Financial Market
What is a Financial Market?
A financial market is a marketplace where buyers and sellers trade in financial assets such as equities, bonds, derivatives, currencies, and other instruments. It plays a key role in the allocation of resources and economic growth by connecting investors with those who need capital.
Functions of Financial Market
- Mobilizing savings and channeling them into productive investments
- Facilitating price discovery through demand and supply forces
- Providing liquidity to financial assets
- Reducing transaction and information costs
- Risk management through derivatives and insurance products
Types of Financial Markets
1. Capital Market
Deals in long-term securities such as equity shares and bonds.
- Primary Market: Where new securities are issued and sold for the first time.
- Secondary Market: Where existing securities are traded among investors (e.g., stock exchanges).
2. Money Market
Deals in short-term instruments with a maturity of less than one year.
- Examples: Treasury Bills, Certificates of Deposit (CDs), Commercial Papers
3. Derivatives Market
Instruments like futures and options derive their value from underlying assets such as stocks or commodities.
4. Foreign Exchange (Forex) Market
Market for buying and selling currencies. It helps in facilitating international trade and investment.
5. Commodity Market
Where raw materials or primary products like gold, oil, wheat are traded, often through derivative contracts.
Participants in Financial Markets
- Retail and Institutional Investors
- Companies and Corporations
- Banks and Financial Institutions
- Government and Central Banks
- Stock Exchanges and Brokers
Regulators of Indian Financial Market
- Reserve Bank of India (RBI): Regulates money market and banking sector
- Securities and Exchange Board of India (SEBI): Regulates capital and derivatives markets
- Insurance Regulatory and Development Authority (IRDAI): Regulates insurance sector
- Pension Fund Regulatory and Development Authority (PFRDA): Regulates pension funds
Financial markets are essential for a well-functioning economy. They help in capital formation, wealth generation, and economic stability by ensuring transparency, liquidity, and trust.