Functions of the Financial Market

Financial markets are a form of marketplace that allows you to sell and buy assets like derivatives, equities, bonds, and foreign exchange. Firms and investors can use financial markets to raise funds to expand their operations or generate more money. It acts as a middleman between investors and collectors, facilitating funds transfer. The stock market is a financial market that allows investors to buy and sell publicly traded company stock. The primary stock market is where new stocks are first launched, while the secondary stock market has stock securities.

What is the Financial Market?

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. This market also locates the funds into the best productive investment opportunity. Two types of financial markets exist, i.e., Money capital and capital market. 

Functions of Financial Market

• Mobilising Funds: Among the many functions that Financial Markets perform is mobilising savings. This market uses saving investing for productive use. This also contributes to economic and capital growth.

• Pricing Different Securities: Pricing different securities is another essential service performed by Financial Markets. In Financial Markets, these prices are determined by demand, supply, and investor engagement.

• Liquidity of the Financial Holdings: Liquidity is required for tradable assets’ proper operation and functioning. The other function of the Financial Market is to assist in the operation of a capitalist economy. It not only makes it simple for investors to sell their securities and assets, but it also makes it simple for them to change them into cash.

• Ease of access: Financial Markets also provide efficient trading because they bring various traders together in one place. As a result, interested buyers and sellers do not have to invest time, money or resources to find potential buyers or sellers. It also provides crucial trading information, reducing the effort required by interested parties to conduct their transactions.

Financial Market Classification 

Money Market

The money market is a financial market segment in which financial instruments with high liquidity and short maturities are exchanged. The money market is made up of several financial institutions and dealers who are looking to borrow or lend assets. The features of this market are:

• This market is meant for the requirement of short term funds.

• No fixed geographical location is needed.

• RBI, private banks and commercial banks are the main institutions. 

Instruments of the Money Market

• Call money 

• Certificate of deposits etc. 

• Commercial bills 

• Treasury bill 

• Commercial paper 

Capital Market

The capital market is the marketplace where investment and savings are channelled among traders, institutions, and suppliers. It consists of the secondary and primary markets. Some most common assets of the Capital market are bonds and stock.

Features of the Capital Market 

• It makes a direct link between investment and investee

• Deals with the long term investments 

• Uses intermediaries

• Regulated by Government norms

Methods of Floatation

• Public firms create prospectuses to generate cash from the public by offering financial instruments such as shares, debentures, and other securities through advertisements in newspapers and magazines.

• Offer for sale: Public businesses sell securities to brokers or issuing houses for a set price, and these middlemen then resale the securities to investors.

• Private placement refers to the issuance and allotment of shares to selected persons and companies without making them available to the general public through a public offering.

• Rights issue: A rights issue is the issuance of new shares to current shareholders in compliance with the company’s terms and conditions.

• e-IPOs: An initial public offering (IPO) is when a firm raises cash by issuing capital to the public via an online stock exchange system (IPO).

Role of the Financial Market

• It provides a safe and secure place for businesses and households to save and store money while earning interest

• Financial markets act as a go-between for savers and borrowers

• To facilitate the final exchange of goods and services such as contactless payments systems, foreign currency, and so on, financial markets transfer money to the highest risk-adjusted return rate.

• Financial market also provides currency and commodity forward markets. The agents can use forward markets to protect themselves against price volatility

• This market allows companies to raise new equity to fund capital expenditure and expansion.

Conclusion

Financial markets are markets where investments are made. We have read about the terms related to financial markets such as financial markets, functions of financial markets, types of financial products, differences between capital markets and financial markets, stock exchanges, distribution methods and functions of stocks.