What is Financial Market?
Financial Market refers to the marketplace where the activities related to the creation and trading of the different financial assets such as bonds, shares, commodities, currencies, derivatives etc takes place.
It provides the platform to sellers and buyers of the financial assets to meet and trade with each other at a price as determined by market forces.
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Financial Market refers to the marketplace where the activities related to the creation and trading of the different financial assets such as bonds, shares, commodities, currencies, derivatives etc takes place.
It provides the platform to sellers and buyers of the financial assets to meet and trade with each other at a price as determined by market forces.
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Types of Financial Markets
Mostly there are 6 types of Financial markets.
1 – Money Market
2 – Capital Market
3 – Derivatives Market
4 – Commodity Market
5 – Foreign Exchange Market
6 – Spot Market
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Mostly there are 6 types of Financial markets.
1 – Money Market
2 – Capital Market
3 – Derivatives Market
4 – Commodity Market
5 – Foreign Exchange Market
6 – Spot Market
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What is Money Market?
Money Market is a type of financial market for lending or borrowing short term loans with a maturity of less than 1 year. The players are usually corporates, banks and financial institutions as a huge amount of money is involved. The instruments dealt in the money market are Treasury Bills, Commercial Papers, Certificate of Deposit, Bills of exchange, etc.
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Money Market is a type of financial market for lending or borrowing short term loans with a maturity of less than 1 year. The players are usually corporates, banks and financial institutions as a huge amount of money is involved. The instruments dealt in the money market are Treasury Bills, Commercial Papers, Certificate of Deposit, Bills of exchange, etc.
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What is Capital Market?
Capital Market is a type of financial market for the trading of stocks (shares) and bonds. This market is used for lending or borrowing money for the long term.
Capital markets are further split into the primary and secondary markets.
The companies issue shares in the form of equity or preference shares or fixed interest-bearing bonds in the primary market. Once the shares are issued, the investors subscribe to them at a lower price and later sell them to another investor at a higher price to earn profit in the secondary market.
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Capital Market is a type of financial market for the trading of stocks (shares) and bonds. This market is used for lending or borrowing money for the long term.
Capital markets are further split into the primary and secondary markets.
The companies issue shares in the form of equity or preference shares or fixed interest-bearing bonds in the primary market. Once the shares are issued, the investors subscribe to them at a lower price and later sell them to another investor at a higher price to earn profit in the secondary market.
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What is Derivatives Market?
Derivatives Market is a type of financial market which deals with trading of Futures, Options, Forward contracts and swaps. They can be dealt with either over the counter or in exchange-traded derivatives. Derivatives derive their value from the underlying asset and are used to manage financial risk due to a change in price.
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Derivatives Market is a type of financial market which deals with trading of Futures, Options, Forward contracts and swaps. They can be dealt with either over the counter or in exchange-traded derivatives. Derivatives derive their value from the underlying asset and are used to manage financial risk due to a change in price.
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What is Commodity Market?
The commodity market is a physical or a virtual market place where market participants meet and buy or sell positions on commodity products like oil, gold, copper, silver, wheat, barley.
Though started with Agri commodities initially, commodity markets today trade in all types of commodities like base metals – gold, silver, copper, infrastructure like oil, electricity, and even weather forecasts.
There are about 50 major commodity exchanges worldwide which trade in more than 100 commodities.
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The commodity market is a physical or a virtual market place where market participants meet and buy or sell positions on commodity products like oil, gold, copper, silver, wheat, barley.
Though started with Agri commodities initially, commodity markets today trade in all types of commodities like base metals – gold, silver, copper, infrastructure like oil, electricity, and even weather forecasts.
There are about 50 major commodity exchanges worldwide which trade in more than 100 commodities.
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What is Foreign Exchange Market?
The foreign exchange market, also known as forex, FX, or the currencies market is an over the counter (OTC) global marketplace that determines the exchange rate for currencies around the world. Participants in these markets can buy, sell, exchange, and speculate on the relative exchange rates of various currency pairs.
Foreign exchange markets are made up of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors.
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The foreign exchange market, also known as forex, FX, or the currencies market is an over the counter (OTC) global marketplace that determines the exchange rate for currencies around the world. Participants in these markets can buy, sell, exchange, and speculate on the relative exchange rates of various currency pairs.
Foreign exchange markets are made up of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors.
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What is Spot Market?
The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date.
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The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date.
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What are Treasury Bills?
Treasury bills are money market instruments issued by the Government of India as a promissory note with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short term requirements of the government, hence, to reduce the overall fiscal deficit of a country.
Government treasury bills can be procured by individuals at a discount to the face value of the security and are redeemed at their nominal value, thereby allowing investors to pocket the difference.
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Treasury bills are money market instruments issued by the Government of India as a promissory note with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short term requirements of the government, hence, to reduce the overall fiscal deficit of a country.
Government treasury bills can be procured by individuals at a discount to the face value of the security and are redeemed at their nominal value, thereby allowing investors to pocket the difference.
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What is Commercial Paper?
Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.
Maturities on commercial paper typically last several days, and rarely range longer than 270 days.1 Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.
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Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.
Maturities on commercial paper typically last several days, and rarely range longer than 270 days.1 Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.
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What is certificate of deposit?
A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.
Certificates of deposit are considered to be one of the safest savings options.
Almost all consumer financial institutions offer them, although it’s up to each bank which CD terms it wants to offer, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties it applies for early withdrawal.
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A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.
Certificates of deposit are considered to be one of the safest savings options.
