The financial market is the marketplace where debt, securities, shares and bonds are traded between sellers and buyers.
In other words, it is a platform that offers the opportunity to the business entities or industrialist to raise funds to expand their organisation by diluting their ownership in terms of shares and at the same time, it also provides an opportunity to retail investors (individuals) or institutional investors to mobilise funds to gain profit.
Types of Financial Market:
The financial market can be classified as follows.
- Money Market
- Capital Market
- Forex Market
Generally, the financial instruments with a short maturity period and highly liquid are traded in the money market. Short maturity period refers to less than one year and there is a limitation of investment amount which is minimum 1.0 lac or 2 lacs, 3 lacs ( multiple of 1.0 lac) in case of CD. Therefore an individual with the bulk amount and institutional investors deal in the money market.
Thus we conclude that money market deals high-value transactions.
CD (certificates of deposit) – multiple of 1.0 lac
CP (commercial paper) – multiple of 5 lacs
CM (call money)
Treasury bill etc
All the above financial instruments are tradable, negotiable and issued at discount at the money market. These instruments are said to be highly secured and hence the return on investment is comparatively less than other investments. Money Market is the resource of working capital finance for business enterprises.
Capital Market is the source of capital assets finance and deals in both debt and equity such as shares, government rated securities.
Capital market deals any value transactions of financial assets with medium and long term maturity period (more than 1 year & more than 5 years respectively).
Capital market is further classified into
- Debt market
- Equity/ Stock market
Loans or debt are arranged in this market whereas the lender provides loans and borrowers agree to repay the amount with interest.
Equity/ Stock Market:
In this market shares or stocks of any company are sold and purchased between two investors. It is also known as various names such as Wallstreet, stock exchange, share market, share bazaar or Dalal street etc. BSE (Bombay Stock Exchange), NSE (National Stock Exchange), NYSE (New York Stock Exchange) are some examples of the equity market.
The equity market is of two categories.
- Primary market
- Secondary market
The primary market also called as New issue market. It deals in IPO (initial public offer) and FPO (follow on public offer). In this market transactions of financial assets happens between investors and companies. The business enterprises raise the funds from this market by diluting their ownership with the help of investment banks or merchant banks.
In this market, only existing shares of a company are traded among different investors and the price of shares depends on actual demand and supply. It is also called as old issues market.
The secondary market is further classified into two segments.
- Spot Market
- Derivatives Market
It is also known as the Cash market. Spot market deals all transactions among investors in cash.
In this market trading of stocks are done in future through a contract between sellers and buyers. Futures, forwards, options, swap are the instruments of the derivative market. These are also known as risk management instruments of the stock market.
As the name suggests foreign exchange ( Currencies of various countries) are sold and purchased in this market.
Now let us explain some uncovered types of the financial market which can be classified on the basis of the following criteria.
- By the nature of financial instruments
Bond Market- Bonds are issued and traded in this market.
Commodity Market- where precious commodities like gold, silver, crude oil etc are sold and purchased.
Over the counter Market- This market includes the business entities having capital 30 lacs to 25 crores. Therefore small and medium companies can also dilute their ownership and raise funds for expansion. The Government of India established OCTEI (Over the Counter Exchange of India) separately for the compliance of the MSMEs.
Thus we learned the structure of the financial market. Financial markets play a vital role in the development of a country. Although the financial market is a broad term, hope you would have understood the whole concept.