Financial Markets

Have you ever pondered upon how & from where big & large corporate houses get funds for fulfilling their long as well as short term capital requirements?

They get money from lenders or investors who can be common public, any company or financial institutions.

What is the financial market?

A financial market is a market which allows transmission of funds between investors & borrowers.

Main functions of the financial market:

(a) Act as a link between the investors and the borrowers.

(b) Provides pricing information

(c) Ensure security to dealings in financial assets.

(d) Provides liquidity by providing a mechanism for an investor to sell the financial assets.

(e) Ensures low cost of transactions and information.

Classification of Financial Market:

A financial market comprises of two major segments:

(a) Money Market

(b) Capital Market

Money market:

It deals in financial assets whose maturity is up to one year. The main instruments traded in this market are - Call money, Treasury Bill, Commercial Paper & Trade Deposit.

These are a close substitute for money & help in meeting the short-term capital requirements of a firm.

Capital Market:

In capital markets, funds are borrowed to meet medium & long-term capital requirements of a firm. It facilitates marketing & trading of securities. The raising of capital through the issue of securities like shares, debentures and bonds fall under this category.

The securities market can be further divided into two segments:

Primary Markets & Secondary Markets

The primary market includes arrangements for the collection of long-term funds by corporate houses through fresh issue of shares and debentures. The secondary market also called stock exchange provides a prevailing market for existing long term securities. It provides a place for regular sale and purchase of different types of securities like debentures, shares, bonds & government securities. Being regulated by the rules and laws of the concerned stock exchanges,it is an organised market for all transactions. The non-security market comprises of Mutual Fund, Fixed Deposits, Post Office Savings and Insurance.

Functions of Stock Exchanges:

It provides a ready and continuous market for securities, information about prices and sales, safety to dealings and investment. It also helps in mobilisation of savings and capital formation by acting as a barometer of economic and business situations for better allocation of funds. In a nutshell, it provides many benefits to companies, investors and society.The outcry system is eliminated thereby increasing the efficiency. In the outcry system, people had to bid for the highest price at some physical place which leads to multiple problems. The highest bidder was difficult to identify & there was no proper mechanism but now, the electronic system has made the task much easier.

But it suffers from drawbacks like speculation and fluctuation in prices due to rumours and unpredictable events. Presently, there are 21 stock exchanges in India among which BSE, NSE and OTCEI are quite famous. Stock Exchanges are regulated by SEBI by the formulation of the Securities Contracts (Regulation) Act. A number of reforms in the primary and secondary market are introduced to regulate the stock market. Documentary and procedural requirements are made more stringent and foolproof to safeguard investors’ interest.