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–Instabilities – Stock Exchanges and SEBI
Instabilities in
The traditional conception of instability in Financial Markets stems from the view that financial institutions act as agents which intermediate between savers willing to lend funds and final borrowers seeking to invest funds. This intermediation function not only requires a matching of borrowers and lenders, but also more importantly concerns the transformation of the maturity of financial assets from short term to long term, with the implicit assumption that lenders prefer short-term, liquid assets, and borrowers long-term, more or less permanent, fixed interest liabilities. The greater the mismatch between the maturity of the short-term assets issued to savers and the long-term liabilities purchased from investors, the greater the risk that an increase in short-term interest rates relative to long-term rates will produce negative net worth and insolvency, or a flight of funds called disintermediation as the short-term bid rates lag behind the market. When the volatility of short-term interest rates is modest, the adjustment can be made by cutting back on new lending, reducing net margins and drawing down secondary reserves; this was the method of monetary control in the post-war period. When the movement in short-term rates is substantial, loans must be called and forced sales of assets may take place leading to downward pressure on asset prices.
In addition to maturity transformation, financial intermediaries are also characterised as producing liquidity through the issue of short-term liabilities against long-term assets. In this process the bank makes an illiquid asset held in the private sector more liquid, while the bank becomes less liquid. The willingness of bankers to create liquidity by lending against a private sector asset (or against the expected income from a private sector asset) depends on the “liquidity preference” of the bank. The price it charges for this liquidity creation is given by the liquidity premium. As Soros has recognised, the willingness of a bank to finance an Investment project has a direct impact on its viability and thus on its returns, and therefore on its price.
Maturity intermediation and liquidity creation are usually linked together. This is the case for banks which lend against real assets by creating demand deposits. However, in the world envisaged by the efficient markets hypothesis with complete specification of transactions for all future events, the two aspects are separated; for long-term capital assets are just as liquid as any other financial assets. In such a world, maturity transformation does not create additional liquidity because it is always possible to trade in any amount for any date and future event.
In Minsky’s approach, financial fragility represents something more than either the mere possibility, or even the persistence, of maturity mismatching in financial institutions. Rather, fragility is inherent in the successful operation of the capitalist economic system, and results from changes in the liquidity preferences of bankers and businessmen as represented by changes in the margins of safety required on liquidity creation, produced by maturity transformation. Thus, fragility could result even in a perfectly stable financial system as defined under the traditional terminology, because of changes in the extent of the creation of liquidity for a given degree of mismatching. In this case, a fall in liquidity preference could take place and the maturity mismatching would remain constant, as bankers become willing to lend against more risky assets.
Fragility in Stable Conditions
Minsky’s theory takes the US financial system as its reference structure; in particular, it is crucially dependent on the negotiations and relationships between bankers and businessmen and their evaluation of future returns and prospects. It presumes a very particular type of banker, the banker of let’s say the 1960s, before the breakdown of the Bretton Woods System, and still subject to the full force of the Glass-Steagall restrictions on commercial Banking. For the businessman, finance is thus a two-stage affair. Short-term project finance comes from the bank, and long-term takeout finance comes from floating the completed project in the Capital Market or from the profits earned from the operation of the project. This is where the rest of the financial system comes in In the former case, investment bankers underwrite the floatation of the project by a primary distribution of securities in the capital market. Although there is no legal restriction preventing Investment Banks from becoming direct investors, they usually act only as brokers between firms and final investors. There is thus an implicit financial structure in which firms’ short-term financial liabilities are held in bank portfolios and firms’ long-term liabilities are held in household portfolios, along with banks’ short-term demand deposit liabilities.
SEBI ( security exchange board of india )
The Securities and Exchange Board of India was established as a non-statutory regulatory body in the year 1988, but it was not given statutory powers until January 30, 1992, when the Securities and Exchange Board of India Act was passed by the Parliament of India. Its headquarters is at the business district at the Bandra Kurla Complex in Mumbai, but it also possesses Northern, Eastern, Southern and Western regional branch offices in the cities of New Delhi, Kolkata, Chennai and Ahmedabad, respectively. It also has small local branch offices in Bangalore, Jaipur, Guwahati, Bubaneshwar, Patna, Kochi, and Chandigarh.
