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Theoretical aspects of financial markets and stock markets.

Definition of financial market ( Needs for fin. Markets, types, regulation, history)

2.2 Stock market. ( size, main parts, composition, structure) description od size and stock market, main dynamics, crisis, compare of share of stock market. Main markets ( indexes , stock exchanges)

2.3 Prospects of financial markets. ( data of capitalization and parts ) future situation, FDI flow< use of fin markets.

Financial markets of BRICS.

3.1 Fin. Markets of BRICS. Description of fin markets of all countries. Compare capitalization. Main influence of fin market. Crisis in those countries in comparison with another countries.

3.2 Stock market of BRICs (2.1 in terms of stock market)

3.3 Future prospects of stock markets of BRICs, Data

4 Stock market of Russia as a member of BRICs.

4.1 Financial market of RF, type of economy. (European, American) stock, financial market.

4.2 Stock market

4.3 Future prospects. Of stock market in RF.

5 Conclusion. 2.3+3.3+4.3


The global financial market have been widely developing and currently plays a leading role in the functioning of the international economic system. In fact, the market is the interaction of buyers and sellers, where each one is independent in his actions. In the role of buyers and sellers can act as individuals and families, firms, government agencies, etc. However, financial market is the system of market relations, which is the field of monetary operations. The objects of the deal are forms of loans, that are granted to users from available funds of the population, economic entities, and state bodies that.

The financial markets have a number of important functions in the economy. These include the accumulation of capital, savings income, controlling function, retribution and many others. More of them will be revealed in this work.

In addition, there are several types of financial markets for more in-depth analysis of each of them.

Properly regulated financial markets give economically optimal result.

This result is significant at the state level. In particular, investors can make the right decisions about the attachment-targeted investments.

It is important to note that the practice of operation of modern financial markets in foreign countries may not be fully adapted to Russian conditions and possibilities. In Russia's financial markets are still in early development. For this, Russia needs to do a lot of preparatory and organizational work at the level of the state structures, experts, financiers, and entrepreneurs and consultants. However, the government bond market is so far the only developed segment of the financial market in Russia. I think this is a normal stage in the development of the economy, and these will depend on the readiness of Russia and their appearance. Therefore, in this paper will be reviewed financial markets of other participants of the BRICs. In addition, there will be given a comparative characteristic of the stock markets and their analysis.

Today there is a growth of the subjects of the global financial market. Increased competition for the last twenty years among global companies and financial institutions has led, on the one hand, to the increase of efficiency of functioning of the global financial market, and, on the other hand, to the increasing requirement for financial institutions from the point of view of economic efficiency of their activity. Therefore, the importance of research on this topic leaves no doubt.

The aim of this work is directly coverage of the major theoretical aspects and characteristics of the financial market, the study of BRICs countries, their essence and mechanisms of functioning. Study of peculiarities of functioning of financial markets in modern conditions and development of measures for their development and improvement in terms of BRICs countries. The subject of study is the financial market on the example of stock market.

To achieve this goal it is necessary to solve the following tasks:

  • define the role of financial markets in the socio-economic development and its main features in BRICs countries;
  • define financial markets and consideration of their classification
  • consider of financial markets on the example of the market of securities
  • review the impact of the global financial crisis10on the functioning of BRICs stock markets
  • define current challenges and problems for BRICs stock market.

Theoretical aspects of financial markets and stock markets

2.1 Definitions Financial markets

The economy is complex economic system that requires quite careful and detailed study. This is primarily connected with the fact that the economy is part of everyday life and is manifested in their primary function is the maintenance of human activity, creation of conditions for the renewal of the human family and the welfare of society. But successful functioning of the economy is impossible without the coherent interaction of its economic structures, one of which is the financial market.

Before talking about the concept of the financial market, it is necessary to consider the components of this term: "Finance" and "market".

The term "Finance" originally meant any monetary payment and its use in the future was connected with the system of monetary relations between the population and the state for the creation of state monetary funds. Finance is the aggregate of monetary relations, which arise in the process of creating funds of funds and the entities of the public, private, community, and other entities of the state and using them for the purpose reproduction, incentives and social needs of society.

"The market" is the organization of the economy arising from natural development of economic relations, it is a universal form of interaction of the subjects of economic activity through which implemented the play of goods, labor and capital in accordance with the changes of their yield at different points economic space.

Thus, the financial market is the market in which the interaction of economic entities and its demand for and implement the supply of capital. A distinctive feature of the financial market from other markets is a subject of trade, as it is the buying and selling of money capital in one or another specific form: in the form of financial instruments in the form of financial services. The main role in this market plays financial institutions, guides cash flows from owners to borrowers.

The concept of the financial market is generalized. In fact, the financial market consists of several separate segments, which are significantly different from each other. These differences allow to speak about the financial market as the whole complex of individual markets.

There are different segments of the financial market, classified by types of tradable financial assets, tools and services, in the forms of organization of procedures for the purchase and sale under the terms of transactions and other grounds. With all the differences of individual segments of the financial market unites them the object of transaction is available cash.

The processes of formation and allocation of financial resources by means of special institutions determine the formation and functioning of financial markets. The basis of financial markets is of a financial system, which in turn arises through the allocation of Finance as separate spheres of social reproduction process. As the social division of labor, with the development of trade and functions of money from various economic entities there are needs and incentives in a particular financial system that includes a variety of financial assets (or the tools of financial activity) and institutions

The economic essence of financial assets is collectively relations of economic agents regarding the formation, distribution and use, the rights to income and other benefits that are created in the real economy.

