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In other words, financial market is the place where assets like equities, bonds, currencies, derivatives and stocks are traded.
Some of the salient features of financial market are:
- Transparent pricing
- Basic regulations on trading
- Low transaction costs
- Market determined prices of traded securities
Basic Functions of Financial Market:
Financial market has emerged as one of the biggest markets in the world. It is engaged in a wide range of activities that cater to a large group of people with diverse needs.
Six key functions of Financial Market are -
- Borrowing & Lending: Financial market transfers fund from one economic agent (saver/lender) to another (borrower) for the purpose of either consumption or investment.
- Determination of Prices: Prices of the new assets as well as the existing stocks of financial assets are set in financial markets.
- Assimilation and Co-ordination of Information: It gathers and co-ordinates information regarding the value of financial assets and flow of funds in the economy.
- Liquidity: The asset holders can sell or liquidate their assets in financial market.
- Risk Sharing: It distributes the risk associated in any transaction among several participants in an enterprise.
- Efficiency: It reduces the cost of transaction and acquiring information.
Major Players in Financial Market:
The main participants in the financial market are as follows:
- BANKS: Largest provider of funds to business houses and corporates through accepting deposits.
- INSURANCE COMPANIES: Issue contracts to individuals or firms with a promise to refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc.
- FINANCE COMPANIES: Engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public.
- MERCHANT BANKS: Funded by short term borrowings; lend mainly to corporations for foreign currency and commercial bills financing.
- COMPANIES: The surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies.
- MUTUAL FUNDS: Acquire funds mainly from the general public and invest them in money market, commercial bills and shares.
- GOVERNMENT: Authorized dealers basically look after the demand-supply operations in financial market. Also works to fill in the gap between the demand and supply of funds.
Components of Financial Market:The financial market can be classified into several sub-types.
The components are:
- CAPITAL MARKET: It consists of stock market and bond market. Works by issuing common stock or bonds.
- COMMODITY MARKET: Provides for trading in commodities.
- MONEY MARKET: Facilitates short-term debt financing and investment.
- DERIVATIVES MARKET: Specializes in financial risk sharing and risk management.
- FUTURES MARKET: Issues contracts for trading commodities at some future date.
- INSURANCE MARKET: Also specializes in re-distribution of various risks.
- FOREIGN EXCHANGE MARKET: Specializes in trading of foreign exchange and international currencies.