The economic growth of any nation largely depends on the palpability of its financial market. Countries like India have capitalistic nature and are moved by its financial market confidence. Financial market confidence is moved by financial frauds, lack of transparency in dealings, lack of knowledge of latest schemes and amendments made by the governments, etc.
The market segment is classified into two:
1. Equity market -:
i) Cash market
ii) Derivative market
A. Future market
a) Stocks future market
b) Indices future market
B. Option market
a) Stocks option market
b) Indices option market
2. Commodity market -:
i. Metals commodity market
a) Bullion metal market
b) Base metals market
c) Energy market
ii. Agriculture commodity market
Equity market is itself another world where trading takes place. In cash segment, there is no provision of lots and contracts, infact, trading happens in unit stocks and the position can be held lifelong. Short selling is allowed only on intraday basis and BTST and STBT provisions are not there. Talking about derivative market, there is no provision of buying and selling of single stocks, in fact, trading happens in lots and contracts i.e.
predefined bundle of stocks. Since a contract is involved, of course, it’ll get expired one day or the other and hence, they can’t be hold lifelong and a contract cycle of three months exists. Another feature of derivative market is that short selling is allowed for intraday as well as delivery. Indices can be traded in derivative market only. Derivative market got its name because it is an instrument derived from some underlying asset and its movements also depends on the movements in the prices of underlying asset. The underlying asset can be equity, nifty or commodity. Commodity trading in India has its roots from pre historic times which got transformed from forward markets to the old barter system to current modern derivative form. Even today,
commodity trading is carried out in two forms:
a) Physical markets: these are the mandis where trading is carried out physically.
b) Virtual markets: there are standard electronically available platforms in India like MCX and NCDEX. MCX deals with hard commodities i.e. metals and NCDEX deals with soft commodities i.e. agricultural goods.
We are all aware about the fact that risks are inevitable in market place. Basically, all the risks prevailing in the market place can be grouped in one of the following:
Let’s understand each of them with different examples.
A company produced galvanized iron pipes and distributed across the horizons of India. The
coastal region didn’t appreciate these because sea breeze often led to corrosion of those pipes. These people preferred PVC pipes. In order to overcome this problem, the company started manufacturing low cost non corrosive steel pipes for the coastal region market.
The above stated problem is an example of operational risks.
Suppose a foreign iron pipes manufacturer wishes to expand his business in India. He can do
So by setting up a subsidiary in India in order to hedge against currency fluctuations in this
sector. He can initially start with making an India partner and borrowing INR. But
the manufacturing technology will be of the parent company based in foreign. Since initial
financing and investment is in INR, revenue regeneration will also be in INR and hence,
currency conversion of project returns is not necessary to repay loans.
This is an example of financial risks.
Today, most of the transactions are carried out online. Now, suppose the web application of a
firm faces some technical problems and causes delayed payments and explicit costs associated
with delays. In order to hedge the above problem, companies often have back up servers.
The above stated incident is an example of system risks.
Suppose a company has to transport its orders to another town, city, state or country within
four months. The order is dispatched within the range of time but, due to the occurrence of
some natural calamity, the order is delayed or is destroyed. In such a case, company has to
borne high losses.
Above stated problem comes under event risks.
Hence, whether it’s an equity market or a commodity market,
“RISKS ALWAYS PERSISTS….”