Financial assets include specific goods (tools) which are traded on financial markets. The main types of financial assets are:

- money in national or foreign currency;

- securities;

- deposits;

- credits;

- insurance products;

- precious metals.

Structure of financial assets changes as market development, the needs of the state, corporations and the population of technical and organizational possibilities for creation of financial instruments. In particular, the Corporation as they develop used in addition to money bills, shares, bonds, warrants, mortgages and other instruments. The fundamental basis of the dynamics of the structure of financial assets include changes in the structure and cost of the manufactured real assets (goods and services).

By creating financial assets and selling economic entities is forming their financial obligations. Volume and structure of liabilities is determined by the specific properties of financial assets (tools).

The purpose of the financial system is the transformation of savings into investment, taking into account the interests and needs of different groups of economic entities. In the case of effective transformation of savings into investment occurs the totality of financial assets, adequate to the interests of the state, companies and population.

Finance performs the following functions:

- distribution;

- reproduction;

- control;

- stimulating;

- information.

Based on the definition and functions of the financial market, it is possible to allocate following advantages:

- The financial markets, including domestic market, allow economic agents on the one hand to receive higher rates of return, and on the other quickly obtain the necessary capital.

- The financial markets allocate resources between users of resources effectively, identifying the most effective directions of their use.

- The financial markets have experienced a qualified intermediary between the seller and the buyer of financial instruments (by professional market participants).

- The financial markets varied in type and terms of the instruments, so they will able to cover all layers of the economic agents.

- The financial markets accelerate the turnover of funds, which helps boost economic processes, i.e. the development of the economy as a whole.

The Russian financial market is developing rapidly and has a high potential, which opens up great possibilities for investment.

With the development of the financial system based on the actual movement of capital and as the institutionalization of financial relations are formed financial markets. Financial markets are an element of the financial system, including, in addition, public Finance, Finance companies, and a complex of financial institutions (commercial banks, insurance companies, private pension funds, investment funds, unit investment funds and others).

Financial market is a combination of the forms of special economic (fiscal) relations between different subjects over the formation and exchange of financial assets with certain institutional infrastructure, including specialized financial institutions. The essence of financial markets lies in the efficient allocation of savings between consumers of financial resources through the mechanism of exchange of financial assets with the help of special institutions.

Functions of financial markets

The functions of financial markets include:

- raise capital;

- savings;

- distribution of risks;

- insurance of financial risks;

- redistribution;

- regulating;

- control;

- information;

- pricing.

The function of mobilizing capital is realized through accumulation of capital and its accumulation with financial institutions in the interests of market participants and the national economy as a whole. The market's ability to perform mobilization function makes them particularly attractive for countries with developing economies, in which the amount of the proposed capital insufficient.

The savings function is implemented by purchase of financial assets (tools) with the purpose of receipt of income. Using savings institutions the opportunity for the world to receive additional income, and consumers saving a certain amount of investment.

The function of risk allocation is that using a variety of financial institutions, financial infrastructure, risks of participants (investment, interest rate, credit etc) are redistributed, creating the possibility of a more sustainable and safe development.

The function of insurance of financial risks (or hedging) is performed by entering into futures (futures, options, forward contracts.

The redistributive function of financial markets is evident in the distribution of investments between their end customers. This function includes the mechanism of redistribution of funds between sectors and spheres of economy with the help of securities received on the primary market. Thus, financial markets complement the system of budgetary transfers and mechanism of direct funding.

The regulatory function is to create the standard rules and regulations for the participants of the financial market, in the determination of the procedure for transactions with financial assets on the trading floors, in the definition of control and Supervisory functions of the regulatory authorities.

The control function is to control compliance with legislation, regulations for transactions with financial market participants.

Information function is realized by creation of information systems to bring the information to issuers, investors, regulators and other participants of financial markets. The amount of information about financial instruments, the market participants, the state of the markets (securities, loans, insurance), differentiated taking into account their specificity. Information essential role, as it is the basis for making investment decisions and issue of securities.

In the process of functioning of financial markets is implemented function of the pricing of financial assets based on the establishment and maintenance of movement of market prices for financial instruments, which is based on supply and demand.

The main suppliers of capital on the financial markets in modern conditions are the population and institutional investors. Among the last stand of collective investors (various funds: investment, pension), the aim of which are to accumulation of funds of small investors with subsequent transformation into investments.

Types of financial markets

Financial markets can be classified according to various criteria:

- By types of financial assets (securities market, capital market, insurance market, the financial derivatives market, currency market). In turn, in each of the markets in financial assets is possible to allocate separate segments. For example, the securities market can be represented in the form of shares, bonds, promissory notes, options.

- On a territorial basis (international, national, regional financial markets).

- According to the degree of organization (organized market functioning according to certain rules based on special financial Institute institutions (stock exchanges, banks), unorganized market, represented by a sphere of circulation of financial assets without observance of common rules for financial markets participants).

- The type of organization (stock exchange and OTC). The exchange market, in turn, presents stock, currency, commodity exchanges. The OTC market is organized market based on OTC trading systems financial assets with the participation of brokers, dealers and appropriate technologies.

- By way of placement of financial assets (primary and secondary markets in financial instruments).

- Types of transactions (spot market - the market with immediate execution of transactions for a period of not more than two working days, and the derivatives market with the conclusion of transactions, the execution of which more than two business days).

