Trade Life Cycle and Financial Markets

Jul 21, 2024

Trade Life Cycle and Financial Markets Overview

Introduction

  • Speaker: Suila Hariharan, Learning Partner
  • Objective: Start a new format covering the trade life cycle in investment banking and settlement processes across different markets.
  • Aim: To create comprehensive lessons for interviews with major investment banks like Goldman Sachs, Morgan Stanley, and JP Morgan.

Financial Markets Overview

Types of Markets

  1. Equity Markets
    • Also known as common stock or shares.
    • Largest examples: NYSE, NASDAQ (USA), Tokyo Stock Exchange, NSE (India), and London Stock Exchange (Europe).
  2. Fixed Income Markets
    • Include debenture markets and bond markets.
    • Securities are long-term and have a maturity date.
  3. Commodity Markets
    • Examples: MCX (India), LSE (London), and Philadelphia Stock Exchange.
    • Trade in metals, non-metals, agricultural products, etc.
    • Crude oil (Brent crude and WTI) is a major commodity.
  4. Currency Markets
    • Foreign exchange markets, a 24x5 market.
    • Trillions of dollars traded daily.

Market Characteristics

Physical vs. Electronic Markets

  • Prior to 1990s: Physical buildings for trading.
  • Now: Predominantly electronic trading platforms.
  • Important metrics: Trade volumes and market capitalization.

Financial Assets

  • Denominated in currency and generate returns.
  • Examples: Equities, commodities, fixed income, money markets, and currencies.
  • Personal financial assets: Fixed deposits, gratuity, provident fund, mutual funds, gold (as a commodity and financial asset).
  • Financial assets vs. Commodities: Gold vs. Gold ETFs (Gold ETFs provide dividends).

Market Categorization

By Financial Assets Traded

  1. Equity Markets: NSE, BSE (India)
  2. Bond Markets: Fixed income securities
  3. Currency Markets: Largest pair: USD/EUR
  4. Commodity Markets: Global and volatile

By Market Structure

  1. Exchange Markets (Centralized)
    • All orders routed through a centralized platform via registered brokers.
    • Examples: NYSE, NASDAQ (USA); NSE, BSE (India); MCX (commodities).
  2. OTC Markets (Decentralized)
    • No centralized order matching; direct trading or via dealers.
    • Customized products, mutually agreed settlement procedures, less transparent but regulated.

By Issuing and Trading

  1. Primary Market
    • Issuer raises capital directly from investors.
    • Includes IPO (Initial Public Offering) and secondary offerings (rights issue).
    • Instruments must get listed on an exchange or OTC market.
  2. Secondary Market
    • Investors trade instruments among themselves.
    • Could be exchange-based or OTC.

By Settlement Method

  1. Cash Market (Spot Market)
    • Settlement on the same day (T), T+1, or T+2.
  2. Derivative Market
    • Settlement beyond the spot date (Futures and Options).
    • Could be exchange-traded (FNO) or OTC derivatives.

Market Examples and Quiz

  1. Currency Pair (USD/JPY)
    • Traded on currency markets.
  2. Stock Example (Zomato)
    • Traded on equity markets.
  3. Derivatives with Calls and Puts
    • Traded on derivative markets.

Conclusion

  • Next Lesson: Understanding Equities
  • Encouragement to watch Standalone videos on related topics.