Almost all consumer financial institutions offer them, although it’s up to each bank which CD terms it wants to offer, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties it applies for early withdrawal.
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What Is a Bill of Exchange?
A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date.
Bills of exchange are similar to checks and promissory notes—they can be drawn by individuals or banks and are generally transferable by endorsements.
A bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand or at some point in the future.
A bill of exchange is used in international trade to help importers and exporters fulfill transactions.
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A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date.
Bills of exchange are similar to checks and promissory notes—they can be drawn by individuals or banks and are generally transferable by endorsements.
A bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand or at some point in the future.
A bill of exchange is used in international trade to help importers and exporters fulfill transactions.
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Types of Derivatives Contracts in Stock Market
There are mainly four types of derivatives that can be traded in stock market. Every derivative are different from the other and has different contract conditions, risk factor, etc.
The different types of derivatives are as follows:
1 - Forward Contracts
2 - Future Contracts
3 - Options Contracts
4 - Swap Contracts
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There are mainly four types of derivatives that can be traded in stock market. Every derivative are different from the other and has different contract conditions, risk factor, etc.
The different types of derivatives are as follows:
1 - Forward Contracts
2 - Future Contracts
3 - Options Contracts
4 - Swap Contracts
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What is Forward Contract?
A forward contract is a type of hedging mechanism where there are two parties involved. It is an agreement that is done on the spot between them regarding buying and selling an asset, but the action is required to be made in the future.
Now, one party will buy, and the other party will sell irrespective of the current market price and the condition of the stock market on a specific future date. The other party will be bound to buy the asset if it is not profitable to do so since they are bound by the contract, and the second party will be riskless in his entire transaction.
This is a mechanism to hedge the risk to a certain level. Forward contracts can be tailored to a specific commodity, amount, and delivery date.
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A forward contract is a type of hedging mechanism where there are two parties involved. It is an agreement that is done on the spot between them regarding buying and selling an asset, but the action is required to be made in the future.
Now, one party will buy, and the other party will sell irrespective of the current market price and the condition of the stock market on a specific future date. The other party will be bound to buy the asset if it is not profitable to do so since they are bound by the contract, and the second party will be riskless in his entire transaction.
This is a mechanism to hedge the risk to a certain level. Forward contracts can be tailored to a specific commodity, amount, and delivery date.
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What is Future Contract?
A futures contract is also a risk minimization mechanism. It is quite similar to forwarding contracts, but the only difference is that the futures contract can easily be transferred, and there is a guarantee of performance.
The forward contracts are not liquid. Suppose after 15 days of your decision to buy, and you finally decide to backtrack. Now, you want to get rid of the obligation to buy because of the market conditions. Therefore, here if the contract is a futures contract, then this conversion is possible. The buyer can now enter into a second contract, and he can shift his obligation to others.
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A futures contract is also a risk minimization mechanism. It is quite similar to forwarding contracts, but the only difference is that the futures contract can easily be transferred, and there is a guarantee of performance.
The forward contracts are not liquid. Suppose after 15 days of your decision to buy, and you finally decide to backtrack. Now, you want to get rid of the obligation to buy because of the market conditions. Therefore, here if the contract is a futures contract, then this conversion is possible. The buyer can now enter into a second contract, and he can shift his obligation to others.
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What is Option Contact?
An option is considered as a contract where there is no liability. The return from option depends upon the occurrence or nonoccurrence of certain events in the stock market. Therefore, it is also considered as a contingent.
Basically, in options, the holder of an option is given a right to either buy an asset or sell without any obligation. If the holder of the option opts to buy an asset, it is called a call option, and if he wants to sell, then it is known as a put option. The price at which this is exercised is called the exercise price or strike price.
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An option is considered as a contract where there is no liability. The return from option depends upon the occurrence or nonoccurrence of certain events in the stock market. Therefore, it is also considered as a contingent.
Basically, in options, the holder of an option is given a right to either buy an asset or sell without any obligation. If the holder of the option opts to buy an asset, it is called a call option, and if he wants to sell, then it is known as a put option. The price at which this is exercised is called the exercise price or strike price.
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What is Swap Contact?
A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments.
Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything. Usually, the principal does not change hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is variable and based on a benchmark interest rate, floating currency exchange rate, or index price.
The most common kind of swap is an interest rate swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter (OTC) contracts primarily between businesses or financial institutions that are customized to the needs of both parties.
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A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments.
Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything. Usually, the principal does not change hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is variable and based on a benchmark interest rate, floating currency exchange rate, or index price.
The most common kind of swap is an interest rate swap. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter (OTC) contracts primarily between businesses or financial institutions that are customized to the needs of both parties.
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What is Over-the-counter or OTC Contract?
Over-the-counter or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price.
In an OTC trade, the price is not necessarily publicly disclosed.
OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such products.
In OTC, market contracts are bilateral (i.e. the contract is only between two parties), and each party could have credit risk concerns with respect to the other party.
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Over-the-counter or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price.
In an OTC trade, the price is not necessarily publicly disclosed.
OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such products.
In OTC, market contracts are bilateral (i.e. the contract is only between two parties), and each party could have credit risk concerns with respect to the other party.
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What Is Absolute Advantage?
Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than another entity that produces the same good or service.
An entity with an absolute advantage can produce a product or service at a lower absolute cost per unit using a smaller number of inputs or a more efficient process than another entity producing the same good or service.
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Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than another entity that produces the same good or service.
An entity with an absolute advantage can produce a product or service at a lower absolute cost per unit using a smaller number of inputs or a more efficient process than another entity producing the same good or service.
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