Financial Market

Finance is considered the blood of a business enterprise and a financial market is a place that ensures the availability of finance. Here we have shared a complete overview of the financial market, What the financial market is, Its meaning, Its definition, type or classification of the financial market, Its functions, Role or importance of the financial market in India’s development.

You heard of different institutions which offer financial holdings like government, public and private enterprises, mutual funds companies, banks, insurances, pensions, etc., and financial offerings by these different institutions like bonds, securities, derivatives, debenture, and shares contribute significantly to a nation’s economic growth.

► What is Financial Market?

Financial markets are very vital for ensuring the smooth functioning of economies. It helps in providing financial resources while also ensuring liquidity for business enterprises and along with this it is a place where different types of financial holdings and securities are traded.

  • As an institution, financial markets provide information transparency to set efficient and appropriate market prices for different securities, stocks, bonds, etc.
  • Aid in influencing the market values of financial holdings which are not indicative of their intrinsic value. the flow of investments and savings.
  • In turn, this facilitates the growth of funds, which goes on to help in the production of goods and services.
  • Another significance of Financial Markets is that it contributes to the demands of receivers, investors, and even a country’s economy.

◉ Financial Market Meaning

As the name suggests itself, the financial market is a type of marketplace that provides an avenue for the sale and purchase of financial assets such as bonds, securities, stocks, foreign exchange, derivatives, etc.

It is a vital place for both businesses and investors where they can raise money to grow their businesses and make more money.

Definition of Financial Market

A Financial Market is a term meant for a Business setup where different types of bonds and securities trade are done at lower rates of transaction. It includes different kinds of Financial securities like bonds, shares, derivatives, and forex Markets, to name a few.

To ensure that a capitalist economy functions well, the Financial Market is very necessary as it helps in resource allocation and creates liquidity for Businesses.

The Financial Market ensures that the flow of capital between investing and collecting parties is mobilized properly.

► Types of Financial Market

There are different ways to classify financial markets on the basis of the following types.

  1. Nature of Financial claim
  2. Maturity of Caim
  3. Timing of Delivery
  4. Seasoning of Claim
  5. Organization Structure
  • Nature of financial claim
    1. Debt Market
    2. Equity Market
  • Maturity of claim
    1. Money Market
    2. Capital Market
  • Timing of delivery
    1. Cash or Spot market
    2. Forward and Future Market
  • Seasoning of claim
    1. Primary Market
    2. Secondary Market
  • Organization structure
    1. Exchange trade Market
    2. Over-the-counter Market

These classifications are explained in detail one by one given below-

✔ 1. On the basis of the Nature of the Claim

  • Debt Market – The debt markets offer debt instruments that have fixed claims like bonds and debentures, etc. for trading. The borrower entity offers to repay fixed payment with regular interest to the holder and it has a definite maturity period.
  • Equity Market – It is also known as the stock market, which is designed for residual claims. It is a place where stocks and shares of companies are traded.

✔ 2. On the basis of the Maturity of the claim

  • Money Market – This kind of market trades in short-term assets which means have a maturity period of less than 1 year or 365 days. It has high liquidity, low risk, and a cheap interest rate. Certificates of deposits, treasury bills, commercial paper, certificates deposit, corporate bonds, etc. are available in these Markets for trading.
  • Capital Market – This kind of market trades in long-term assets which means having a maturity period of more than 1 year or 365 days. They have high liquidity, low risk, and cheap interest rate. Capital markets are divided into primary markets and secondary markets.

✔ 3. On the basis of the Timing of the Delivery

  • Cash or Spot Market – These Markets offer real-time transactions that are immediately settled between different sellers and buyers.
  • Forward and Future Market – Among various types of Financial Markets and their functions, these Markets offer transactions where settlements and commodities are delivered on future dates.

✔ 4. On the basis of the Seasoning of the Claim

  • Primary  Market – Primary markets allow newly listed companies, governments, and other institutions to issue new securities, while also allowing listed companies to issue new shares. IPO or Initial Public offering is an example of a primary market. There are only a few players are involved in buying and selling newly issued financial assets.
  • Secondary Market – A secondary market is a place where all previously issued financial assets like bonds, stocks, and securities buy and sell.

✔ 5. On the basis of Organizational Structure

  • Exchange trade Market – These are centralized trading markets that record immense trading on a daily basis. These have standard procedures which regulate their functioning while trading financial holdings like shares. These are legal in nature and regulatory bodies have an eye over them.
  • Over-the-counter Market It is a kind of decentralized market, that has no standard procedure or regulation without fixed geographical locations. Here, the trade is directly done between two parties instead of an agent/broker. Most stock trading is done through exchanges

► Functions of the Financial Market

Financial markets perform a very diverse set of functions that are given below that are.

  • Price determination
  • Mobilizing funds or saving
  • Provide liquidity
  • Ease of Access
  • Lower the transaction cost
  • Provide information

✔ Price Determination

Financial market help in discovering the true value of financial assets. On the basis of the demand and supply of different financial instruments, the true price can be determined.

✔ Mobilizing Funds or Saving

One of the most significant functions of the financial market is that of mobilization of savings. It utilizes the savings of people and provides funds lenders so that invest funds for productive use and provide returns to people, thereby it is contributing to the capital and economic growth of the nation.

✔ Provide Liquidity

Availability or continuous flow of money is very crucial for the smooth functioning of a business enterprise. It provides an opportunity to financial asset holders to easily sell their securities and assets and convert them into cash money when required.

✔ Ease of Access

As a result, relevant parties do not have to spend any resources, be it capital or time, to find interested buyers or sellers. Additionally, it also provides necessary information related to trading, which also reduces the effort that interested parties must put in to complete their trades.

✔ Lower the Transaction Cost

Financial market offer trading opportunity to buyers and sellers at low cost and it also provides vital and easy access to key financial information without the need to spend any resource, be it capital or time,

✔ Provide Information

The financial market not only determines the true price of different assets but also provides necessary information related to the financial health of a nation’s economy, domestic and international currency values, etc.

Role and Importance of the Financial Market in India

The role of financial markets is very vital to ensure the success and strength of India’s economy. The important functions of financial markets are as follows;

  • To mobilize the savings into more productive use in return it provides a return on investment.
  • To attract foreign investment in India through FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment).
  • To ensure the availability of funds to the government for the development of roads, highways, ports, and infrastructure.
  • To ensure availability of funds to private sectors or business enterprises for expansion or diversification of business, conduct research and development roads, import and export, etc.
  • It ensures the effective implementation of fiscal and monetary policy.
  • It contributes to the formation of capital assets.
  • It provides direct and indirect employment opportunities to millions of people.
  • It promotes financial literacy and inclusiveness.
  • It helps in integrating India’s economy with the rest of the world.
  • It contributes immensely to social, economical, and political growth.
  • Financial markets provide a place where participants like investors and debtors, regardless of their size, will receive fair and proper treatment.
  • They provide individuals, companies, and government organizations with access to capital.
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