What Are Financial Markets?

Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others. Financial markets are vital to the smooth operation of capitalist economies.

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Financial markets create securities products that provide a return for those who have excess funds (Investors/lenders) and make these funds available to those who need additional money (borrowers).

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Structure Of Financial Market In India

There are mainly two types of financial markets where majority of trading is happening. The first one is money market and second one is capital market.

For short term finance, the Money markets.
For long term finance, the Capital markets;

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Money Market

A money market is a type of market that trades in such securities that has a short maturity period (mostly, less than one year). Such securities are often risk-free. As their maturity periods are smaller (more liquid), and the risk of loss (volatility) is also smaller, hence their yield is also less. Common men generally invest in the money market through money market mutual funds.

Securities which trade in money market are T-Bills, Certificate of Deposits (CD’s), Commercial Papers (CP’s) , Repo, etc.

2. Capital Market

On one hand Indian household has small savings. On other other hand corporates need funds to meet their capital requirements. If an Indian household want to invest in business, it can be done through the security market. How? By buying stocks, bonds from the capital market (stock market). Capital market has further two branching’s.

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  • (a) Primary Market: This market is also called the new issue market. The company raises capital here to fund its business activity. In the primary market, companies issue their securities for the first time to the public (in form of shares or bonds). It is here where the IPO’s are issued by companies.
  • (b) Secondary Market: Households who’ve bought the security in the primary market can sell (exit) it in the secondary market. When we say “stock exchange” we are actually referring to the secondary market. Here the already issued securities are traded between buyers and sellers independent of the issuer’s intervention. If the issuer (company) wants to buy back its shares, they have to do it in the secondary market.

Other Types of Financial Markets

  • Derivatives Market –They trades securities that determine its value from its primary asset. The derivative contract value is regulated by the market price of the primary item — the derivatives market securities, including futures, options, contracts-for-difference, forward contracts, and swaps.
  • Forex Market – It is a financial market where investors trade in currencies. In the entire world, this is the most liquid financial market.
  • Commodities market – The commodities market is where traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold. A specific market is created for such resources because their price is unpredictable. There is a commodities futures market wherein the price of items that are to be delivered at a given future time is already identified and sealed today.