Question

1. Briefly explain the benefits of having a thriving capital markets even in an economy like India where banking system provides most of the funding to firms.

2. What are the four types of traders? Name two types who facilitate the price discovery process and briefly state how do they facilitate?

Answer 1

1. A capital market is a front for firms who are looking to raise money either for exapnsion or for offering an exit to its investors. Whenever a company wants to expand and it needs money to do so, having a thriving capital market makes it easy for the firm to approach the markets so that it can launch an IPO to raise money from the market which will fund its operations. Only being reliant on banks for funding is not the best option as that would increase the leverage of the firm and the capital structure may not be optimal

2.

There are 4 types of traders

1. Fundamental trader

2. Sentiment trader

3. Noise Trader

4 Market timer

Price discovery is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers. The futures and options market serve important functions of price discovery. The market itself brings potential buyers and sellers together, with members of each side having very different reasons for trading and very different styles for doing so. By allowing all buyers and sellers to come together, these marketplaces allow all parties to interact and by doing so a consensus price is established. Without knowing it, all the players do it again to set the very next price, and so on.