Historically, financial markets have developed as a mechanism of interaction of investors (savers) and consumer’s capital of the banking system. Over time, the institutional structure of financial markets is changing, including new financial institutions and instruments. The efficiency of interaction of investors and issuers depends first of all on state of the financial institutions and instruments, organizational and technological conditions, level of development of legislation in the financial sector, the role of regulatory bodies. The way of financial markets to attract private capital is primarily determined by their institutional device.

Depending on the combination of these factors in a country and the current configuration there are two main models of financial markets. The first model of the organization of the financial markets requires participation of the population and special institutions as investors to the capital markets. This approach - approach with broad participation" - characteristic for the US and the UK.

The second approach to organization of financial markets focuses on the banking system. This type of financial market based on universal commercial banks that holds the major part of savings in the form of deposits, and their participation as buyers of shares and bonds of companies. This model of the financial market widespread in continental Europe (particularly in Germany), as well as in Japan.

The Anglo - American model of functioning of the financial market (capital market with "participatory") is characterized by the following features:

- issuing activity of corporations;

- a wide range of investors;

- high level of organization of the stock market;

- division of banks on commercial and investment.

European (or German) model of organization of the financial markets is characterized by the following features:

- active participation of banks in the securities markets;

- the use of bonds emissions as the primary means of raising capital on the securities market;

- in the active control of banks, industrial companies through ownership of shares.

The regulation of financial markets: causes and goals

Importance of regulation of financial markets is evident. As a rule, unregulated markets may not be successful, economically optimal beneficial for participants of the market, and for the state. In this case, investors will not take the right decisions about the attachment optimal targeted investments, and risk of different levels will not be distributed throughout the economy properly. The danger is that in this case, increasing the rate of decline of one of the sectors of the market, which will entail a violation in the work of the whole financial system.

If the regulation of financial markets is maintained at the proper level, then investors will be apparent stability and economic benefits (resulting) of their investment. In such case, the crisis and the risk is on the Economics of optimal and safe. For this reason, financial markets need a good competent regulation. Taking into account the complexity of providing services of such financial markets, their regulation of financial markets is much higher degree of regulation of financial services.

The form and degree of regulation of any market different and sometimes even contradict each other, but there are some global model regulation. In all developed countries markets, including financial, inevitably subject to regulation. The main objectives of this regulation are:

1) identify weaknesses in a particular area of the financial market;

2) support the effective and orderly market segments;

3) protection of consumers of financial markets and services;

4) to stabilize the financial system and maintaining trust and confidence in its stability.


The concept of the securities market and its types.

In General, the securities market can be defined as a set of economic relations regarding the issue and circulation of securities between participants.

Classification of securities markets have many similarities with the classifications themselves securities. So are distinguished:

international and national markets of securities;

regional markets of securities;

the market for specific types of securities (shares, bonds, etc.,);

the markets of governmental and corporate securities;

the markets of primary and derivative securities. [4]

The meaning of one or another classification of the securities market is determined by its practical importance.

In that part, in which market securities based on money as capital, he called the stock market. The stock market makes up a large portion of the securities market. The remaining part of the securities market due to their small size has not received a special name, and therefore often the concept of the securities market and the stock market are considered synonymous.

The securities market is part of the financial market. The other part of it is the market of Bank loans. Commercial Bank rarely makes the loan more than a year. Manufacturing securities, you can get a loan for several decades (bonds) or in perpetuity (shares). For the division of financial market into two parts is a division of capital for working capital and main. The securities market complements the system of Bank credit and interacts with it. Commercial banks provide intermediaries RZB loan for a subscription to securities of new issues, and those banks sell large blocks of securities for resale. [1]

An important part of the securities market is the money market, at which turn short-term debt, mainly Treasury bills (tickets). Money market provides a flexible flow of cash in the Treasury of the state and allows corporations and individuals to earn income on their temporarily free funds.

Like any other market, RZB is the sum of the supply, demand, and balancing their prices. The demand is created by companies and the state, that lack of own revenues for financing investments. Businesses and governments are on RZB net borrowers (take more than lend), and net creditor is the population whose income for different reasons exceeds the expenditures for current consumption and investment in physical assets (e.g. real estate).

1.2 the Functions of securities market

The securities market has a number of functions, which can be divided into two group: the General market functions inherent in each market, and specific features that distinguish it from other markets. [4]

To the General market functions include:

commercial function, that is, the profit from operations in this market;

pricing function, i.e. the process of folding market prices, their constant movement and so on,

informational function, i.e., the market produces and brings to its market participants information about the objects of trade and its participants;

regulating function, i.e. the creation of trade rules and the participation in it, the procedure for resolution of disputes between participants, sets priorities, control authorities or even control etc.

The specific functions of the securities market are the following:

the redistributive function;

the insurance function of price and financial risks.

The redistributive function is conditionally can be divided into three subfunctions:

the redistribution of funds between sectors and spheres of market activity;

the transfer of savings, first of all population of unproductive to productive form;

financing of the deficit of the state budget for non-inflationary basis, i.e. without issuance of additional funds.

The insurance function of price and financial risks, or hedging, was made possible by the emergence of a class of derivatives: futures and options contracts.

1.3 components of the securities market

Part of the securities market, are based not one or the other type of securities, and the way to trade on this market in the broad sense of the word. From these positions are the following markets:

primary and secondary;

the organized and unorganized;

exchange and OTC;

traditional and computerized;

cash and term. [4]

The primary market is the securities purchase their first owners, the first stage of the implementation process of the securities; the first appearance of the securities market, with specific rules and requirements. The secondary market is the conversion of the previously issued securities; the combination of all acts of sale or other forms of transfer of securities from one owner to another during the whole period of existence of securities.

