2.1 FINANCIAL MARKETS
A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
Types of financial markets
* Capital markets which consist of:
* Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. * Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. * The capital markets may also be divided into primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors. * Commodity markets, which facilitate the trading of commodities. * Money markets, which provide short term debt financing and investment. * Derivatives markets, which provide instruments for the management of financial risk. * Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. * Insurance markets, which facilitate the redistribution of various risks. * Foreign exchange markets, which facilitate the trading of foreign exchange.
Constituents of Financial Market
Based on market levels
* Primary market: Primary market is a market for new issues or new financial claims. Hence it’s also called new issue market. The primary market deals with those securities which are issued to the public for the first time. * Secondary market: It’s a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities.
Based on security types
* Money market: Money market is a market for dealing with financial assets and securities which have a maturity period of up to one year. In other words, it’s a market for purely short term funds. * Capital market: A capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into: (a) industrial securities market (b) Govt. securities market and (c) long term loans market.
Equity Market - With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets. The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks.
Debt market - The market where funds are borrowed and lent is known as...