Financial Market, in very crude terms, is a place where the savings from various sources like households, government, firms and corporates are mobilized towards those who need it. Alternatively put, financial market is an intermediary which directs funds from the savers (lenders) to the borrowers.
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. Determination of prices is major function of financial market.
- 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. It help to increase efficiency in financial market.
Major Players in Financial Market:
The principle participants in the financial market are as follows:
BANKS: Largest provider of funds to business houses and corporates through accepting deposits. Banks are the major participant in the financial market.
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. Mutual fund is also principle participant in financial market.
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.
Last Updated on : 23rd June 2015