan from a fixed interest rate loan, or
vice versa.
Hybrid security, as the name suggests, is a type of security that combines characteristics of both
debt and equity securities. Many banks and organizations turn to hybrid securities to borrow
money from investors.
Similar to bonds, they typically promise to pay a higher interest at a fixed or floating rate until a
certain time in the future. Unlike a bond, the number and timing of interest payments are not
guaranteed. They can even be converted into shares, or an investment can be terminated at any
time.
Examples of hybrid securities are preferred stocks that enable the holder to receive dividends
prior to the holders of common stock, convertible bonds that can be converted into a known
amount of equity stocks during the life of the bond or at maturity date, depending on the terms of
the contract, etc.
Hybrid securities are complex products. Even experienced investors may struggle to understand
and evaluate the risks involved in trading them. Institutional investors sometimes fail at
understanding the terms of the deal they enter into while buying hybrid security.
Derivatives are contracts that derive their value from the underlying asset. These are widely used
to speculate and make money. Some use them as risk transfer vehicle as well. This article covers
the following:
Derivatives are financial contracts whose value is dependent on an underlying asset or group of
assets. The commonly used assets are stocks, bonds, currencies, commodities and market
indices. The value of the underlying assets keeps changing according to market conditions. The
basic principle behind entering into derivative contracts is to earn profits by speculating on the
Imagine that the market price of an equity share may go up or down. You may suffer a loss
owing to a fall in the stock value. In this situation, you may enter a derivative contract either to
make gains by placing an accurate bet. Or simply cushion yourself from the losses in the spot
Apart from making profits, there are various other reasons behind the use of derivative contracts.
at a low price in one market and selling it at a high price in the other market. In this
way, you are benefited by the differences in prices of the commodity in the two
different markets.
your probability of losses. You can look for products in the derivatives market
which will help you to shield yourself against a reduction in the price of stocks that
you own. Additionally, you may buy products to safeguard against a price rise in
risk. However, others use it for speculation and making profits. Here, you can take
advantage of the price fluctuations without actually selling the underlying shares.
Each type of individual will have an objective to participate in the derivative market. You can
divide them into the following categories based on their trading motives:
Hedgers: These are risk-averse traders in stock markets. They aim at derivative
markets to secure their investment portfolio against the market risk and price
market. In this manner, they transfer the risk of loss to those others who are ready
to take it. In return for the hedging available, they need to pay a premium to the
risk-taker. Imagine that you hold 100 shares of XYZ company which are currently
priced at Rs. 120. Your aim is to sell these shares after three months. However, you
don’t want to make losses due to a fall in market price. At the same time, you don’t
future. In this situation, you can buy a put option by paying a nominal premium
Speculators: These are risk-takers of the derivative market. They want to embrace
risk in order to earn profits. They have a completely opposite point of view as
compared to the hedgers. This difference of opinion helps them to make huge
profits if the bets turn correct. In the above example, you bought a put option to
secure yourself from a fall in stock prices. Your counterparty i.e. the speculator
will bet that the stock price won’t fall. If the stock prices don’t fall, then you won’t
exercise your put option. Hence, the speculator keeps the premium and makes a
profit.
Margin traders: A margin refers to the minimum amount that you need to deposit
with the broker to participate in the derivative market. It is used to reflect your
losses and gains on a daily basis as per market movements. It enables to get
the stock market. However, in the derivative market, you can own a three times
bigger position i.e. Rs 6 lakh with the same amount. A slight price change will lead
They simultaneously buy low-priced securities in one market and sell them at a
higher price in another market. This can happen only when the same security is
Rs 1000 in the stock market and at Rs 105 in the futures market. An arbitrageur
would buy the stock at Rs 1000 in the stock market and sell it at Rs 1050 in the
The four major types of derivative contracts are options, forwards, futures and swaps.
Options: Options are derivative contracts that give the buyer a right to buy/sell the
underlying asset at the specified price during a certain period of time. The buyer is
not under any obligation to exercise the option. The option seller is known as the
option writer. The specified price is known as the strike price. You can exercise
American options at any time before the expiry of the option period. European
options, however, can be exercised only on the date of the expiration date.