The organized market of securities is their appeal on the basis of sustainable policies between licensed professional intermediaries - market participants - on behalf of other market participants. Unorganized market is the securities without observance of all the participants of the market rules.

The stock market is trading in securities on stock exchanges. The OTC market is the trading of securities, bypassing the stock exchange. The stock market is always an organized market of securities, as Forex trading is strictly by the rules of the exchange and only between exchange intermediaries, selected among all other market participants. OTC market can be organized and unorganized. The organized OTC market is based on computer communications, trade, and services for securities.

The trading of securities can be carried out on the traditional and computerized markets. In the latter case, the trading is through a computer network, bringing together relevant stock intermediaries in the unified computerized market, characteristics of which are:

the lack of a physical place where sellers and buyers, and, consequently, the absence of direct contact between them;

full automation of the process of trade and services; the role of market participants is reduced basically only to enter bids for purchase-sale of securities in the trading system.

Cash securities market ("cache"the market or spot-market) is a market with immediate execution of transactions within 1-2 business days. Term securities market is the market on which consist of different types of transactions with maturity date in excess of 2 working days. Most often, the term of execution of orders is 3 months.

Size of market

In 2010, global stock market capitalization stood at $54 trillion, according to the McKinsey Global Institute’s report “Mapping Global Capital Markets 2011.” The outstanding global debt including public debt securities, financial institution bonds and nonfinancial reached $93 trillion -- almost twice the capitalization of the equity market.

The size of the U.S. bond market is just under $37 trillion, finance professor Torben Anderson at the Kellogg School of Management says in “Volatile Assets” in July 2012. In comparison, the market capitalization of the U.S. stock market is about $21 trillion.

The process of growth of financial assets was suspended global

the financial crisis of 2007-2008 Fall of financial assets affected

almost all groups of countries, except for Western Europe, where held

the governments of the program of recapitalization of problem banks caused

expansion of production of private debt. In particular, the level of support

rose after the decision of the European Central Bank and Bank of England

the possibility of using securitized assets as collateral for

credits REPO. The renewed post-crisis growth of the world financial market

restored the indicators of financial depth on the basic segments of the market

in addition resecuritisation loans.

Deepening of financial markets was defined as General trends

development and modernization of financial mechanisms and peculiarities of development

regional markets, the catalyst of the growth of individual groups of financial products:

first, capital markets in Western and Eastern Europe, some Asian countries

has undergone a major transformation, in particular in the use of schemes

full or partial privatization public and semi-public

enterprises through public funding or sale to private companies, and

also revaluation of the shares upwards after growth of their dividend yield;

secondly, the expansion of the stock market by issuing corporate

bonds, securities backed by assets; third, increasing

deposits as a result of growth of incomes of the population, the new savings outlet

products (certificates of Deposit and money market instruments)

Over the past thirty years the volume of export of capital increased many times, when

this main peak growth began from the second half of 90-ies and continued until

the global financial crisis. Depending on the methodologies in assessing

the most important components of this magnitude since the beginning of 90th years has increased from 28 to 30 times and

was about 13-15% of global GDP. Despite the high inertia

cross-border capital flows, the emergence of many new drivers,

caused by network interaction in the markets, the degree and forms

participation of major groups of investors have had a noticeable effect on the overall picture

of formation and distribution of the movement of capital resources on key

market segments and groups of creditors and debtors


Prospects of financial markets. ( data of capitalization and parts ) future situation, FDI flow< use of fin markets.

Financial markets are experiencing significant transition as a base for further growth in countries with high income are notifications of final extraordinary stimulus measures in the Wake of the global financial crisis.20

During the spring and summer of 2013, long-term interest rates on sovereign debt of the USA almost twice as financial markets have reacted to the prospect of a tapering-off Federal reserve's quantitative easing policy. The sharp increase in U.S. yields caused a sudden adjustment of the portfolio of international investors from developing countries funds, which led to a significant reduction in capital flows. Most adjustments have played it to the end of August 2013, stocks, bonds and currency markets, recovery or stabilization in the last months of the year.11 Gross capital inflows, which were recovered in the fourth quarter of 2013, the amount of foreign capital raised th

rough new bonds, shares and syndicated lending of banks to 13.6% higher than a year earlier.

Unlike in the summer, when financial markets did not react, when the Federal reserve system of the USA10 has actually announced on December 18, and began to reduce the scale of quantitative easing policy (in early January 2014). Long-term U.S. Treasury Yields remained stable and volatility in the currency markets was low, suggesting that a large part of the reduction in dosage are already priced in in.However this period of relative market calm was broken at the end of January, when the Argentine peso depreciated by 16%amid concerns about slowing growth in China has led to a sudden change in market sentiment. Though not entirely unexpected, global equity markets has sharply weakened. Sell-off was concentrated among developing countries, including some that were already severely damaged in the summer of 2013. However, stock market losses in countries with higher income is almost the same severe, indicating broad-based correction of the stock market, not the address recoil from the assets of developing countries. As at 14 February (cut-off date of this publication), the market seems to have stabilized, and recouped some of its early losses, with the stock market indexes in developing countries and countries with high income fell by about 3%starting from January 22.Although shock coincided with a further unwinding of the Federal reserve's quantitative easing program, apparently, were not called. The actual decision to continue narrowing of asset purchases was adopted on 29 January, after falling in the steel market and in line with market expectations. Unlike the mid 2013 episode, when the us long-term interest rates increased by 130 basis points, but they have actually decreased by 20 basis points since the start of 2014. These developments suggest modest " flight to Quality " General rotation on the securities market with high ranking government bonds.

