Concept of Financial Markets
The financial market refers to the institutional arrangement for dealing in financial assets and credit instruments. A financial market acts as a link between the savers and borrowers. Some people have surplus money, while others need it for investment, the transfer of surplus money is undertaken through financial markets. The money is transferred from surplus units of savers/lenders to deficit units(investors).
There are two ways through which funds can be allocated : (i) through banks (ii) through financial markets. The persons who have surplus money may keep their savings in banks, or ma buys securities from the capital market. The banks and financial markets lend the money to business firms. A financial market is a market for the creation and exchange of financial assets.
Functions of Financial Markets
Financial markets perform the following functions :
1. Mobilisation of Savings and Channelising them into Productive Uses.
The main function of the financial market is to facilitate the transfer of savings from households/savers to firms/investors. It provides different investment options to savers, which help them to invest or channelize their surplus funds into the most productive uses.
2. Facilitate Price Determination.
The price of everything is determined through market forces of demand and supply.
⦁ The households supply their surplus funds in the financial market and business firms make a demand.
⦁ An interaction between the savers and business firms will help in determining the price of securities in that financial market.
3. Provide Liquidity to Financial Assets.
Financial securities can easily be purchased and sold in financial markets.
⦁ It provides liquidity to financial assets as they can easily be converted into cash as and when required.
⦁ The holders of financial assets can easily sell them through the mechanism of financial markets.
4. Reduce the Cost of Transactions.
Financial markets provide full information about securities being traded to the buyers and sellers.
It provides a common platform to buyers and sellers for fulfilling their individual needs. It helps to save time, effort, and money for both sellers and buyers otherwise they will have to spend in searching for each other.
Types Of Financial Market.
The financial market may be classified as follows:
Money Market
Concept
Money market refers to a market for short-term funds. It deals in monetary assets whose period of maturity is up to one year.
It has no physical location, most of the activities are conducted over the telephone or on the internet.
It aims to provide short-term funds for meeting the urgent requirements of cash and temporary investment of funds for earning returns.
Reserve Bank of India, Comercial Banks, Non-banking Finance Companies, State Governments, Mutual Funds, Big Corporate Houses are the main participants in this market.
Capital Market
Concept
The term capital market refers to the institutional for facilitating the borrowing and lending of long-term funds. A capital market may be defined as an organized mechanism for effective and efficient transfer of money capital or financial resources from the investing public i.e. individuals or institutional savers to entrepreneurs (individuals or institutions ) engaged in industry or commerce. Capital market is related to only long-term instruments consisting of equity shares, debentures, bonds, etc., and equity instruments. The long-term instruments consist of equity shares, debentures, bonds, etc.
The capital market involves the following :
(i) Raising of capital by issue of new shares.
(ii) Raising of borrowings by the issue of new debentures.
(iii) Raising of long-term borrowing by inland and foreign banks and financial institutions. It may be noted here that the capital market is not located in a particular place.
