Understanding Financial Markets

What are Financial Markets?

Financial markets is a marketplace where buying and selling of securities like stocks, bonds, derivatives, commodities, currencies, etc. occur. These markets may include securities which are listed on an regulated exchanges or are traded Over-The-Counter(OTC). Financial markets basically provide a way for those who have excess money to invest and those who are in need to money to borrow.

Financial markets play an important role in creating liquidity for capitalist economies. Financial markets are transparent as they ensure that the prices set are efficient and appropriate.

Types of Financial Markets

Stock Markets

Stock markets are a place where trading of equities occur. Equity is the value of shares issued by the company. In a stock market, securities are traded via Primary Market and Secondary Market. In Primary Market, securities are issued to investors directly by the issuer. Companies raise capital by an Initial Public Offering(IPO). Primary markets are also known as New Issue Markets.

Secondary markets are where investors buy and sell securities they already own. The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments are traded.

The most popular stock exchanges in India are National Stock Exchange(NSE) and Bombay Stock Exchange(BSE).

Bond Markets

The Bond Market is a marketplace where participants can issue new debt, known as primary market and buy and sell debt securities, known as secondary market. A bond is an financial instrument in which an investor loans money for a specific period of time at a pre-determined interest rate. Bonds are issues by  municipalities, states, and sovereign governments to finance projects and operations. Debt securities usually include bonds, but it may include notes, bills, and so for public and private expenditures.

Money Markets

Money Markets involves trading of securities that are highly liquid and are issued for short time period with low interest rates. Money market consists of various financial institutions and dealers, who seek to borrow or loan securities. Examples of securities traded in money markets are treasury bills, commercial papers and certificate of deposits. Money markets are considered a safe place to invest as they have high liquidity.

Money markets are Over-The-Counter(OTC) markets which means that they are not regulated and not structured. Money markets give lesser returns however they offer a variety of products.

Derivatives Market

Derivatives markets are financial markets for derivatives like futures, options, forwards, etc. Derivatives are financial instruments whose value is determined by the value of the financial instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks. The four major types of derivative contracts are options, forwards, futures and swaps. Futures and Options are listed and traded on stock exchanges while forwards and swaps are not.

Forex Market

The forex (foreign exchange) market is a market where people can buy, trade, hedge, and speculate on currency pairs’ exchange rates. Because cash is the most liquid of assets, the Forex market is the most liquid in the world. The currency market conducts more than $5 trillion in daily transactions, which is higher than the combined volume of the futures and stock markets. The forex market, like the OTC markets, is decentralized and is made up of a global network of computers and brokers from all over the world. Banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors make up the forex market.

Commodities Market

Commodities markets are gathering places for producers and consumers to trade physical commodities like maize, livestock, and soybeans, as well as energy goods (oil, gas, and carbon credits), precious metals (gold, silver, and platinum), and “soft” commodities (such as cotton, coffee, and sugar). Spot commodities markets are those where tangible things are exchanged for money.

Cryptocurrency Markets

Cryptocurrencies like Bitcoin and Ethereum, which are decentralised digital assets based on blockchain technology, have been introduced and have grown in popularity over the last few years. Hundreds of cryptocurrency tokens are now accessible and traded on a patchwork of independent online crypto exchanges throughout the world. These exchanges provide traders with digital wallets via which they can exchange one cryptocurrency for another or fiat currencies like dollars or euros.

E-Commerce – Benefits and Disadvantages

Long gone are the days when you had to venture through 7-8 shops before buying a desirable mobile or shoes. It didn’t take long to get all of those suitable things you crave to be present on your few clicks which was quite unimaginable back in a decade or so.

The growth of E-Commerce escalated with double or even triple digit annually around mid-1990s and this escalation was a result of the launch of the first web browser, aptly named “World Wide Web”. Also, the sheer development of internet and its usage was a major catalyst in the E-Commerce boom. By the end of 2020, 60-70% of the world has connected to internet. Amazon, eBay emerged as the major dominators in the world of E-Commerce with Amazon still keeping up its level till date.

The development and evolution of e-commerce has made our life easier and less hectic. One can give countless advantages of it like convenience, security etc. but what about the benefits which get cloak under the blanket of the obviously known advantages?