Although developing countries ' spreads increased by about 35 basis points, the decrease in U.S. rates means that the profitability of expenses on loans and credits increased only marginally. Several larger number of developing countries devalued currencies in January of this year when compared to last summer, with new pockets of vulnerabilities is observed, in particular, in Eastern Europe and Central Asia.

Answering the currency and domestic inflationary pressures, monetary policy was tightened in several developing countries, since January 22. In particular, the aggressive increase of interest rates in Turkey have helped to stabilize its currency, and soon after a period of relative calm in the foreign exchange market. Interest rates apparently, not too tight, given the home.

Looking forward, the prospects are mixed. Financing conditions are likely to tighten further in the coming months, as monetary policy continued to normalize. This, combined with the decrease of the growth differential between developing countries and those with high income level should translate into weaker capital inflows to developing countries this year. In General, the net inflow of private capital is projected to slow from $1.078 billion rubles (4.6% of GDP in developing countries) in 2013 to $1.065 billion rubles (4.2% of GDP) in 2014 (see table below).

Should the global interest rate is rising more sharply than expected, or market volatility becomes the new norm, more disorderly adjustments cannot be excluded. Modelling shows that a sudden and sustained 100 basis points, the growth in the US may adversely affect the yield of capital inflows to developing countries rose by about 50% in a few months, while persistent 10 point rise in the VIX index, a total market share of risk aversion, could reduce by about 30 percent compared to the same horizon (see Fig. below).


  1. Financial markets of BRICS.

3.1 Fin. Markets of BRICS. Description of fin markets of all countries. Compare capitalization. Main influence of fin market. Crisis in those countries in comparison with another countries.


Brazil financial market is one of the most promising global markets right now. From 2003, the financial scenario of Brazil has been going through several positive changes. The worldwide markets of coffee, soybeans, iron ore and crude oil have developed considerably in the recent times. 

This has stimulated the growth of the financial markets of Brazil because these are the basic products and minerals, which are exported from the country. The prices of these commodities are on the higher side and this price-hike is becoming a boon for the Brazilian economy as the brazilian traders are making good profits from the market and this profit is adding an additional edge to the investment sector. 

In Brazil, the huge surplus have replaced the trade shortages. The value of the Brazilian real is almost half the value of US dollar. On the other hand, the performance of the stock market of Brazil has been quite satisfactory. 

The Bovespa index touched the 52,750 points in May 2007 and the rise in the market is estimated at a rate of 18.2%. The financial market and the economic condition of any country are inter-related. 

In the previous years, the Brazilian economy is gaining momentum and in 2006 the total output was of $1.6 trillion. The next expected thing is the rise in the stock market. 

The Bovespa index of the Sao Paolo Stock Exchange has been doing very well. There are several shares from different sectors which are providing steady growth to the bovespa index. 

The Brazilian sugar industries are doing extremely well and the IPOs offered by these industries are the hot favorite of the market. These are attracting huge investment in the Brazil financial market from both the national and international investors. Apart from these, there are many other financial service providing companies, which are also becoming popular among the investors operating in the Brazilian financial market. The foreign currency reserve of the country is also experiencing an upward trend. 

India Financial market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. The history of Indian capital markets dates back 200 years toward the end of the 18th century when India was under the rule of the East India Company. 

The development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second19 half of the 19th century.19 Thefinancial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmedabad and Kolkata were established as early as the 19th century. 

By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmedabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. 

Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the stock markets in India remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. 

The corporate sector wasn't allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of the economy right up to the early 1990s. 

Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out, the securities markets witnessed a flurry of IPOs that were launched. This resulted in many new companies across different industry segments to come up with newer products and services. 

A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India. 

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid 1990s by the government of India was meant to usher in an easier and more transparent form of trading in securities. The NSE was conceived as the market for trading in the securities of companies from the large-scale sector and the OTCEI for those from the small-scale sector. While the NSE has not just done well to grow and evolve into the virtual backbone of capital markets in India the OTCEI struggled and is yet to show any sign of growth and development. The integration of IT into the capital market infrastructure has been particularly smooth in India due to the countrys world class IT industry. This has pushed up the operational efficiency of the Indian stock market to global standards and as a result the country has been able to capitalize on its high growth and attract foreign capital like never before. 

The regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into prominence in the 1990s after the capital markets experienced some turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain market forces to advance their vested interests. After this initial phase of struggle SEBI has grown in strength as the regulator of Indias capital markets and as one of the countrys most important


China Financial Market


For the past 25 years, China has demonstrated phenomenal growth rate financial depth of the economy. The ratio of M2 to GDP increased from 24% in 1978 to 151% in 2007. In 1990, the ratio of M2 to GDP in China and Russia were approximately at the same level of 70%, but by 1995, in Russia it was reduced to 21%, while in China rose to 103%. In 2007 in Russia it was 32%.

