Financial Market

What is a Financial Market?

A financial market refers to a place of business where different types of bonds and securities are traded. This includes different financial securities like bond markets, share markets, forex markets, derivative markets, etc. Financial markets are crucial for the smooth functioning of a capitalist economy and it serves as an agent between various collectors and investors. Essentially, these markets mobilise capital flow between investors and collectors.

Understanding Financial Markets and Institutions

Financial markets help in smooth functioning of economies by allocating resources while also creating liquidity for business enterprises. Different types of financial holdings can be traded in these markets. A vital importance of financial markets is that it enforces informational transparency to set efficient and appropriate market prices.

Notably, macroeconomic factors like tax and other aspects often influence the market values of financial holdings which are not indicative of their intrinsic value. There are various types of financial markets, the New York Stock Exchange is one of the biggest stock markets on this globe and this financial market records trade worth trillions of dollars everyday.

As an institution, financial markets aid in the flow of investments and savings. In turn, this facilitates the growth of funds, which goes on to help in production of goods and services. Another significance of financial markets is that it contributes to the demands of receivers, investors and even that of a country’s economy.

Different institutions which offer financial holdings like mutual funds, insurances, pension, etc. combined with that of financial markets which offer bonds and shares contribute to a nation’s economic growth.

Types of Financial Markets

The different types of financial markets are explained below in detail. 

  • Over-the-counter Market: These refer to decentralised financial markets which do not have any physical location. In these markets, trades are conducted directly without any broker.Conducted electronically, these markets handle exchanges pertaining to publicly traded stocks which are not listed in stock exchanges. These markets have fewer regulations in comparison to stock exchanges and therefore also offer lesser functional cost. Typically, these markets are used for trading by small companies which are not available in primary financial markets.

  • Bond Market: Bonds are basically securities which allow investors to loan a sum of money. These have a fixed period of maturity and also have pre-determined interest rates. While understanding what are the types of financial markets, students must understand that bond markets sell securities like notes, bills, bonds, etc.

Also known as debt markets, credit markets, and fixed-income markets, these offer financial holdings which are agreement deeds between lenders and borrowers. These agreements note the relevant interest rates, tenures etc.

  • Money Market: These markets trade in highly liquid financial holdings which offer a very short-term maturity tenure (usually lesser than 1 year). While these financial holdings offered by such markets are regarded as highly safe financial holdings, they offer lower interests on the investments.

Usually these markets record high volume trade between companies which are conducted at a wholesale trade. Retail trading in these markets include individuals and investors who trade in mutual funds, debentures, etc. 

  • Derivatives Market: Derivatives are agreed-upon contracts between 2 or even more number of parties based on financial assets or sets of assets. Here assets refer to those of securities, while sets of assets refer to indexes.

Essentially as its name suggests, these are secondary securities whose value depends on primary assets like those of stocks. These financial holdings derive their value from underlying financial tools like bonds, currencies, interest rates, commodities, stocks, etc. While understanding the nature of financial markets, students must understand that derivative markets trade in futures and options contracts. 

  • Forex Market: These markets deal with currencies and have its name derived from “foreign exchange markets”. These are most liquid among various financial markets since they allow individuals to directly buy, sell, exchange and even speculate on currencies and their values.

Typically these markets record more trading than that of equity and futures markets together. Similar to that of over-the-counter markets, these are often decentralised and consist of banks, financial institutions, investment management firms, commercial companies, etc.

Functions of Financial Market

While studying the functions of financial markets, students must take note of these aspects discussed below.

  • Mobilising Funds: Among the diverse types of functions served by financial markets, one of the most crucial functions is that of mobilisation of savings. Financial markets also utilise this savings investing it for productive use, thereby contributing to capital and economic growth.

  • Determination of Prices: Another vital function served by financial markets is that of pricing different securities. Essentially, demand and supply in financial markets along with its interaction between investors determine these pricing.

  • Liquidity of Financial Holdings: Tradable assets must be provided with liquidity for its smooth functioning and flow. This is another role of the financial market which goes on to help in the functioning of a capitalist economy. It not only allows investors to easily sell their securities and assets, but also allows them to easily convert them into cash money.

  • Ease of Access: Financial markets also offer efficient trading since they bring traders to the same market. As a result, relevant parties do not have to spend any resource, be it capital or time, to find interest buyers or sellers. Additionally, it also provides necessary information related to trading, which also reduces the effort that interested parties must put in to complete their trades.

Students must note, the importance of the financial market is undeniable in this global economy. However, these markets do not necessarily need a physical location and trading can often be conducted online or via phone.

Classifications of Financial Markets

Students trying to learn “what are the different financial markets” must note these classifications described below. These classifications can be divided into two further sections, which are explained in detail.

1. By Nature of Claim

  • Debt market: These markets offer debt instruments and fixed claims like bonds and debentures, etc. for trading. Traders can buy these financial holdings at debt markets  for a fixed return and an agreed-upon maturity period.

  • Equity market: These markets are designed for residual claims. Investors can deal in equity financial holdings in such markets. 

2. By maturity of claim

  • Money Market: Certificates of deposits, treasury bills, etc. are available in these markets for trading. These are usually short term financial holdings, and can be traded online since these markets usually do not exist physically.

  • Capital Market: Among classification of financial markets, capital markets are divided into primary and secondary markets. Primary markets allow newly listed companies to issue new securities, while also allowing listed companies to issue new shares.

3. By Timing of Delivery

  • Cash Market: These markets offer real time transactions which are immediately settled between different sellers and buyers.

  • Futures Market: Among various types of financial markets and their functions, these markets offer transactions where settlements and commodities are delivered in future dates.

4. By organisational Structure

  • Exchange-Traded Market: These are centralised trading markets which record immense trading on a daily basis. These have standard procedures which regulate their functioning while trading financial holdings like shares.

  • Over-the-Counter Market: These markets have customised procedures and do not have any centralised organisation. Traders can trade without involving any broker in their transactions. Typically offering shares from small companies, investors can trade in these markets online.

This topic discussed above is a vital part of standard 10 + 2 curriculum for commerce students, as are many other related topics. Students can now avail study material on all these relevant topics from Vedantu for greater clarity and understanding. Additionally, students can also attend the live classes offered by Vedantu to attend lectures and clear any doubt they might have regarding their syllabus.

FAQ (Frequently Asked Questions)

1. What is a Financial Market?

A financial market is an institution which offers trading of different types of financial holdings. This includes shares, stocks, bonds, derivatives etc.

While some financial markets record low activity on a daily basis, markets like the New York Stock Exchange record trillions of dollars in trade. These are vital for efficient and smooth functioning of capitalist economies since they create liquidity for business enterprises while also allocating resources properly.

2. What is the Meaning of Financial Market?

Financial market refers to a plethora of institutions which trade in various types of financial holdings. Shares, stocks, derivatives, bonds, etc. are traded in these institutions, thereby making financial markets a crucial part of capitalist economies. These institutions depend on informational transparency to set appropriate market prices, at which different financial holdings are traded.

3. Define Financial Market

Financial market is an umbrella term which refers to quite a few types of institutions, essentially trade in shares, bonds stocks, derivatives, etc. These markets facilitate capital flow between investors and collectors, thereby boosting an economy with its trade.