FINANCIAL MARKET

Financial market is refered to a geographical place where savers and investors meet.

Savers counts all those individuals, households etc, that save their money. Whereas, investors counts all those firms that invest that money for other economic purposes.

So, basically a financial market is place where these savers and investors meet. A financial market is directly able to provide funds to the investors for various purposes. This leads to-

1) A higher rate of return to savers,

2) The funds generated are allocated to the firms so that they can have a higher productivity.

Now, the firms has two ways to get funds or rather we say there are two alternatives to allocate funds-

a) via banks- individuals save their excess money in bank which inturn lend these funds to firms in form of loan,

b) via financial market- individuals can buy shares or debentures of a business of their choice which will give the respective co. their funds.

Thus, a financial market mobilizes funds to both firms and individuals and help in growing their money.

There are many functions performed by a financial market:-

1) It’s major function is to allocate saved funds to a proper place so that both parties will able to get benefits.

2) We know that the price of a good is set by the interaction of demand and supply of that good, similarly the price of an financial asset is set by the demand generated by the firms and supply of funds by households.

3) Market also provide liquidity to assets ie it makes an easy task for an assets holder to sell his assets into cash whenever needed.

4) It reduces the cost of transaction by a intermediary because it provides all info about traded securities that easily help seller or buyer to perform.

DIVISION OF FINANCIAL MARKET——–

A) MONEY MARKET:-                              

1) It is a market where all those assets are sold whose approx. period of maturity is upto or generally less than one year.

2) In this market unsecured, low risk and highly liquid assets are  traded every day.

3) Major participants are RBI, banks mutual funds etc.

B) CAPITAL MARKET:-

1) It is a market from where long term funds can be raised and invested.

2) Here, public funds are provided directly to the firms for various industrial and commercial purposes.

3) It can be further studied as primary and secondary markets.

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