Such a level of financial depth puts China in a number of countries with the most developed financial systems. Such a high rate is related to a number of factors. This is a very high savings rate (up to 50% of GDP); hard currency legislation and the system of regulation, which hindered care savings abroad or the emergence of savings in cash foreign currency (as in Russia); the reliability of the banking system in the eyes of the population and credibility (and, again, was almost entirely state); relatively moderate inflation rates (average for the 1980s and the first half of the 1990s no more than 10% per year; a surge in 17% took place in 1995, but in 1998 and 1999 saw deflation); the relative scarcity of financial products (choice the population is small: either Bank deposits or shares).

The last circumstance contributed to the arrival of the Chinese population on the stock market. Population's deposits account for about half of the money supply. The share of domestic credit (banks ' credits to enterprises and households) in GDP reached 178% in 2003 (138% in 2007), which almost twice exceeded the indicator for US.

The majority of the financial assets of China is concentrated in the banking system. Bank credit remains the main source (80%) of financing of Chinese enterprises. The market of corporate bonds (non-financial companies) is virtually absent. The price of outstanding non-Bank corporate bonds is less than 1% of GDP. The issuance of shares as a means of raising capital enterprises until 2006 did not play any significant role.

Dominant position in the banking sector is 5 state banks. In the late 1990s, their share in assets reached 60-70%. By 2007 it decreased, but nevertheless, over half of all assets of credit institutions. The top five are:

Industrial and commercial Bank of China (ICBC),15 the largest Bank in the country, initially, was responsible for the lending industry.

Bank of China (BOC) is the second largest and most profitable Bank (traditionally, he was responsible for foreign exchange and foreign trade financing). Has a wide network of branches and subsidiaries.

Construction Bank of China (CERs), traditionally the main sphere of activity is crediting of construction of infrastructural objects.

Agricultural Bank of China (ABC), as the name implies, was engaged primarily loans and development of the agricultural sector. Fourth in size, the weakest of the five largest.

Bank of communications (BOCOM), founded in 1985, entered the group of the state banks in 2007, previously belonged to the category of joint-stock commercial banks.

Currently, all banks Big five are diversified commercial banks operating in various fields. The total value of assets in excess of 3.8 trillion. $ . They have more than 200 thousand offices and approximately 1.5 million of employed people. For execution of target tasks of the government in 1994 were created three specialized state Bank: the State development Bank, Agricultural development Bank15 and the Export-import Bank of China.15 They do not accept deposits, and are engaged in financing long-term projects at the expense of issue of bonds and loans of other banks. The second group of banks (about 14% of assets) in Chinese statistics is called "joint-stock commercial banks" (although 4 of the Big five is also a shareholder). Almost all - state (more precisely, with state control).

The number of city commercial banks increased during 2003-2007 with 80 up to 124, urban and rural cooperatives, on the contrary, was reduced several times.

Foreign banks are represented 440 institutions (including branches, the number has doubled over the 2003-2007), of which 29 - head of the company. At the end of 2006, according to the19 terms of joining the WTO, China has opened access of foreign banks to their markets and their share has increased to 2.4%.

Thus, the peculiarity of the banking system of China is the complete dominance of state banks (or banks with state capital). The share of private banks in the assets does not exceed several percent. Conducted in recent years, policy change in the ownership structure (see below) in the near future will not lead to radical changes in its structure.

Until 1995 in the basis of the credit policy of the banks were national priorities defined by the state authorities. Accordingly, the loans were not issued on a commercial basis, without assessing market efficiency. Even the commercial banks in the conditions of the credit expansion in the first half of 1990-ies, and later, are often not paid enough attention to the assessment of the borrower. This policy has led to accumulation of bad debts in the amount of 4 trillion. yuan at the end of the past decade (about 480 billion, about half of GDP in 1999). According to some estimates, the share of bad loans in the total loan portfolio of Chinese banks reached 50%! in 1998. Perhaps, there was nothing similar in any major country in the world in the postwar period. The share of bad credits in the GDP of Japan and Korea in the late 1990-ies was 25-30%. Almost all the bad loans were associated with non-payment of state enterprises. Access of private enterprises to Bank loans was very limited. So, in the end of 1999, private enterprises received only 0,62% of all Bank credits and less than 0.5% of the loans of the state banks. And this despite the fact that in 1998, private enterprises gave 35% of industrial output.

The government has developed a programme for the rehabilitation of the banking system. In 1998, it released a special Treasury bonds for the amount of 270 billion yuan (then approximately 33 billion), the proceeds of which were to recapitalize state-owned banks.

In October 1998, the Chinese government has made the decision on creation of a special state management company, which would take his bad debts SBC. In April 1999 the company (called Cinda) started work. In future similar companies were created and for the three other major banks. The balance of these companies at nominal value were transferred to the loans granted before 1996 in the framework of the development policy (i.e. provided by the authorities ' instruction). Other bad credit, due to their own mistakes banks, this was not transferred.

On average asset management companies manage to return 20% of the nominal value of bad loans, which, of course, demanded direct state support. But, as you can see, the burden for the Chinese budget proved to be feasible. Unlike Japan, where the national banks (including) led to the aggravation of the problem of public debt (156% of GDP in 2004), China has managed to maintain sound public finances. Moreover, commercial banks used their own reserves and capital in order to write off bad loans.

