What Is Financial Market? Types & Functions Explained
Financial markets are the backbone of any country’s economy. If you have ever invested your money in the stock market, bought bonds, or even made a bank deposit, then you have already used a financial market at least once in your life. But still, many new people are looking to know about the concept of “what is financial market?” , “capital market”, “money market” and “Classification of Financial market”.
What is Financial Market?
It is simply defined as an entity where the buying and selling of financial instruments like shares, bonds, currencies, and derivatives take place. The concept of what is financial market, the types of financial market, and its role is important to understand for anyone who is willing to dive into the field of financial markets in India.
In this article, we will try to explore the classification of the financial markets, the differences between the capital and money markets, and the importance of the technical analysis of the financial markets for investors.
Understanding What Is Financial Market
To understand what is financial market, it’s a marketplace where securities are exchanged instead of goods. Investors give their money to businesses, and for business it is funds that they use for expansion operations.
The main purpose of a market is to ensure that there is a smooth flow of funds between individuals who have excess funds and individuals who need funds. This helps in growth of economy.
The markets function through various institutions that help in trading. These institutions consist banks, stock exchanges, brokerage firms, and online trading platforms. National Stock Exchange and Bombay Stock Exchange are the well-known markets in India.
Types of Financial Market
Knowing the types of financial market helps investor select best market for them, it also helps to maximize their profit with low risk. There are mainly three types of market capital market, Money market and foreign exchange market.
Capital Market
Capital market is a market that deals in long-term securities with maturity period above one year. Here, Companies needs finance as stocks or bonds to raise fund, expand their businesses, and to develop new infrastructure.
It include:
- Primary Market: In the primary market, companies offer new securities to investors in the form of IPOs. This helps businesses to raise fresh capital.
- Secondary Market: In the secondary market, investors buy and sell existing securities. Stock exchanges are in this segment.
Capital markets facilitate investment and allow investors to gain returns in the form of dividends and capital appreciation.
Money Market
In case of, Money market is a market that deals in short-term securities with maturity period less than one year. Governments, banks, and corporations use money markets when they want raise fund for short-period.
Some instruments in money market are:
- Treasury Bills
- Commercial Papers
- Repurchase Agreements
Money markets are generally safer because investments mature fast .
Foreign Exchange Market
Another important type of financial market is the foreign exchange market. This market allows people and institutions to trade currencies. For example, Indian companies trading internationally must exchange Indian Rupees for foreign currencies such as the US Dollar.
This market also determines global exchange rates.
Classification of Financial Markets
The classification of financial markets is important for understanding the market by the investors. There are various ways of classifying markets.
Classification of Financial market based on Maturity Period
It is divided into:
Money Market: Handles short-term instruments with maturity less than one year.
Capital Market: Handles long-term securities like stocks and bonds.
Classification of Financial market based on Financial Instruments
The classification of markets is also possible on the basis of the financial instruments involved
. For example,
- Equity Market
- Bond Market
- Derivatives Market
- Commodity Market
Each market serves different investors with different risk level.
Classification of Financial market based on Trading Structure
The markets can also be classified on the basis of the trading structure. For example,
- Exchange-Based Markets: The exchange takes place on the stock exchange.
- Over-the-Counter Markets: Trades take place directly between parties.
Function of Financial Markets
The function of Markets is not merely to buy and sell securities. The role of financial markets is very important in economic development.
- Capital Formation: It helps businesses to raise capital. Investors give capital to businesses, which is used to build business infrastructure and expand business operations.
- Price Discovery: Markets help us to know about the real value of financial securities. Here, Prices always fluctuates because of increasing or decreasing demand of securities in market. The real value of securities is found out through price discovery.
- Liquidity Creation: Markets provide liquidity to investors. Here, Liquidity means that investors can easily convert their securities to cash when required. Liquidity makes it safer and more attractive to invest in markets.
- Risk Management: Markets help investors to manage their financial risks. For example, derivatives help companies to hedge against price risks of commodities, foreign exchange rates, and interest rates.
Difference Between Money Market and Capital Market
Many people often find it difficult to understand the difference between money markets and capital markets. The money market is concerned with short-term investments that mature within a year. The money market is used for short-term money by banks and governments. The risk factor is less, and treasury bills and commercial papers are part of it.
Capital market is for long-term investments that are used to raise capital for business growth. The risk is more because investments like stocks and bonds price changes. The capital market is used by investors and companies
Advanced Concepts
With more experience, investors want to explore more advanced concepts related to market. It helps to increase their profit. Here, are some advanced concepts:
Derivatives Market
Derivatives are instruments whose value we find from assets like stocks, goods, or currencies. It include:
- Futures
- Options
- Swaps
It help investors to reduce risks.
Market Regulation
Stock market is need to be watched. Securities Exchange Board of India (SEBI) controls the stock market in India. It ensures that no fraud, insider trading and manipulation happens in market.
Online Platforms
Financial markets have been completely changed by online platforms. Technology has enabled investors to invest in stock markets. Today, mobile applications allow users to invest in the stock market or mutual funds anywhere. Digitalization has increased the overall investor in the market.
Final Thought: Why Understanding What Is Financial Market Matters
If you want to become rich, or if you want to make smart investments or comprehend how the world economy works, then it is crucial to know what is financial market. It connect investors, companies, or countries and it also helps in economic growth of a country, to efficiently utilize capital for a business, and financial success for many companies.
