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The financial market serves as a link between fundraisers and investors. It involves the sale and purchase of treasury securities such as banknotes, bonds, securities, foreign currency, and contracts. It is a mechanism that facilitates the movement of equity and debt money by bringing together financial institutions (banks, etc.), financial products (bonds, stocks, etc.), associations (investment banks), and regulatory authorities (RBI, SEBI, etc.). In addition, the financial market provides a marketplace where market participants can trade resources at prices established by producers and consumers.

Financial Market Functions

  • The financial market facilitates the transfer of funds between savers and investors, besides helping them determine the prices of securities. 
  • It aids in determining the prices of different financial products (bonds, stocks, etc) based on demand and supply. 
  • It allows investors to sell their holdings and convert assets to cash within a short time frame, thereby making the financial commodity market more dynamic.
  • It also offers a platform for producers and consumers to find each other easily. 
  • It facilitates the flow of new savings by investors into the country, which contributes to capital formation.

Financial Market Types

The financial market is classified into two categories: money market and capital market. 

Money Market

The money market deals with short-term financial instruments with a high liquidity level. The primary function of the money markets is to provide an outlet for balancing the short-term supply of and demand for funds. It also helps facilitate monetary policy decisions. The key instruments of the money market are call money, Treasury bills, commercial paper, deposit certificates, banker’s acceptances, and inter-corporate funds. Due to the high liquidity of the securities, the money market is considered a safe investment option.

Capital Market

The capital market is a term used to describe the channels through which medium and long-term funds are collected and invested. Commercial banks, development banks, and stock exchanges make up the capital market. The main capital market instruments are equity shares, bonds, debentures, preference shares, and so on. 

Difference between Money Market and Capital Market

  • Money market participants are largely institutional players, such as the Reserve bank of India, banks, financial institutions, etc. Among the participants in the capital market are banks, financial institutions, foreign investors, corporations, and retail investors.
  • It is possible to issue money market instruments for one day or one year. In contrast, capital market securities include debentures and equity shares, which are medium- and long-term investment vehicles.
  • As the money market has a short term, it does not yield high returns. On the other hand, the returns on investments in capital markets are typically higher than those in money markets. Securities held for an extended period have a greater possibility of generating higher earnings.

Capital Market and its Types

Primary market: Primary markets are the places that issue securities. First-time stock and bond offerings take place in this market. IPOs, or initial public offerings, are examples of primary markets. Primarily, the primary market is responsible for:

(a) Origination: It is the process of analysing and evaluating new proposals submitted to the primary market. 

(b) Underwriting: Underwriting companies assist in launching new issues by ensuring a minimum subscription. They also purchase unsold issues.

(c) Distribution: Distribution is carried out primarily by the dealers and brokers who deal directly with the investors to ensure the success of the issue.

Secondary market: Secondary markets are capital markets where existing securities are traded. Also known as the stock market, it is the place where investors can buy and sell securities. Moreover, the secondary market provides investors with regular information about the value of securities. Additionally, it provides investors with liquidity for their assets.

Stock Exchanges Role in the Financial Market

Stock exchange markets play an important role in the financial market. The system facilitates transactions between traders of financial instruments and their prospective buyers. India’s stock exchanges are regulated by the Securities and Exchange Board of India or SEBI. 

The stock market in India enables investors to trade investment instruments, such as stocks, bonds, securities, and currencies. This is an online platform for buyers and sellers to trade financial tools at specific hours during the day while adhering to the rules that are laid out by SEBI. Nevertheless, only companies that are listed on a stock exchange are allowed to trade on it. 

However, stocks that are not registered on a reputable securities exchange can still be traded via over-the-counter (OTC) derivatives. In OTC derivatives, two counterparties arrange a financial contract with minimal regulations. Moreover, these can be tailored to the needs of the parties involved. However, these shares are not highly valued on the stock exchange.  

Following are the recognised stock exchanges according to the Securities and Exchange Board of India (SEBI):

  • Calcutta Stock Exchange 
  • Bombay Stock Exchange
  • International India Exchange (India INX)
  • Indian Commodity Exchange Limited 
  • India’s Multi Commodity Exchange Limited
  • National Commodity & Derivatives Exchange Ltd. 
  • The National Stock Exchange of India (NSE)
  • NSE IFSC Ltd. 

Financial Market Indices (Stock Indices)

A stock index is a statistical metric that indicates how the values of stocks in publicly traded corporations have changed over time. Moreover, it shows the general market sentiment and the direction of price movements in financial, commodities, or any other market. The following are also some of the major stock market indices:

  • NIFTY 50: It is an index consisting of 50 stocks representing 13 economic sectors
  • BSE SENSEX: It is a free-floating market-weighted stock market index comprising 30 reputable and financially secure businesses listed on the Bombay Stock Exchange. 
  • S & P CNX 500: It is India’s first broad-based stock market index. S&P CNX 500 makes up almost 96% of total market capitalisation.
  • MSX-SX: Multi Commodities Market Exchange ranks third among India’s national stock exchanges after Bombay Stock Exchange and National Stock Exchange. The exchange allows trading in the shares of 1,116 listed companies
  • Other stock indices include NIFTY India Consumption, NSE Midcap, etc.

Financial Market Regulatory Bodies

Financial markets and institutions in India, like banks, insurance companies, etc., are regulated by autonomous regulatory agencies. Such as:

  • The money market is regulated via the Reserve Bank of India.
  • The capital market and mutual fund market is regulated via the Securities Exchange Board of India (SEBI)
  • The insurance marketplace is regulated via the Insurance Regulatory and Development Authority (IRDA); and
  • The pension fund is regulated through the Pension Fund Regulatory and Development Authority (PFRDA). 

Conclusion

The Indian Capital Market is a place for buyers and sellers to buy and sell financial instruments such as stocks, bonds and other securities. The financial market provides a platform for buyers and sellers to trade assets at prices based on supply and demand. However, only corporations that are authorised on a stock market are permitted to trade on it. Nevertheless, stocks not listed on a reputable securities exchange can be bought and sold on over-the-counter derivatives. However, these securities might not have a high market value.