Advantages

1) Economy – The Indian E-commerce market is likely to grow to US$ 200 billion by 2026 from US$ 38.5 billion as of 2017. Much of the progress for the industry has been prompted by an upsurge in internet and smartphone penetration

  • On October 23, 2020, Flipkart acquired a 7.8% stake in Aditya Birla Fashion and Retail, a subsidiary of the Aditya Birla Group, for Rs. 1,500 crore (US$ 203.8 million). (IBEF, 2021)
  • In October 2020, Amazon India collaborated with the Indian Railway Catering and Tourism Corporation (IRCTC) to enable users to book and reserve train tickets on Amazon. (IBEF, 2021)
  • In October 2020, Flipkart acquired a 140-acre land at Rs. 432 crore (US$ 58.87 million) to establish their largest fulfilling center in Asia, in Manesar, Gurgaon, in a bid to scale their fulfilment infrastructure to cater to increased demand post COVID-19. (IBEF, 2021)
  • In October 2020, Amazon India invested over Rs. 700 crore (US$ 95.40 million) into its payment unit, Amazon Pay. (IBEF, 2021)

2) Cost reduction – E-commerce is affordable and requires less investment when compared with a physical store. This is also a good opportunity for an individual and a new seller who wants to earn an income but doesn’t have the required capital to run his business. Sellers also don’t have to spend a lot of money to promote their product. The world of e-commerce has several affordable and quick ways to advertise a product. E-commerce is a virtual channel and sellers can easily show off their products. In e-commerce sellers can compare the products on their own by using different tools. This gives them a good idea of product alternatives available, the standard rates, if a product need is fulfilled. This one is more benefit for the customers too so the people are more confident about the product they are buying. (Amazon, 2020)

3) Boon in the current COVID situation – World wouldn’t have asked a better boon than getting your essentials and suitable needs at home without going out in this deadly pandemic which has been haunting the world now for more than a year. This doesn’t only keep you safe but also keeps the fatal infection from contracting.

By now, we all have at least got an idea that internet has become an amazingly powerful tool to conduct business electronically. Many companies have jumped into e-commerce realm after seeing its potential and profit margin. Now here kicks in the concerns related to e-commerce business. Increasing relevance of this field also increases privacy concerns. The dearth of consumer protection legislations also starts lurking around. Indeed, the dark side of e-commerce is not short listed.

Disadvantages

1) Security – One of the biggest drawbacks to ecommerce can be the lack of reliability and security due to poor implementation. Online transactions are mainly processed via debit card, credit card and internet banking and in very few cases via the “cash on delivery” option. Website owners try to take all available precautions to protect card details. However, what if the website is hacked by cyber criminals? This is a harsh reality with ecommerce websites. It is important to remain vigilant and proactive in protecting the website and, primarily, customer-related information. Security has been an issue from the start and is considered to be one of the main disadvantages of e-commerce.

2) Lack of Privacy – The privacy invasion problem is a serious drawback of e-commerce. A customer must provide their personal information before purchasing. Some websites do not have advanced encryption technology that can protect their personal information from hackers, and this is very important. The leakage of this confidential information can create many problems for a consumer.

3) Huge technological cost – E-commerce requires advanced platforms to improve performance. If you run into issues in the form of software, network, or domain issues, you will not be able to offer smooth transactions. The right technical infrastructure is expensive and requires large investments. It also needs to be updated regularly to accommodate changing times. The cost of running a successful business is a disadvantage of the e-commerce portal.

Conclusion

E-commerce is generally defined as the automation of routine business processes and operations and their transfer into virtual space. This process significantly increases business efficiency and simplifies daily routine work. Recent research has shown that businesses are moving quickly between local businesses. Many companies are using the internet and e-commerce in more convenient ways to market their products in the local market. Most of the online retailers are cheaper than the same products they sell, which is the main reason why today’s online stores are gaining market share. Some online stores have exceptional terms where you don’t have to pay for a certain amount for home delivery. For e-commerce sales as the reports are automated. It is convenient for small businesses to go online as they can easily compete with the larger ones. In addition, online sales save costs, there is no need to rent an in-store point of sale, and storage is not always required. It is much easier to access overseas markets through the internet. The biggest shortcoming of online stores is that they cannot display a product before buying it.