Besides the obvious progress in reducing the share of bad loans in the current decade has significantly improved the quality of loans. The share of bad loans by commercial banks after 2000, is 2%, whereas in the 1990-ies some banks it reached 60% (and in General, repeat, - about 50%). The restructuring program-provided benefits, and by 2007 the share of bad loans in the total loan portfolio of the largest banks was reduced to 8%. In General, to date, the banking system of China has significantly improved all indicators of capital adequacy, quality of loans and other

The Financial Markets over the world have suffered from the problems of heavy inflationary Over the last two decades the ‘China growth story’ has been nothing short of spectacular. As the fastest growing and one of the largest economies of the world China has witnessed a magical transformation from a stagnant command economy to a dynamic market economy. 

Private enterprise has brought about tremendous vibrancy in the Chinese economy but this whole process has been conspicuous by the absence of a regulated financial market. Apparently the process of establishing a capital market structure requires a longer gestation than it does to set up an industrial base. 

The financial market is evolving in China quite rapidly but perhaps not as fast as one would like, given the size of Chinese industry. For an economy the size of China, growth hasn’t been even with certain parts of the economy reaching first world levels of growth while other parts are still way behind. 

A case in point is the territory of Hong Kong and its financial market. The Hong Kong Stock Exchange is one of the world’s premier securities exchange and its index the Hang Seng, is also one of the most famous indexes of the world. Unlike most other prime financial markets of the world the Hong Kong financial market do not reflect the health of the Chinese economy. 

Partly due to history and also because the Hong Kong financial market has a distinct global dimension, it is not integrated to the Chinese economy as the other major financial markets are, to theirs. Therefore, despite the market capitalization of the Hong Kong financial market adding up to China’s GDP, it does not reflect the health of the country’s capital markets.

Financial markets in China

Hong Kong 

Centered on the Hong Kong securities exchange it was established at the end of the 19th century20 and is the sixth largest securities exchange in the world with a market capitalization of over USD 1.8 trillion. A total of 4,338 stocks are listed on the Hong Kong securities exchange. 


The Shanghai securities exchange was established in November 1990 and is mainland China’s premier securities exchange with 837 listed companies and an investor base of 37.87 million in FY 2004. During the same time the total market capitalization of Shanghai securities exchange was RMB 2.6 trillion and the amount of capital raised amounted to RMB 45.7 billion. 


The Shenzhen securities exchange was established in 1990 and is the second most important securities exchange in mainland China after the Shanghai securities exchange. The Shenzhen securities exchange has 540 listed companies and 35 million registered investors with a market capitalization of RMB 1 trillion. 

Additionally China has set up commodities markets with the potential to integrate in a single Chinese financial marketplace in the future. These markets are in Dalian and Zhengzhou. 

Capitalization data.


Stock market of BRICs (2.1 in terms of stock market)

Brazil (along with all of Latin America and most of the emerging markets) has been a horrendous stock market over the last three years.

After doubling in 2009, the IBOVESPA index began to sag the following year. Brazilian stocks are down 25% over the last three years and 20% just since the start of 2013 – a slow-motion crash that almost no one is talking about. The main reasons for this is the huge drop in commodity demand and the economic slowdown of its big trading partner, China. Much of Brazil’s growth output comes from selling commodities to the far east and a lot of the economy is still dependent on that, although this will change.

Another contributing factor to Brazilian stocks’ massive underperformance is the country’s current leadership. In 2011, Brazil elected its first female president, Dilma Rousseff, who also happens to have been a Marxist guerilla back in the day. The government has become highly involved with the massive commodity and banking concerns that dominate the Brazilian stock indices, sometimes to the point where it is actually issuing strategic or operational directives. These giant corporations, like Vale, Petrobras, Banco Do Brasil, Itau Unibanco and Banco Bradesco, make up a great deal of the market capitalization of the country’s stock market.

Petrobras, for example, is one of the worst-run, most mismanaged oil companies on the planet, including both private and other state-run concerns. There’ve been instances where its been forced by politicians to procure supplies and equipment from Brazilian suppliers rather than from the most competitive vendors. In terms of the banks, government officials are leaning on the ones they control and banks in the private sector all the time to achieve political aims. In the latest twist, foreign banks like Credit Suisse are being muscled out of the capital markets and issuance business thanks to a misguided attempt to steer more market share to local companies.

Brazil’s primary challenges at the moment are poverty and inflation. While millions have joined the middle class over the last 15 years, 13 million Brazilian households are still living in the subhuman conditions of the favela slums. This while the government builds world-class soccer stadiums to prepare for both the World Cup in 2014 and the Summer Olympics in 2016.  In the meantime, because the currency (the real) held up better than others from 2009 to 2011, it has gotten too strong and inflation has become an issue again. The Brazilian central bank has been hiking rates, attempting to bring inflation down below its 4.5% target. Most Latin American countries are deathly afraid of inflation given their epic battles with prices and default in the 20th century – this has meant extreme conservatism in monetary policy and, in recent years, subpar GDP growth.

In my opinion, these very real negatives are the signs of adolescence and economic immaturity that we can always expect to see as a developing country awkwardly finds its legs to stand up on. Trade protectionism and jittery financial bourses are eventually seen to be a passing phase as politicians are inevitably forced to understand the greater benefit of open markets, global influence and foreign investment. In addition, these negatives are very well known at this point.

The below chart of country market performance for the first six months of 2013 makes this abundantly clear:

The opportunity in Brazilian stocks from here forward looks excellent, although it could be years before investors – foreign or domestic – care to begin bidding them up. It is always difficult to say when sentiment will turn and “cheap” markets can remain cheap (or get cheaper still). That said, I’ll lay out the positives below as a jumping-off point for you to do your own homework.

195 million people call Brazil home, making it the world’s fifth most populous nation (almost 3% of the global total).