Futures: Futures are standardised contracts that allow the holder to buy/sell the
asset at an agreed price at the specified date. The parties to the futures contract are
under an obligation to perform the contract. These contracts are traded on the stock
exchange. The value of future contracts is marked to market every day. It means
that the contract value is adjusted according to market movements till the
expiration date.
obligation to perform the contract. But forwards are unstandardised and not traded
on stock exchanges. These are available over-the-counter and are not marked-to-
market. These can be customised to suit the requirements of the parties to the
contract.
Swaps: Swaps are derivative contracts wherein two parties exchange their
financial obligations. The cash flows are based on a notional principal amount
agreed between both parties without exchange of principal. The amount of cash
flows is based on a rate of interest. One cash flow is generally fixed and the other
changes on the basis of a benchmark interest rate. Interest rate swaps are the most
commonly used category. Swaps are not traded on stock exchanges and are over-
You need to understand the functioning of derivatives markets before trading. The
strategies applicable in derivatives are completely different from that of the stock
market.
The derivative market requires you to deposit a margin amount before starting
trading. The margin amount cannot be withdrawn until the trade is settled.
Moreover, you need to replenish the amount when it falls below the minimum
level.
You should have an active trading account that permits derivative trading. If you
are using the services of a broker, then you can place orders online or on the phone.
For the selection of stocks, you have to consider factors like cash in hand, the
margin requirements, the price of the contract and that of the underlying shares.
You can choose to stay invested till the expiry to settle the trade. In this scenario,
either pay the entire outstanding amount or enter into an opposing trade
There are several types of government securities offered by the Reserve Bank
of India. Let’s look at the given below:
Treasury Bills
Treasury bills, also called T-bills, are short term government securities with a
maturity period of less than one year issued by the central government of
India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
Several financial instruments pay interest to you on your investment; treasury
bills do not pay interest because they are also called zero-coupon securities.
These securities do not pay any interest; instead, they are issued at a discount
rate and redeemed at face value on the date of the maturity.
For example a 91 day T-bill with a face value of Rs. 200 may be issued at
Rs.196, with a discount of RS. 4 and redeemed at face value of Rs. 200.
However, RBI performs weekly auctions to issue treasury bills.
Zero-Coupon Bonds
Zero-coupon bonds are generally issued at a discount to face value and
redeemed at par. These bonds were issued on January 19th 1994.
The securities do not carry any coupon or interest rate as the tenure is fixed for
the security. In the end, the security is redeemed at face value on its maturity
date.
FAQS
What is the major difference between dated government securities and state
development loans?
The major difference between dated government securities and state
development loans is that G-Securities are issued by the central government
while SDL is issued by the state government of India.
Final Thoughts
There are several types of government securities in India, and an investor can choose their
desired securities for their portfolio.
In addition, these securities will provide fixed or guaranteed income to help the investor
align with the risk factor in your investment portfolio.
In the end, buying government securities can turn out to be a great way to make both
investing and portfolio better.
Government securities are investment products issued by the both central and state government
of India in the form of bonds, treasury bills, or notes.
They are generally issued for the purpose of refunding maturity securities for advance refunding
of securities that have not yet matured and raising fresh cash resources.
However, they carry minimal risk and are called risk-free gilt-edged instruments. So let’s look at
the different types of government securities in India:
There are several types of government securities offered by the Reserve Bank
of India. Let’s look at the given below:
Treasury Bills
Treasury bills, also called T-bills, are short term government securities with a
maturity period of less than one year issued by the central government of
India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
Several financial instruments pay interest to you on your investment; treasury
bills do not pay interest because they are also called zero-coupon securities.
These securities do not pay any interest; instead, they are issued at a discount
rate and redeemed at face value on the date of the maturity.
For example a 91 day T-bill with a face value of Rs. 200 may be issued at
Rs.196, with a discount of RS. 4 and redeemed at face value of Rs. 200.
However, RBI performs weekly auctions to issue treasury bills.
Zero-Coupon Bonds
Zero-coupon bonds are generally issued at a discount to face value and
redeemed at par. These bonds were issued on January 19th 1994.
