A Detailed Study on Financial Markets

When we think of markets, we envision a place where people can buy and sell goods and services. In practice, the concept has a far broader meaning. A market is essentially the sum of a commodity or service’s demand and supply.

As a result, a financial market is a market, an arrangement, or an institution that allows the trading of financial products and securities. Stocks, shares, debentures, bonds, commercial papers, bills, and cheques are examples of these products. In this article, we will understand the concept of the financial market in detail while understanding the functions of the financial market as well as the types of financial markets. 

Concept Of The Financial Market

We must first comprehend the structure and significance of financial markets in order to fully understand the concept of the financial market and its significance in our economy. When it comes to money, every economy now has two primary sectors: savings and investment. Individual households save money, which is referred to as savings and investment is the money that businesses need to get started and stay in business.

As a result, the economy must establish a connection between savings and investments. Banks are one obvious option to turn savings into investments. Alternatively, financial markets can be used to convert savings into investments. Households will utilise their savings to purchase financial instruments and commodities such as stocks, bonds, and debentures, among other things. This is the concept of the financial market. 

Functions Of The Financial Market

By completing the four fundamental functions listed below, financial markets play a vital role in the distribution of limited resources in an economy. The functions of the financial market are: 

• Mobilisation and utilisation of funds: The movement of savings from savers to investors is facilitated by a financial market. It allows depositors to choose from a variety of assets, allowing surplus cash to be put to the most profitable use possible.

• Facilitation of price determination: Households are the supply of funds in the financial market, while businesses are the demand. The interplay between them aids in the establishment of a rate for the financial asset being traded in that market.

• Ease of liquidity: Financial markets make it simple to buy and sell financial assets. They do so by providing liquidity to financial assets, allowing them to be easily turned into cash when needed.

• Reduction in the cost of transaction: Financial markets give useful information on the securities that are traded. It enables buyers and sellers of financial assets to save time, effort, and money that would otherwise be spent trying to find them.

Types Of Financial Markets

There are numerous financial markets, and each country has at least one, albeit of varying sizes. Some are modest, while others are well-known around the world, such as the Bombay Stock Exchange (BSE), which trades trillions of Rupees every day. The following are some types of financial markets.

• Stock Market: The stock market is where you can buy and sell shares in public corporations. Each share has a value, and investors profit from the stocks when they outperform the market. Purchasing stocks is simple. The main issue is determining which stocks will generate profit for the investor. The investor profits from the sale of equities that were purchased at a lower price and sold at a higher price.

• Bond Market: Organisations and the government can use the bond market to secure funds to fund a project or an investment. In a bond market, investors purchase bonds from a firm, which the company then returns to the investors, plus interest, over a certain period of time.

• Commodities Market: Investors and traders purchase and sell natural resources or commodities such as maize, oil, meat, and gold on the commodities market. Because the price of such resources is unpredictable, a separate market has been formed for them. There is a commodities futures market where the price of goods to be delivered at a future date is already known and agreed upon today.

• Derivatives Market: Derivatives or contracts whose value is reliant on the market value of the asset being traded are part of such a market. A derivative is something like the futures stated before in the commodities market.

Importance of Financial Markets

Financial markets are important in essence that many things are made possible by financial markets, including the following:

• Financial markets create a location where all participants, including investors and debtors, are treated fairly and appropriately, regardless of their size.
• They give capital to people, businesses, and government agencies.
• Because of the numerous job possibilities available, financial markets assist in lowering the unemployment rate.

Conclusion

In this article, we spoke about the concept of the financial market, functions of the financial market and types of the financial market. We can now deduce the concept of the financial market. Financial markets are a form of a marketplace that allows you to sell and buy assets like bonds, equities, foreign exchange, and derivatives. Simply put, firms and investors may use financial markets to raise funds in order to expand their operations or generate more money. A good understanding of the concept of the financial market can go a long way in earning financial success.