Financial Markets – Functions, Importance And Types

The financial market is a very broad term that primarily refers to a marketplace where buyers and sellers participate in the trade, i.e., buying and selling of assets. Simply saying, it is a platform that facilitates traders to buy and sell financial instruments and securities. These instruments and securities can be shares, stocks, bonds, commercial papers, bills, debentures, cheques and more.

Financial markets are known for transparent pricing, strict regulations, costs and fees and clear guidelines. One big characteristic of such markets is that the market forces determine the price of the assets. Also, a financial market may or may not have a physical location, meaning investors can buy and sell assets over the Internet or phone.

Importance

Financial markets are common to each country, and they play a major role in the economic growth of the country. Some countries have small markets, while some have big financial markets, like NASDAQ. Such markets act as an intermediary between savers and investors, or they help savers to become investors. On the other hand, they also help businesses to raise money to expand their business.

It won’t be wrong to say that investors and businesses access the financial markets to raise money and also to make more money. Moreover, they also help in lowering unemployment as these markets create massive job opportunities.

Functions

Price Determination: Demand and supply of an asset in a financial market help to determine their price. Investors are the supplier of the funds, while the industries are in need of the funds. Thus, the interaction between these two participants and other market forces helps to determine the price.

Mobilization of savings: For an economy to be successful it is crucial that the money does not sit idle. Thus, a financial market helps in connecting those with money with those who require money.

Ensures liquidity: Assets that buyers and sellers trade in the financial market have high liquidity. It means that investors can easily sell those assets and convert them into cash whenever they want. Liquidity is an important reason for investors to participate in trade.

Saves time and money: Financial markets serve as a platform where buyers and sellers can easily find each other without making too much efforts or wasting time. Also, since these markets handle so many transactions it helps them to achieve economies of scale. This results in lower transaction cost and fees for the investors.

Classification of the Financial Market

As we mentioned before that financial is a very broad term, so just mentioning their types will not give readers a good idea of the financial markets. That is why we are mentioning classification and giving type under each category.

By Nature of Assets

Stock market: This is the market where shares of the company are listed and traded after their IPO.

Bond market: This market allows companies and the government to raise money for a project or investment. Investors buy bonds from a company, which later returns the amount of bond with agreed interest.

Commodities market: In this market, investors buy and sell natural resources or commodities, like corn, oil, meat, and gold.

Derivatives market: This market deals in derivatives or contracts, whose value is based on the underlying asset being traded.

Financial Market

By Nature of Claim

Equity Market: It is a market where investors deal in stocks or other equity instruments. It is basically the market for residual claims.

Debt Market: In this market, investors buy and sell fixed claims or debt instruments, like debentures or bonds.

By Maturity of Claim

Money Market: The markets where investors buy and sell securities that mature within a year are the money market. Assets that investors buy and sell in this market are commercial paper, certificate of deposits, treasury bills, and more.

Capital Market: Markets, where investors buy and sell medium and long term financial assets, is a capital market. There are two types of capital market: Primary Market (where a company issues its shares for the first time (IPO), or already listed company issues fresh shares) and Secondary Market or Stock Market (where buyers and sellers trade already issued securities in the primary market).

By Timing of Delivery

Cash Market: It is the market where transactions are settled in real time.

Futures Market: In this market, settlement and delivery take place at a future specified date.

By Organizational Structure

Exchange Traded Market: A market with centralized authority and set regulations are Exchange Traded Market, like NYSE, NASDAQ.

Over-the-Counter Market (OTC): Markets with customized procedures and decentralized organization is an OTC market. It is a type of secondary market. Smaller organizations prefer this market as it has fewer regulations and is less expensive.

Last updated on : February 12th, 2019
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