The Securities and Exchange Board of India (SEBI) supplanted the Controller of Capital Issues, which hitherto had regulated the securities market in India, as per the Capital Issues (Control) Act of 1947, one of the first acts passed by the Parliament of India following its independence from the British Empire. It is run by its own members, which consist of the Chairman, who is elected by the Parliament of India, two officers from the Union Finance Ministry, one member from the Reserve Bank of India and five members who are elected by the Parliament with the Chairman.
The Securities and Exchange Board of India’s stated objective is “to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.” According to its charter, it is expected to be responsible to three main groups: the issuers of securities, investors, and market intermediaries. The body has somewhat nebulous powers, as it drafts regulations and statutes in its legislative capacity, passes rulings and orders in its judicial capacity, and conducts investigation and enforcement actions in its executive capacity.
Many criticize the regulatory body because it is insulated from direct accountability to the public. The only mechanisms to check its power are a Securities Appellate Tribunal, which consists of a panel of three judges, and a direct appeal to The Supreme Court of India. Fortunately for the people of India, the SEBI has been mostly benevolent in its use of its authority, issuing strong systematic reforms rapidly and aggressively with its unchecked power. For example, after the Great Recession of 2008 and the Satyam Fiasco, the SEBI was able to quickly take regulatory steps to mitigate the effects of these problems, stabilize the economy and take drastic steps to make sure such situations never occurred again.
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Financial markets are where buyers and sellers of financial instruments come together to trade. These instruments can include stocks, Bonds, Derivatives, and currencies. Financial markets play a vital role in the global economy by providing a way for businesses and individuals to raise capital and invest their Money.
Bonds
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). The borrower issues bonds to raise money and agrees to pay the bondholders a fixed interest rate for a specified period of time, known as the maturity date. Bonds are considered to be relatively safe investments, as they are backed by the full faith and credit of the issuer.
Derivatives
A derivative is a financial instrument that derives its value from another asset, such as a stock, bond, or currency. Derivatives are often used to hedge risk or to speculate on the future price of an asset. There are many different types of derivatives, including Options, futures, and swaps.
Equity is ownership in a company. When you buy Shares of stock, you are buying a piece of ownership in that company. Equity is considered to be a riskier investment than bonds, as the value of your shares can go up or down depending on the performance of the company. However, equity also has the potential to generate higher returns than bonds.
Foreign exchange (FX) is the market where currencies are traded. The FX market is the largest and most liquid financial market in the world, with an Average daily turnover of over $5 trillion. FX trading is used by businesses and individuals to buy and sell currencies, to hedge against currency risk, and to speculate on the future value of currencies.
Interest Rates
Interest rates are the prices that borrowers pay lenders for loans. Interest rates are determined by a number of factors, including the supply and Demand for Money, the Inflation rate, and the central bank’s Monetary Policy. Interest rates have a significant impact on the economy, as they affect the cost of borrowing money, the level of investment, and the rate of inflation.
Investment Banking
Investment banking is a service that helps companies raise capital and advise them on mergers and acquisitions. Investment banks are also involved in underwriting securities, such as stocks and bonds. Investment banking is a highly competitive and lucrative field, but it is also a high-pressure and demanding job.
Money Markets
The Money Market is a market for short-term loans, typically with maturities of less than one year. The money market is used by businesses and governments to raise short-term cash, and by investors to earn a return on their money. The money market is a very liquid market, with a large volume of transactions taking place every day.
Securities
A security is a financial instrument that represents an ownership interest in a company or a debt obligation of a company or government. Securities can be traded on stock exchanges, and they can be bought and sold by individuals and institutions. Securities include stocks, bonds, options, and futures.
Risk Management
Risk management is the process of identifying, assessing, and controlling risks. Risk management is important for businesses and individuals, as it can help to protect them from financial losses. There are a number of different risk management techniques, including diversification, hedging, and insurance.
Trading
Trading is the buying and selling of financial instruments. Trading can be done on stock exchanges, over-the-counter markets, or through private transactions. Trading can be done for a variety of reasons, including to make a profit, to hedge against risk, or to speculate on the future price of an asset.
Financial markets are complex and ever-changing. However, they play a vital role in the global economy. By understanding the basics of financial markets, you can make informed decisions about your own finances.
What is a financial market?
