Global Financial Markets Article

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Global Financial Markets

Financial Markets are complex and unpredictable. The movements in financial markets of one country may be the effect of incidents occurring in some foreign land. It may be difficult to comprehend the financial markets at a given time and place.

Author: Praveen Kumar

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In common parlance, a market is a place where trading takes place. Whenever we think about markets, a picture that flashes across our minds is of a place which is very busy, with buyers and sellers, some sellers, shouting at the top of their voice, trying to convince customers to buy their wares. A place abuzz with vibrancy and energy.

In the early stages of civilization, people were self-sufficient. They grew every thing they needed. Food was the main commodity, which could be very easily grown at the backyard, and for the non-vegetarians, jungles were open with no restrictions on hunting. However, with the development of civilization, the needs of every being grew; they needed clothes, wares, instruments, weapons and many other things which could not be easily made or produced by one person or family. Hence, the need of a common place was felt, where people who had a commodity to offer and the people who needed that commodity, could gather satisfy their mutual needs.

With time, the manner in which the markets functioned changed and developed. Markets became more and more sophisticated and specialized in their transaction so as to save time and space. Different kinds of markets came into being which specialized in a particular kind of commodity or transaction. In today’s world, there are markets which cater to the needs of manufacturers, sellers, ultimate consumers, kids, women, men, students and what not. For the discussion of the topic at hand, the different kinds of markets that exist in the present day can be broadly classified as goods markets, service markets and financial markets. The present article seeks to give an overview of Financial Markets.

What Is A Financial Market?----------------------------
According to Encyclopedia II, ‘Financial Markets’ mean:
“1. Organizations that facilitate trade in financial products. i.e. Stock Exchanges facilitate the trade in stocks, bonds and warrants.

2. The coming together of buyers and sellers to trade financial product i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.”

Financial Markets, as the name suggests, is a market where various financial instruments are traded. The instruments that are traded in these markets vary in nature. They are in fact tailor-made to suit the needs of various people. At a macro level, people with excess money offer their money to the people who need it for investment in various kinds of projects.

Risks In Financial Markets And Hedging Them:----------------------------
“In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.” ~Peter Lynch (Research Consultant, Fidelity Consultant)

When a transaction takes place in financial markets, there is always a risk factor associated with the transaction. The various risks that financial markets are usually associated with are:

- The lender may not repay the money to the borrower,

- There may be an abnormal upward or a downward movement in the price of securities, thereby hampering the interest of the buyer or seller of securities respectively,

- Negative sentiments or expectations may make some financial instruments unattractive or the whole financial market an unattractive place to the investors and force them to withdraw their investments, resulting in deep plunge of prices of the securities which once seemed very luring and attractive,

- Change in the fiscal policies of the government may make the financial markets unattractive for foreign or domestic investors,

- Change in political power in a country may result in a preferential treatment to one industry, and/ or step-motherly treatment to another, which was not foreseeable by the investors, thereby sharply decreasing the value of their securities.

From the above discussion, we can understand that investment in Financial Markets entails a lot of risks. There are other risks associated to investing in financial markets which may be a result of many composite factors which are closely or remotely related; like serious fluctuations in foreign markets or in Indian scenario, failure of monsoons. To tide over this problem, various hedging securities are traded in the financial markets.

The holders of these kinds of instrument lower the risk that is associated with financial markets, by purchasing the risk that is associated with a kind of transaction. Therefore, the holders of hedging instruments are not a party to the original transaction. They are merely the ones who minimize the risk in a transaction by purchasing the risk associated with a transaction. Since these financial instruments are derived from another transaction, these instruments are also called ‘derivatives’. The ones who buy the risk are compensated in monetary terms. The higher the risk, higher will be the compensation and vice versa.

Conclusion:----------------------------
“An investor without investment objectives is like a traveler without a destination.” ~Ralph Seger (Founder, Seger-Elvekrog Inc.)

However, an intelligent player in financial markets always takes decisions by carefully studying the trends in the financial markets and closely following the cues in the domestic and international markets.

To conclude, the author would like to admit that financial markets are a very interesting playground, in which a player needs to be flexible and patient. There may be initial hiccups when one starts investing, however, with time, as one starts to understand the financial markets, things start falling in place; and a reminder, never under-estimate the result of a remotely connected incident in financial markets.

“It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.” ~ George Soros (Chairman, Soros Fund Management)

About Author

MBA,LL.B.,LL.M.,JRF
Member, High Court Bar Association, P & H high court, Chandigarh

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