What is meant by a 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.
Understanding Financial Markets and Institutions
Financial Markets help in smooth functioning of economies by allocating resources while also creating liquidity for Business enterprises. Different types of Financial holdings can be traded in these Markets. A vital importance of Financial Markets is that it enforces informational transparency to set efficient and appropriate Market prices.
Notably, macroeconomic factors like tax and other aspects often influence the Market values of Financial holdings which are not indicative of their intrinsic value. There are various types of Financial Markets, the New York Stock Exchange is one of the biggest stock Markets on this globe and this Financial Market records trade worth trillions of dollars everyday.
As an institution, Financial Markets aid in the flow of investments and savings. In turn, this facilitates the growth of funds, which goes on to help in production of goods and services. Another significance of Financial Markets is that it contributes to the demands of receivers, investors and even that of a country’s economy.
Different institutions which offer Financial holdings like mutual funds, insurances, pension, etc. combined with that of Financial Markets which offer bonds and shares contribute to a nation’s economic growth.
Types of Financial Markets
Stock Markets- In this kind of Market, an organization makes a listing of its shares which traders and investors buy and sell. Stock Marketing, through the usage of IPO(Initial Public Offering), allows companies to increase their capital.
Over The Counter Markets- It is a kind of decentralized Market, 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.
Bond Markets- The kind of securities that allow investors to borrow money from the lender for a certain period of time, with a fixed interest rate is known as bonds. Bonds are issued to aid Financial projects by different state and central government bodies, municipal corporations, etc. Bonds are usually issued as bills and notes.
Money Markets- This kind of Market trades in holdings with higher liquidities and is relatively safer. In addition, the interest return is also cheaper. The capacity of trading between organizations and traders is quite huge if viewed on the wholesale level.
Derivative Markets- This is a kind of Market where a contract is signed between two or more parties depending upon the Financial securities or assets. The worth of the derivatives is derived from the primary source of security to which it is linked, thus making it “secondary security”.
Forex Market- Foreign Exchange Market, also called the Forex Market, is the kind of Market that basically deals with currencies. As cash is the most liquid asset, Forex Market has the highest liquidity of all Markets around the globe. Banks, commercial organizations, and investment management firms comprise the majority of the Forex Market.
Functions of Financial Market
Financial Markets helps in mobilizing savings, determining and settling the prices of various securities, providing liquidity to assets, and easing access to all types of traders.
While studying the functions of Financial Markets, students must take note of these aspects discussed below.
Mobilising Funds: Among the diverse types of functions served by Financial Markets, one of the most crucial functions is that of mobilisation of savings. Financial Markets also utilise this savings investing it for productive use, thereby contributing to capital and economic growth.
Determination of Prices: Another vital function served by Financial Markets is that of pricing different securities. Essentially, demand and supply in Financial Markets along with its interaction between investors determine these pricing.
Liquidity of Financial Holdings: Tradable assets must be provided with liquidity for its smooth functioning and flow. This is another role of the Financial Market which goes on to help in the functioning of a capitalist economy. It not only allows investors to easily sell their securities and assets, but also allows them to easily convert them into cash money.
Ease of Access: Financial Markets also offer efficient trading since they bring traders to the same Market. As a result, relevant parties do not have to spend any resource, be it capital or time, to find interest 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.
Students must note, the importance of the Financial Market is undeniable in this global economy. However, these Markets do not necessarily need a physical location and trading can often be conducted online or via phone.
Classifications of Financial Markets
Students trying to learn “what are the different Financial Markets” must note these classifications described below. These classifications can be divided into two further sections, which are explained in detail.
By Nature of Claim
Debt Market: These Markets offer debt instruments and fixed claims like bonds and debentures, etc. for trading. Traders can buy these Financial holdings at debt Markets for a fixed return and an agreed-upon maturity period.
Equity Market: These Markets are designed for residual claims. Investors can deal in equity Financial holdings in such Markets.
By maturity of claim
Money Market: Certificates of deposits, treasury bills, etc. are available in these Markets for trading. These are usually short term Financial holdings, and can be traded online since these Markets usually do not exist physically.
Capital Market: Among classification of Financial Markets, capital Markets are divided into primary and secondary Markets. Primary Markets allow newly listed companies to issue new securities, while also allowing listed companies to issue new shares.
By Timing of Delivery
Cash Market: These Markets offer real time transactions which are immediately settled between different sellers and buyers.
Futures Market: Among various types of Financial Markets and their functions, these Markets offer transactions where settlements and commodities are delivered in future dates.
By organizational Structure
Exchange-Traded Market: These are centralised trading Markets which record immense trading on a daily basis. These have standard procedures which regulate their functioning while trading Financial holdings like shares.
Over-the-Counter Market: These Markets have customised procedures and do not have any centralised organisation. Traders can trade without involving any broker in their transactions. Typically offering shares from small companies, investors can trade in these Markets online.
This topic discussed above is a vital part of standard 10 + 2 curriculum for commerce students, as are many other related topics. Students can now avail study material on all these relevant topics from Vedantu for greater clarity and understanding. Additionally, students can also attend the live classes offered by Vedantu to attend lectures and clear any doubt they might have regarding their syllabus.
FAQs on Financial Market
1. Define Financial Market?
Financial Market is a type of Market in which bonds and securities are traded. There are many types of Financial Markets. This includes bond Markets, derivative Markets, forex Markets, money Markets, etc. To run a capitalist economy in a smooth and regulated way, Financial Markets are extremely important. When there’s a failure in the proper functioning of Financial Markets, an economic recession is seen. As capital flow improves between investors and collectors, the economy runs well.
2. How can money and capital Markets be differentiated?
The capital Market includes corporate banks and retail investors while the money Market includes Financial institutions like the Reserve Bank Of India.
The capital Market has a higher risk as compared to Money Market, which is safer. The capital Market offers higher rates of return, while the Money Market has a low return rate.
Instruments of trade in a capital Market include stocks and bonds while in the money Market it’s usually deposit certificates, commercial papers, etc.
3. What are some of the important functions of the secondary Market?
The important functions of the secondary Market includes:-
It provides liquidity to assets and securities and also provides traders with a safe space to trade.
Transparency and safety are ensured in the process of the transaction.
The securities are estimated constantly, thus improving demand and supply levels.
The savings of individuals can be channelized in the best possible way.
It helps traders provide the access to every necessary information.
4. Explain Capital Market. Define the two types of Capital Market?
Capital Markets are the ones in which people or institutions with savings or investments lend to the ones who require it. Suppliers include investors and banks, and those in need of capital include Business corporations, government bodies, etc. Stock and bond Markets are the best kinds of capital Markets. New securities get issued and sold in primary capital Markets and in secondary Markets, investors trade securities, issued previously.
5. What is the major difference between primary and secondary Markets?
In primary Markets, security sales by new companies get sold to the investors. In secondary Markets, only existing securities are traded.
Only securities can be bought in the primary Market. Whereas, in the secondary Market, the securities are both bought and sold.
Physical location isn’t fixed in primary Markets whereas secondary Markets have fixed locations.