A financial market is a place where people can buy and sell financial instruments, such as stocks, bonds, and derivatives.
What are the different types of financial markets?
There are two main types of financial markets: primary markets and secondary markets. Primary markets are where new financial instruments are issued, while secondary markets are where existing financial instruments are traded.
What are the different types of financial instruments?
There are many different types of financial instruments, but some of the most common include stocks, bonds, and derivatives. Stocks represent ownership in a company, bonds are loans that companies or governments issue, and derivatives are financial instruments that derive their value from other assets.
What are the benefits of participating in financial markets?
There are many benefits to participating in financial markets, including the potential to earn a return on investment, the ability to diversify risk, and the opportunity to access capital.
What are the risks of participating in financial markets?
There are also some risks associated with participating in financial markets, such as the potential for loss, the possibility of fraud, and the volatility of prices.
How can I get started in financial markets?
If you’re interested in getting started in financial markets, there are a few things you need to do. First, you need to open a brokerage account. Once you have a brokerage account, you can start buying and selling financial instruments. It’s important to do your research before you start investing, and to only invest money that you can afford to lose.
What are some common financial market terms?
Some common financial market terms include:
- Stock: A share of ownership in a company.
- Bond: A loan that a company or government issues.
- Derivative: A financial instrument that derives its value from another asset.
- Return on investment (ROI): The amount of money you earn on an investment, expressed as a Percentage.
- Risk: The possibility of loss.
- Volatility: The tendency of prices to fluctuate.
- Brokerage account: An account that allows you to buy and sell financial instruments.
- Investment: The act of putting money into something with the expectation of earning a return.
- Diversification: The practice of spreading your money across different types of investments to reduce risk.
- Capital: Money that is used to finance a business or other venture.
- Fraud: An act of deception that is intended to gain an unfair advantage.
- Volatile: Subject to sudden and unpredictable changes.
What are some of the latest trends in financial markets?
Some of the latest trends in financial markets include:
- The rise of cryptocurrencies, such as Bitcoin.
- The increasing popularity of online trading platforms.
- The growing popularity of robo-advisors, which are automated investment Services.
- The increasing regulation of financial markets.
- The growing importance of environmental, social, and governance (ESG) factors in investment decisions.
What are some of the challenges facing financial markets?
Some of the challenges facing financial markets include:
- The risk of a financial crisis.
- The increasing complexity of financial products.
- The growing inequality in wealth.
- The lack of transparency in financial markets.
- The growing threat of cyberattacks.
Sure, here are some multiple choice questions about financial markets:
Which of the following is not a type of financial market?
(A) Stock market
(B) Bond market
(C) Currency market
(D) Commodity marketWhich of the following is the most common type of financial instrument?
(A) Stocks
(B) Bonds
(C) Derivatives
(D) Mutual FundsWhich of the following is the primary purpose of a stock market?
(A) To provide a place for companies to raise capital
(B) To provide a place for investors to buy and sell stocks
(C) To provide a place for companies to track their stock price
(D) To provide a place for investors to get information about companiesWhich of the following is the primary purpose of a bond market?
(A) To provide a place for companies to raise capital
(B) To provide a place for investors to buy and sell bonds
(C) To provide a place for companies to track their bond price
(D) To provide a place for investors to get information about companiesWhich of the following is the primary purpose of a currency market?
(A) To provide a place for companies to exchange currencies
(B) To provide a place for investors to buy and sell currencies
(C) To provide a place for companies to track their currency price
(D) To provide a place for investors to get information about currenciesWhich of the following is the primary purpose of a commodity market?
(A) To provide a place for companies to exchange commodities
(B) To provide a place for investors to buy and sell commodities
(C) To provide a place for companies to track their commodity price
(D) To provide a place for investors to get information about commoditiesWhich of the following is a type of stock?
(A) Common stock
(B) Preferred stock
(C) Convertible stock
(D) All of the aboveWhich of the following is a type of bond?
(A) Government bond
(B) Corporate bond
(C) Municipal bond
(D) All of the aboveWhich of the following is a type of derivative?
(A) Option
(B) Future
(C) Swap
(D) All of the aboveWhich of the following is a type of mutual fund?
(A) Stock mutual fund
(B) Bond mutual fund
(C) Money market mutual fund
(D) All of the above
I hope these questions were helpful!