The securities do not carry any coupon or interest rate as the tenure is fixed for
the security. In the end, the security is redeemed at face value on its maturity
date.
FAQS
What are government securities?
Government securities are called investment products issued by the both
central and state government of India in the form of bonds, treasury bills, or
notes.
What is the major difference between dated government securities and state
development loans?
The major difference between dated government securities and state
development loans is that G-Securities are issued by the central government
while SDL is issued by the state government of India.
Final Thoughts
There are several types of government securities in India, and an investor can choose their
desired securities for their portfolio.
In addition, these securities will provide fixed or guaranteed income to help the investor
align with the risk factor in your investment portfolio.
In the end, buying government securities can turn out to be a great way to make both
investing and portfolio better.
There are several types of government securities offered by the Reserve Bank
of India. Let’s look at the given below:
Treasury Bills
Treasury bills, also called T-bills, are short term government securities with a
maturity period of less than one year issued by the central government of
India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
Several financial instruments pay interest to you on your investment; treasury
bills do not pay interest because they are also called zero-coupon securities.
These securities do not pay any interest; instead, they are issued at a discount
rate and redeemed at face value on the date of the maturity.
For example a 91 day T-bill with a face value of Rs. 200 may be issued at
Rs.196, with a discount of RS. 4 and redeemed at face value of Rs. 200.
However, RBI performs weekly auctions to issue treasury bills.
Zero-Coupon Bonds
Zero-coupon bonds are generally issued at a discount to face value and
redeemed at par. These bonds were issued on January 19th 1994.
The securities do not carry any coupon or interest rate as the tenure is fixed for
the security. In the end, the security is redeemed at face value on its maturity
date.
FAQS
What is the major difference between dated government securities and state
development loans?
The major difference between dated government securities and state
development loans is that G-Securities are issued by the central government
while SDL is issued by the state government of India.
Final Thoughts
There are several types of government securities in India, and an investor can choose their
desired securities for their portfolio.
In addition, these securities will provide fixed or guaranteed income to help the investor
align with the risk factor in your investment portfolio.
In the end, buying government securities can turn out to be a great way to make both
investing and portfolio better.
Government securities are investment products issued by the both central and state government
of India in the form of bonds, treasury bills, or notes.
They are generally issued for the purpose of refunding maturity securities for advance refunding
of securities that have not yet matured and raising fresh cash resources.
However, they carry minimal risk and are called risk-free gilt-edged instruments. So let’s look at
the different types of government securities in India:
There are several types of government securities offered by the Reserve Bank
of India. Let’s look at the given below:
Treasury Bills
Treasury bills, also called T-bills, are short term government securities with a
maturity period of less than one year issued by the central government of
India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
Several financial instruments pay interest to you on your investment; treasury
bills do not pay interest because they are also called zero-coupon securities.
These securities do not pay any interest; instead, they are issued at a discount
rate and redeemed at face value on the date of the maturity.
For example a 91 day T-bill with a face value of Rs. 200 may be issued at
Rs.196, with a discount of RS. 4 and redeemed at face value of Rs. 200.
However, RBI performs weekly auctions to issue treasury bills.
Zero-Coupon Bonds
Zero-coupon bonds are generally issued at a discount to face value and
redeemed at par. These bonds were issued on January 19th 1994.
The securities do not carry any coupon or interest rate as the tenure is fixed for
the security. In the end, the security is redeemed at face value on its maturity
date.
Capital Indexed Bonds
In these securities, the interest comes in a fixed percentage over the wholesale
price index, which offers investors an effective hedge against inflation.
The capital indexed bonds were floated on a tap basis on December 29th 1997.
FAQS
What is the major difference between dated government securities and state
development loans?
The major difference between dated government securities and state
development loans is that G-Securities are issued by the central government
while SDL is issued by the state government of India.
Final Thoughts
There are several types of government securities in India, and an investor can choose their
desired securities for their portfolio.
In addition, these securities will provide fixed or guaranteed income to help the investor
align with the risk factor in your investment portfolio.
In the end, buying government securities can turn out to be a great way to make both
investing and portfolio better.