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.
There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.
In finance, financial markets facilitate:
•The raising of capital (in the capital markets)
•The transfer of risk (in the derivatives markets)
•Global transactions with integration of financial markets •The transfer of liquidity (in the money markets)
•International trade (in the currency markets)
Types of financial markets
Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance: for long term finance, the Capital markets; for short term finance, the Money markets. Another common use of the term is as a catchall for all the markets in the financial sector, as per examples in the breakdown below. 1.The money markets
2.The bond market
3.The stock market
4.The mortgage markets
5.The foreign exchange market
6.The international financial system
Roles of Financial Markets
One of the important requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the following manner. •Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets. •Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same. •National Growth: An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposed is also made possible. •Entrepreneurship growth: Financial markets contribute to the development of the entrepreneurial claw by making available the necessary financial resources. •Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.
Functions of Financial Markets
Intermediary Functions: The intermediary functions of financial markets include the following: •Transfer of Resources: Financial market facilitate the transfer of real economic resources from lenders to ultimate borrowers. •Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. •Productive usage: Financial market allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. •Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. •Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process. •Sale Mechanism: Financial markers provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. •Price determinants: Financial market allow for the determination of price of the traded financial asset through the interaction of buyers and sellers. They provide a signal for the allocation of funds in the economy, based on the demand and supply through the mechanism called price discovery process. •Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefits of marketability and liquidity, of such assets. •Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets