Global financial market - Free Essay Example

INTRODUCTION:- MONEY MARKET:- Money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a money market is about 13 months or lower. Some of the more common types of things used in the money market are certificates of deposits, bankers acceptance, repurchase agreements and commercial paper to name a few. Basically what the money market consists of is banks that borrow and lend to each other, but other types of finance companies are involved in the money market. What usually happens is the finance companies fund themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of eligible assets into an asset backed commercial paper conduit. Your most common examples of these are auto loans, mortgage loans, and credit card receivables. There are different instruments in the money market which offering different returns and different risks are given following:- Treasury Bills (T-Bills) Certificate Of Deposit (CD) Bankers Acceptance CAPITAL MARKET:- Capital market is a type of financial market, it includes the stocks and bonds market as well. But in general the capital market is the market for securities where either companies or the government can raise long term funds. One way that the companies or the government raise these long term funds is through issuing bonds, which is where a person buys the bond for a set price and allows the government or company to borrow their money for a certain time period but they are promised a higher return for allowing them to borrow the money, the higher return is paid through interest that accrues on the money that the government or company borrows. Another way that the companies or government can raise money in the capital market is through the stock market, most of the time you dont see the government as a part of the stock market, but it can actually happen so we need to include them. But how the stock market works is that the companies decide to sell shares of their stock, which is basically ownership in the company, to ordinary people and other companies, as a way to raise money. The people who buy the stock are usually given dividends each year, if the company has agreed to pay out dividends, so that is another possible return on their investment. The capital market actually consists of two markets: Primary market secondary market Primary market is where new issues are distributed to investors, and the secondary market where existing securities are traded. Both of these markets are regulated so that fraud does not occur and in the United States the U.S. Securities and Exchange Commission is in charge of regulating the capital market. The different types of financial instruments that are traded inthe capitalmarkets are equity instruments credit market instruments insurance instruments foreign exchange instruments hybrid instruments derivative instruments DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET:- Basically the difference between the capital markets and money markets is that capital markets are for long term investments, companies are selling stocks and bonds in order to borrow money from their investors to improve their company or to purchase assets. Whereas money markets are more of a short term borrowing or lending market where banks borrow and lend between each other, as well as finance companies and everything that is borrowed is usually paid back within thirteen months. Another difference between the two markets is what is being used to do the borrowing or lending. In the capital markets the most common thing used is stocks and bonds, whereas with the money markets the most common things used are commercial paper and certificates of deposits. SIGNIFICANCE OF CAPITAL MARKET MONEY MARKET WITH EXAMPLES:- The capital market plays a pivotal role in a market system. It is the financial system that facilitates the flow of funds between buyers and sellers in the various markets, it allows the plumber, teacher, and banker to specialize in what they do best and for society to minimize the resources devoted to the transactions that must accompany any specialization. A financial system also stimulates borrowing and saving. A key to economic growth is investment spending on new machines and factories. For our plumber and carpenter, this meant better tools, and anyone who has done plumbing and carpentry knows the time savings of better tools. But where would we find the funds to purchase the tools? From the recycling of the savings of others. If it was not for the savings, the surplus of production above that earmarked for consumption, there would be no way to find the resources necessary for spending on machinery which produces no direct, immediate benefit to the consumer. It is no surprise that the former Eastern European countries attempted to develop capital markets as they struggled with their conversion from command systems to market systems. If they were to establish an array of markets in the real sector for the exchange of goods and services, they would need to establish the financial markets needed to provide the money for these transactions. The capital market functions as the set of pumps and hoses that delivers the oil where it is needed, to the markets. Firms come to the capital market to finance their investment projects and to invest their surplus funds; households use the capital market when they borrow money to buy a home or a car and when they invest their surplus funds in savings accounts, stocks, bonds, mutual funds, life insurance policies, or pensions for later use; the government goes to the capital market every time that it needs to borrow to finance its deficit; and foreigners come to borrow money or invest it. When the oil stops, we know the consequences. The economic engine that generates jobs and goods seizes up. In the US, the most notable seizure by far would be the stock market crash of 1929, the opening event of the Great Depression of the 1930s. In the aftermath of the crash, the nations banks took holidays and shut their doors and the money needed to keep the engine running smoothly disappeared. We may recall the scene from the Jimmie Stewart movie that plays each Christmas season Its a Good Life when the Baileys Building and Loan (a bank) is threatened by a rush of people looking to get their money out. Imagine if employers could not get the money to pay wages and salaries. People would not be able to pay their mortgages and car payments, they would be unable to purchase food at the supermarket or clothes at the mall. It would not be long before the workers who produced the food, the clothes, and autos would find themselves out of work. By the time we were done we would find massi ve unemployment in the labor market and idle factories and offices in the output market. In the US at the height of the Depression, unemployment peaked at 25 percent of the labor force. The oil keeps flowing the government has heavily regulated the capital market, in part because of the widespread perception among policy makers that the capital market shock was the cause of the Depression. The agency primarily responsible for regulating the capital market is the Federal Reserve (FED), the central bank of the US. Since its inception in 1914, the FED has exerted considerable influence over the workings of the capital market, both indirectly by establishing the rules governing the behavior of the major financial institutions operating in this market, and directly by controlling the nations money supply. The Fed is the monetary authority in the US and the agency responsible for the conduct of monetary policy, something we will discuss at length in our later discussion of macro policy. Money market which is an essential segment of the financial markets generally refers to borrowing and lending for periods of a year or less. The need for a money market arises from the fact that receipts available to businesses, governments and all other economic agents do not coincide with expenditures. PRESENT SCENARIO CAPITAL MONEY MARKET :- The current condition of Indian markets have drastically improved. There is absolute transparency and instant transactions. All Indian Stock markets are now computerized andInternetTradinghas become a common phenomenon. Indian stock markets have also developed a dynamic nature and can change from a bullish temperament to a bearish slide. Any small bit of information or even a rumour from any part of the country can affect the market and is a fairly accurate indicator of the prevalent atmosphere in the region or country. People from across the country and globe get in touch with minute wise readings on the stock market and gain a lot of trading aptitude after daily seeingBSE Stock GainersorBSE top loserslist which does a world of good to theirinvestmentportfolio. Fixed Income Market scenario: Short-term money market yields continued to trend lower due to excess liquidity pressure. 3 month CD rates dropped by 75 bp from 4% to 3.25% over the month of June and are currently at 3%. Indias benchmark wholesale price index (WPI) declined to negative 1.30% for the week ending June 20, recording a fall for three consecutive weeks. The decline in inflation could be largely attributed to high base effect as WPI stood at 11.91% in the corresponding week of the last year. The bond market seems to have shrugged off the initial impact of the petrol and the diesel price hikes. The 10% (app.) hike in the petroleum prices should push up the inflation by about 75-100 bp over a period of time. Currently, we expect the WPI inflation to be in subzero levels for a period of 2-3 months. This is purely due to high base effect of last year. Post the petroleum price hike the WPI index will now move up faster than previously expected, but not as fast as to create worries of inflation within the system before the calendar year end. More recently, following the budget, the bond market was shocked to discover the huge excess borrowing of Rs.90,000 crore. The yields are currently re-aligning to the negative news. However, the views of international rating agencies are also critical given the sharp hike in fiscal deficit to 6.8% from the interim budgets estimate of 5.5% The market presently runs a lower risk of negative surprise as the budgeted tax receipts are realistic except for the corporate tax collections. However, the non-tax receipts as per the budgeted estimates of 2009-10 run the uncertainty of the 3G spectrum auction timelines. CURRENT STATE OF THE MARKETS FROM 2005-08:- Investor sentiment is largely bearish across many measures, which typically is a positive forward indicator for the market. Discerning investors that buy select securities when everyone else is selling, tend to make outsized returns over the long run. Decembers reading showed less than 1/4th of those surveyed did NOT expect a market crash in the next 6 months. The American Association of Individual Investors sentiment survey showed bearish sentiment at 54% in its December 31st reading, similarly at relative bearish levels. On the other hand, in the number of bulls increased in December according to the Investor Intelligence survey, which does not show the complete capitulation that we may have preferred to see. In fact, the pervasive stealth bull market that we start the new year with indicates investors remain too eager too us. The closing of these valuation gaps represent capital being put to work and addressing market inefficiencies. The equity markets have seen similar rallies off their November and December lows. Of particular note is the 25.5% gain in the Russell 2000 index of small cap companies from November 20th through to the end of the year versus a 17.3% rally in the SP 500, a relative outperformance of 47%. The rally has been broad with 90% of the constituents of the Russell 2000 seeing their equity prices appreciate. 30% of have seen their stock prices rise in excess of 50%. It indicates a relative return of reason and the beginning of, if not gradual, increase in risk appetite from the September to December time frame. We remain acutely aware of the risks for negative feedback into the financial markets from the precipitous decline in economic activity but believe most of the downside is priced in already. Its shown in graph which is given below:- LITERATURE REVIEW:- Are Investors Ready for Higher Interest Rates? If the economy keeps growing, it hastens the day when the Federal Reserve ends the era of 0% interest rateClick here to find out more!. TheU.S. economyis growing again has renewed the debate about where interest rates are headed with big implications for both the economy and investors. The U.S. gross domestic product report showed that the economy grew by 3.5% last quarter, a higher percentage than many were expecting, and fixed-income markets took it as a sign that a rate increase will happen sooner. Treasury prices fell after the release of the GDP figure, and the yield on 10-year U.S. Treasuries rose 0.08 points to 3.5%. A historically low rate which is reflecting the fact that the Federal Reserveis holding the short-term federal funds rate near zero in order to stimulate the economy. Its the reason why yields on bank savings and money market accounts are so paltry. Global equity fund flows turn negative: EPFR Global fund flows intoequitiesfell in the week ended as policymakers shifted focus to unwinding stimulus measures, while unemployment continued to rise, making investors question what will drive economic growth. Outflows from equity funds totalled $5.42 billion and outflows from all emerging market equity funds were at an 11-week high. Fixed-income funds drew net inflows of $3.63 billion. Only six of 24 major global funds and fixed-income fund groups tracked by EPFR Global registered inflows, despite additional liquidity resulting from another week of heavy outflows frommoneymarketfunds. Global bond funds drew fresh money for a 30th week. US bond funds remained attractive, absorbing $2.1 billion, and short-term debt funds led the way. Outflows from money market funds rebounded to $27.3 billion for the week. Govt parks Rs 61k cr of idle money with RBI The government is bearing a portion of the cost of liquidity management by paying interest on money it does not need. The central government has been regularly borrowing from the market through bond issues to fund its huge fiscal deficit. The bond issues are timed to meet cash requirements of the government. Instead of spending the money, the government has parked Rs 61,343 crore of idle money in its account with the Reserve Bank of India (RBI). The idle money with RBI rose from Rs 12,837 crore in June 2009 to Rs 80,775 crore by end-September. 2009 a challenging year for U.S. venture capital market The year 2009 has been a very challenging year for venture capital sector in the United States, and analysts are expecting a recovery for the market next year with more investment going to companies doing real business. In the gloomy market, some U.S. venture-backed companies is still successfully in securing big deals.The biggest deal in 2009 belongs to social networking website Face book, which raised 200 million dollars from Russias Digital Sky Technologies.The latest example is Exact Target, a marketing e-mail software provider which recently raised another 75 million dollars, bringing the startups total funding this year alone to 145 million dollars, technology blog Tech Crunch.2010 as a year when the U.S. venture capital market recovers and e-commerce companies do well. Managing inflation expectations smartly The need to manage