Introduction
- Financial market is an intermediary between investors and borrowers which provides an avenue for the sale and purchase of various financial assets.
- Financial market consists of financial institutions (banks etc.), financial instruments (bonds and shares), organizations (stock exchange) and regulatory bodies (RBI, SEBI etc.), which facilitates the flow of equity and debt capital.
- It gives a platform to the buyers and sellers for trading assets at the prices determined by the demand and supply forces.
Functions of Financial Market
- It provides information about companies to investors.
- It helps in enhancing liquidity of financial claims through trading of securities.
- It facilitates mobilization of savings, where an investor can invest his savings according to risk and choice assessment.
- It helps in determining the price of financial commodities based on demand and supply.
- It saves the time, money, and efforts of investors. The financial market gives a platform where both the buyers and sellers can find each other easily.
- It also provides portfolio management services.
Characteristics of Financial Market
- Financial markets are characterised by large volumes of transactions and the speed with which financial resources move from one market to another.
- Financial markets are divided into various segments such as stock market, bond market, options and futures markets, etc.
- Financial markets are highly volatile.
- Financial markets are dominated by financial intermediaries who take investment decisions as well as the risks on behalf of their depositors.
- Negative externalities are associated with financial markets. A failure in one segment of the market may affect the other segment as well.
- Financial markets are sensitive to global economic and geo-political conditions.
Types of Financial Market
- Money Market: It is the market that fulfills the requirements of funds for the period ranging from overnight to one year. It is a market for short term debt instruments.
- Capital Market: Capital Market is the market that fulfills the requirements of funds for the period above one year. It is a market for long term securities.