A financial market is a word that describes a marketplace where bonds, equity, securities, currencies are traded. Few financial markets do a security business of trillions of dollars daily, and some are small-scale with less activity. These are markets where businesses grow their cash, companies decrease risks, and investors make more cash.
Meaning of Financial Markets
A Financial Market is referred to space, where selling and buying of financial assets and securities take place. It allocates limited resources in the nation’s economy. It serves as an agent between the investors and collector by mobilising capital between them.
In a financial market, the stock market allows investors to purchase and trade publicly companies share. The issue of new stocks are first offered in the primary stock market, and stock securities trading happens in the secondary market.
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Types of Financial Markets
- Over the Counter (OTC) Market – They manage public stock exchange, which is not listed on the NASDAQ, American Stock Exchange, and New York Stock Exchange. The OTC market dealing with companies are usually small companies that can be traded in cheap and has less regulation.
- Bond Market – A financial market is a place where investors loan money on bond as security for a set if time at a predefined rate of interest. Bonds are issued by corporations, states, municipalities, and federal governments across the world.
- Money Markets – They trade high liquid and short maturities, and lending of securities that matures in less than a year.
- Derivatives Market –They trades securities that determine its value from its primary asset. The derivative contract value is regulated by the market price of the primary item — the derivatives market securities, including futures, options, contracts-for-difference, forward contracts, and swaps.
- Forex Market – It is a financial market where investors trade in currencies. In the entire world, this is the most liquid financial market.
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Functions of Financial Market
Mentioned below are the important functions of the financial market.
- It mobilises savings by trading it in the most productive methods.
- It assists in deciding the securities price by interaction with the investors and depending on the demand and supply in the market.
- It gives liquidity to bartered assets.
- Less time-consuming and cost-effective as parties don’t have to spend extra time and money to find potential clients to deal with securities. It also decreases cost by giving valuable information about the securities traded in the financial market.
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Classification of Financial Market
The financial market can be classified into three different forms.
1.By Nature of Claim
- Debt Market – It is a market where fixed bonds and debentures or bonds are exchanged between investors.
- Equity Market – It is a place for investors to deal with equity.
2. By Maturity of Claim
- Money Market – It deals with monetary assets and short-term funds such as a certificate of deposits, treasury bills, and commercial paper, etc. which mature within twelve months.
- Capital Market – It trades medium and long term financial assets.
3. By Timing of Delivery
- Cash Market – It is a market place where trade is completed in real-time.
- Futures Market – Here, the delivery or compensation of products are taken in the future specified date.
4. By Organizational Structure
- Exchange-Traded Market – It has a centralised system with a patterned procedure.
- Over-the-Counter Market – It has a decentralised organisation with customised procedures
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What are Financial Markets and Institutions?
Financial markets dispense efficiently flow of investments and savings in the economy and facilitate the growth of funds for producing goods and services. The right blend of financial products and instruments and financial markets and institutions fuels the demands of investors, receiver and the overall economy of a country.
Financial markets (bonds and stocks), instruments (derivatives, bank CDs, and futures), and institutions (banks, pension funds, insurance companies, and mutual funds) give the investors the opportunities to specialize in specific services and markets. As quoted by Demirgcc-Kunt and Levine “Financial markets and financial institutions together contribute to economic growth and not the relative mix of these two factors”.
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FAQs
A financial market is a platform or system where buyers and sellers come together to trade stocks, bonds, commodities, currencies, or other financial assets. These buyers and sellers can be individual investors, financial institutions, or governments.
What is financial markets explain its functions and types? ›
A Financial Market is referred to space, where selling and buying of financial assets and securities take place. It allocates limited resources in the nation's economy. It serves as an agent between the investors and collector by mobilising capital between them.
What is financial market and its example? ›
Financial Markets include any place or system that provides buyers and sellers the means to trade financial instruments, including bonds, equities, the various international currencies, and derivatives. Financial markets facilitate the interaction between those who need capital with those who have capital to invest.
What is the function of the financial market answer the following questions? ›
A financial market is a marketplace that provides facilities to create assets and exchange of securities to provide long term, medium and short term business finance. The financial market mobilises the funds between the investors and savers.
What are the 5 roles of financial markets? ›
The 5 roles of financial markets are ensuring a low cost of transactions and information, ensuring liquidity by providing a mechanism for an investor to sell the financial assets, providing security to dealings in financial assets, and providing facilities for interaction between the investors and the borrowers.
What are functions of financial market? ›
Financial markets provide a common platform where buyers and sellers meet. It helps in saving time, effort and money of the buyers and sellers at the time of trading in the market, by providing them valuable information.
What is financial market in simple words? ›
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets as commodities.
What are some examples of market? ›
A market is where buyers and sellers can meet to facilitate the exchange or transaction of goods and services. Markets can be physical, like a retail outlet, or virtual, like an e-retailer. Examples include illegal markets, auction markets, and financial markets.
What are the two types of financial markets explain? ›
The two main types of financial markets are Capital Markets and Money Market. The capital market is the market for medium and long term funds. You can read about the Financial Market – Functions, Features, Difference between Money and Capital Market in the given link.
What is the structure and function of the financial markets? ›
The structure of the financial market broadly divides into the Money Market and Capital Market. The money market caters to short-term fund requirements, while the capital market takes care of long-term funding needs. The structure of the financial market broadly divides into Private Market and Public Market.
Roles of Financial Markets and Institutions
They perform several key roles: Collecting and redirecting savings into investment. Risk management. Providing liquidity.
How many types of financial markets are there? ›
The 4 types of financial markets are currency markets, money markets, derivative markets, and capital markets. Capital markets are used to sell equities (stocks), debt securities.
What are characteristics of financial market? ›
Some of the characteristics of financial markets are providing security dealings in financial assets and ensuring liquidity by giving mechanisms to sell financial assets. You can read about the Financial Market – Functions, Features, Difference between Money and Capital Market in the given link.
What are the 4 functions of financial management explain? ›
Most financial management plans will break them down into four elements commonly recognised in financial management. These four elements are planning, controlling, organising & directing, and decision making.
What are the important financial decisions? ›
There are three types of financial decisions- investment, financing, and dividend. Managers take investment decisions regarding various securities, instruments, and assets. They take financing decisions to ensure regular and continuous financing of the organisations.
What is the largest financial market in the world? ›
The foreign exchange market or forex market is the market where currencies are traded. The forex market is the world's largest financial market where trillions are traded daily.
What is the function and structure of the financial markets? ›
The primary components of the financial market structure include primary markets, secondary markets, stock market, bond market, etc. In addition, the financial market regulates the availability of funds and the return on these funds. Where new stocks are issued and bought by investors for the first time.
What are the two main types of financial markets? ›
The two main types of financial markets are Capital Markets and Money Market. The capital market is the market for medium and long term funds. You can read about the Financial Market – Functions, Features, Difference between Money and Capital Market in the given link.
What are the 7 major types of financial institutions? ›
The major categories of financial institutions are central banks, retail and commercial banks, credit unions, savings and loan associations, investment banks and companies, brokerage firms, insurance companies, and mortgage companies.