Of this 195 million, the median age is a vigorously young 29 years old. The median age in the United States, by way of contrast, is more than a decade older at 39.5 and the median age in Japan is 44.6.

52% of Brazilians or almost 100 million people, are now considered to be in the middle class. This is a massive consumer base with more disposable income than ever.

The middle class wants to higher quality of life and is prepared to fight for it. Million of  Brazilians took to the streets in late June and July in a massive awakening of consciousness the likes of which the world has ever seen. They want better health care, better public transportation and they mostly want to close the wealth gap.

Dilma Rouseff’s popularity has absolutely collapsed to 31% favorability down  from 54% between June and July. The people no longer believe in her or in her socialist party’s agenda. Only 33% of the country indicated that they would vote for her in the election next year and there are already three other credible candidates waiting in the wings. Change, in this context, would be a positive.

On valuation, Brazilian stocks are now trading at a cyclically-adjusted price to earnings (CAPE) ratio of 9.96.  This is compared to the United States stock market which is now selling for a CAPE of 22. For a closer comparison, Mexico now sells for a 19X cyclically adjusted PE while Peru and Colombia are both above 20. While valuation measures like the Shiller CAPE we’re discussing are not good timing tools, the research does suggest that investing in the countries with the “cheapest” CAPEs gives you a substantial performance advantage over portfolios that are heavily weighted toward the most popular (and hence, expensive) ones. Brazil probably should not trade below a CAPE of 10 times earnings, this is incredibly low relative to both the rest of the world and its own recent historical averages.

The opportunity for Brazil – both the nation and its stocks – is as plain as day: the rapidly developing middle class develops inwardly and begins to consume more and rely on exports less as the years pass by. A young, vibrant nation of people who want more for themselves and are no longer afraid to speak up for it is a tantalizing proposition. In this context, the ramp up to the Summer Olympics could be just the thing to re-introduce Brazil’s domestic potential to global investors once again after years of complete apathy.

It would seem to me that a successful equity strategy for Brazil would be to get long stocks that play the consumption side of the equation and minimize exposure to the large cap mineral exporters that are so dominant in the mainstream country index. This can be done with both non market cap-weighted index ETFs or individual ADR positions.

Market opportunity

In order to better comprehend the Brazilian economy today, it’s important to understand how the market has developed and modernised. As recently as the 1990s, the Brazilian capital market was struggling and losing ground to others due to the lack of protection for shareholders, uncertainties regarding investments, and lack of technological enhancements. With the lack of management transparency and adequate instruments to monitor companies, it gave off an impression of risk, which consequently increased the cost of company capital. In fact, between 1995 and 2003, there were only six initial public offerings in Brazil. Consequently, the Brazilian Stock Exchange was not used by companies to source funds and many Brazilian companies began to go to foreign markets, through American Depositary Receipts (ADRs).

Then in 2000, the Brazilian stock exchange system began to unify and consolidate, led by Bovespa and eight other Brazilian stock exchanges. The capital markets recovered as a result of a series of very favourable macroeconomic events for the Brazilian economy. The number of IPOs rose dramatically, with over 100 IPOs between 2003 and 2011. During this timeframe, the merger of BM&FBovespa occurred, liquidity levels improved and stock prices rallied, prompting the market to embrace the self-deceiving belief that this exchange consolidation was allowing Brazilian equities markets to inch closer to major international markets in terms of performance.

In the last few years, however, new investment alternatives have been few and the economy has suffered without any real growth in retail investing. Despite a growing middle class in Brazil that is consuming more goods than ever before, the domestic capital markets are not representative of the economy as a19 whole. The number of listed19 issuers compared to overall GDP is also not a clear representation of the whole picture (see Fig. 1). When compared to other exchanges, the monthly trading volume as a percentage of GDP of Brazil’s stock exchange is 2.4 percent, considerably below the 12.4 percent of key US markets such as NYSE and NASDAQ, and roughly three percent for key European markets (see Fig. 2). When broken down even further, approximately 50 percent of the volume traded is concentrated in only 10 companies in the Bovespa segment, and in the futures market almost 90 percent of the volume is concentrated in only five types of contracts. In addition, the Brazilian markets also have also had some of the largest bid-ask spreads worldwide.


With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets.

The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a people’s market, flooded with primary issues. In the first 11 months of 2007, the new capital raised in the21 global public equity markets through IPOs accounted for $107 billion in 382 deals out of the total of $255 billion raised by the four BRIC countries. This was a sizeable growth from $90 billion raised in 302 deals in 2006. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks.

Financial markets

Financial market India is one of the oldest in the world and is considered the best and fastest growing among all the markets of the countries with developing economy. History of Indian financial markets began 200 years ago, in the late 18th century, when India was under the rule of the East-India company.

Today, financial market India is more developed than many other sectors of the economy, as it was organised long before them; stock exchange Mumbai, Ahmedabad and Kolkata were created in the early 19th century. By the early 1960 the total number of stock exchanges in India increased to eight, to the stock exchanges in Mumbai, Ahmedabad and Kolkata was added by the exchange in Madras, Kanpur, Delhi, Bangalore and Pune. Today, in addition to the centralized National stock exchange-NSE and OTC market India-OTCEI there are 21 regional stock exchange. However securities markets in India remained stagnant due to the strict control measures of market economy, which allow a small number of monopolists to dominate in the relevant sectors. Corporate investors were not allowed in many industry segments in which dominate

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