What is Financial Market?
As the name suggests, financial market is a marketplace where the trading of financial instruments like bonds, mutual funds and shares takes place. It is an arrangement or institution that facilitates trading and where buyers and the sellers aggregate to trade in financial products.
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SEE ALSO: Money Market Instruments
What Is Financial Market?
Classification of financial market:
The financial market can be classified into the primary and secondary market:
- Primary market: a primary market is a part of the financial market which deals in the issuance of new securities with sales directly to the investor. The companies issue their shares in the primary market through the process of initial public offering (IPO) and follow-on-public offerings (FPO). In the primary market, trading takes place directly between the investors and the company. IPO is the process of launching shares for the very first time in the primary market to raise money from investors. FPO is the process in which the already listed companies offer fresh equity in the market to raise additional funds from the investors.
- Secondary market: the secondary market is a place where the securities purchased in the primary market are traded over stock exchanges like NSE and BSE. In the secondary market the trading takes place between buyers and sellers through an intermediary. These intermediaries are known as brokers who facilitate the trade. The securities in the secondary market can be sold innumerable times.
Types of financial market:
- Capital markets: the capital market is where the traders trade in financial securities. Companies raise funds to finance their business through the secondary market. The government organizations as well as private companies issue bonds and securities to raise money for investments.
- Commodity markets: this market is a trading platform where trade in commodities take place. Types of commodities sold under this market are metals, spices, bullion, pulses, grains, oil and oilseeds.
- Money market: the money market facilitates the trading of securities with high liquidity and short term maturity. In this market the financial securities are traded for short term which is less than a year.
- Derivatives market: the derivatives market is also a part of the financial market where instruments like futures and options are traded.
- Foreign exchange market: the foreign exchange market is a market where the participants are able to trade in currency pairs. These markets consist of banks, central banks, commercial companies, investment management firm. The most commonly traded is USD vs INR.
- Spot market: a spot market is a marketplace where the financial instruments are traded for immediate delivery. It differs from futures market in which the delivery takes place at a later date. Here the trade is made at spot prices.
- Interbank lending market: it is a market in which banks lend money to one another for a pre defined tenure. Most of the interbank loans are given with a maturity period of less than a week and sometimes overnight.
SEE ALSO: Growth of Money Market in India
Features of financial markets:
- The financial market enables the transfer of resources from the lenders to the borrower.
- It offers liquidity in the market to facilitate trading.
- The financial market determines the prices of the financial products through demand and supply.
- The financial market enables the borrowers to use the borrowed funds productively.
- It promotes investment and savings
- The financial market facilitates a balanced economic growth.
SEE ALSO: Features Of Indian Money Market
Role of financial market:
Given below are the roles and functions carried out by a financial market:
- Mobilizing funds: the financial market helps in mobilizing funds by linking investors to industries which require the money. This not only helps companies raise money for business development, it also allows the investors to make money by doubling investments. This will also lead to investment of idle money and help boost the economy.
- Price determination: the prices of the financial instruments that are traded in the financial market are determined by the demand and supply of commodities. This helps communicate between the investors and industries, thus helping to determine the prices of the commodities.
- Liquidity: Many financial instruments traded in the financial market have high liquidity. These financial products can be sold at any point of time and converted into cash.
- Ease of access: the financial market provides a platform where the buyers and the sellers can meet and participate in trading. The buyers and sellers can easily find each other without spending time and effort.
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