inflation expectations as proposed by the State Council, the countrys cabinet, suggests that the decision-makers have developed a forward view on the risks of potential inflation, which is a timely and helpful move. To manage inflation expectations, the government should regulate the controllable factors in advance and appropriately guide market views on the trend of these factors, including expectations on domestic monetary policy (especially money supply growth and real interest rate), fiscal policy, the governments intervention in the stock and housing markets, land supply and policies affecting global liquidity conditions. First, the current year-on-year growth rate of M2 surpassed nominal GDP growth rate in the first three quarters by 23 percentage points and credit growth, by 27 percentage points, signaling excessive liquidity. The credibility of monetary policy should be improved. The 17 percent growth rate of M2 declared has been exceeded substantially because of the approval of overfull government-dominated projects and the acceleration in project implementation. In 2010, if government policies are not coordinated effectively and the growth targets for money and credit are once again not adhered to, then monetary policy will lose credibility and inflation expectations may worsen. SEBI eases norms for raising funds from bond market Capitalmarketregulator Securities and Exchange Board of India (SEBI) eased norms for security or the asset cover, required for issuing secured bonds. SEBI said that issuers will have to maintain a 100% asset cover that is sufficient to discharge the principal amount at all times for their debt securities offerings. The charge was created on a portion of assets and the rest was secured by way of negative. SEBI has also enhanced disclosures toinvestorsby issuers. Issuers will also have to deposit 1% of the issue proceeds with the exchange till all the investor complaints are disbursed off. Scope of study This proposed study will help to find the future of money market and capital market. These both are very essential factors for our Indian economy. Research Methodology Research Method is a way of doing something and methodology is a set of methods used in a particular area of activity. The research methodology employed in the research is as given by Philip Kotler. Developing the problems and research objective Developing the information sources. Collecting and analyzing the information Presenting the information Research Design Research Design is a series of advanced decisions that taken together comprise a model for the conduct of an investigation. So research design provides a framework of plan for study, which guides the collection, measurement, analysis, and interpretation of the data. The research carried out here is descriptive in nature. Descriptive research provides data about the population or universe being studied. It can describe 5 Ws, 1H i.e. what, when, why, who, where, and how. Method of Data Collection The next step of research methodology is data collection. It can be done through primary or secondary techniques. In this study secondary techniques is used to collect the data. For secondary data I have referred journals, magazines and Internet. CONCLUSION:- Money market capital markets are a critical component for any developed economy.Today Indian capital markets are amongst the best regulated markets in the regulatory framework with the significant growth in the securities markets. The story of Indian capital market reveals an efficient trading and settlement infrastructure, high levels of disclosure and fostering an environment of innovation. In this back drop it is seen that a new trend of corporate financing is gaining ground. The sale of Foreign Currency Convertible Bonds by domestic companies and banks has surged over the last couple of years. Thus, some articles in this study seeks to examine some fundamental concepts related to Foreign Currency Convertible Bonds, its nature, regulatory mechanism, tax treatment, advantages and disadvantages. it is concluded that Foreign Currency Convertible Bonds can be advantageous only in a booming market and cannot be the buzzword in a bearish market, which the Indian markets did experience a little while back. In a bearish market, listed companies may resort to Qualified Institutional Placements that have been introduced by SEBI guidelines. Indian Stock Markets can be a very rewarding avenue of investment but the constant changes and the inherent dynamic nature of the markets can wipe out our funds or savings within a minute. Dont always rely on the daily list of BSE top gainers or BSE top losers as it only takes a minute to get the things changed here. Keeping ones eyes and ears open can theinsurethe investor against any major losses. Hence, it is a way to turn our savings into a fortune. REFERENCES:- www.capitaline.com www.investopedia.com www.articlesbase.com www.business.mapsofindia.com https://linguistics.byu.edu/faculty/henrichsenl/apa/apa01.html www.sbidfhi.com www.improvingyourworld.com https://www.uri.edu/artsci/newecn/Classes/Art/INT1/Mac/Measure/Cap/Capital1.htm www.businessweek.com Finance India and Journal of Finace.