Understanding Financial Markets

Subject: Economics

Concept:

Financial market refers to a place where buyers and sellers participate in the trade. It is platform that facilitates traders to buy and sell financial instruments/securities.
The main functions of the financial market are :
It provides facilities for interaction between the investors and the borrowers.
It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets.
It provides security to dealings in financial assets.
It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
It ensures a low cost of transactions and information.

Financial markets consist of two major segments:

Money Market:

Market for overnight to short-term funds and instruments having a maturity period of 1 or less than 1 year.
This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.
Money Market consists of all the organizations and institutions which deal or facilitate dealings in short term debt instruments. These institutions include RBI, commercial banks, cooperative banks, non-banking financial companies like LIC, GIG, UTI, and special institutions like Discount and Finance House of India (DFHI). The important money market instruments or securities (financial assets) are as follows.
RBI is the primary regulator for money market.

Capital Market:

Market for long-term funds–both equity and debt–that have maturity period greater than year.
In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges.
SEBI is the primary regulator for capital market.
Capital market can be further divided into primary and secondary markets.

Primary Market :

In primary Market, new securities are issued for the first time. It helps a company /government to connect with the investor.
It has no separate physical existence but classified as such for economic analysis.

Secondary Market :

Secondary Market is a place where the old securities are resold.
It has physical existence such as Bombay Stock Exchange (BSE) at Dalal Street, Mumbai. Provides liquidity & confidence to investors to buy new securities in Primary Market.
Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.