Financial Market: Functions And Types of Financial Market

The financial market refers to the institutional arrangement for dealing in financial assets and credit instruments of different types such a currency, cheques, bank deposits, bills, bonds, etc.

Finance is an integral part of modern business. It is the pre-requisite for modern business. It is through financial markets and institutions that the financial systems of an economy work.

Financial markets are the centres or arrangements that provide facilities for buying and selling of financial claims and services.

The corporations, financial institutions, individuals and government trade in financial products on these markets either directly or through the brokers and dealers on organized exchanges or off-exchange.

The participants on the demand and supply sides of these markets are financial institutions, agents, dealers, brokers, lenders, borrowers, savers and others who are interlinked by the law, contracts and communication networks.

The Main functions of Financial markets:

  1. To facilitate the creation and allocation of credit and liquidity.
  2. To serve as an intermediary in the process of mobilization of savings in the economy.
  3. To provide financial convenience to the people.
  4. To help the process of economic improvement through an increasingly balanced regional and sectoral distribution of investible assets.
  5. To meet the various credit needs of the business house.

Types Of Financial Market:

The financial markets are broadly divided into two categories :

  1. Money Market
  2. Capital Market

Financial markets, in essence, are the credit market. They take into account the different credit needs of the people, firms, and organizations. Credits are generally required and supplied on short term or long term basis.

Other Types of Financial Market:

Apart from the money market and capital market, the financial market may also be classified into the following types:-

  1. Organized Market and unorganized market
  2. Primary Market And secondary market
  3. Equity market And debt Market.
  4. Government securities market and industrial securities market.
  5. Foreign exchange market
  6. Housing Finance market
  7. Insurance market.

Money Market :

Money market involves dealing in cash or near money or liquid assets of short term nature. Thus, the money market is essentially concerned with lending and borrowing of cash and also buying and selling of assets which are close substitutes for money and can be quickly converted into money within a short period.

In other words, money market deals in cash or money and also trade bills, promissory notes, government papers, etc which are drawn for short periods.

The dealers in the money market consist of the government, banks, commercial and industrial concerns, stock exchange brokers, dealing in government and other securities, merchants, manufacturers, etc.

Features Of Money Market :

The salient features of the money market are as follows :

1. The flow of short term funds: The money market brings together the lenders who have surplus funds for the short term and the borrowers who are in need of short term funds.

2. Geographical name: A geographical name may be given to a money market according to its location such as the Mumbai money market or the New York money market.

3. Role of Brokers: Dealing in the money market may be conducted with or without the help of brokers or intermediaries.

4. Sub-Markets: Money market consists of many submarkets such as inter-bank call money market, treasury bills market, bills discounting market, etc.

5. Reasonable access: Money market provides reasonable access to users of short term funds to meet their requirements on reasonable terms or rates of interest.

6. Source of Working Capital: Money market constitutes a major source of working capital finance.

Importance of Money Market :

Money market plays an important role in the economy of any country in the following ways :

1. The money market is an important source of financing trade and industry through commercial bills, commercial papers, etc.

2. The money market helps the lenders to earn on their idle or surplus funds for short periods.

3. The money market allows the government to raise funds from investors and commercial banks.

4. The money market acts as a connecting link between all the segments of financial markets like the capital market, foreign exchange market, etc.

5. The money market facilitates the implementation of the monetary policy of the country’s central bank.

Structure of the Indian Money Market :

The Indian money market is composed of two categories of financial agencies :

A) The Organised Sector

B) The Unorganized Sector.

  1. The Organised Sector: This sector contains well established financial institutions. The Reserve Bank of India, at the apex, is the lender of the money market and controls the banking sector. The scheduled and non scheduled commercial banks in the private, as well as the public sector, foreign banks, post office Savings, and co-operative banks, are parts of this scheme.
  2. The Unorganised Sector: The unorganized sector contains agencies that have different strategies, absence of consistency and consistency in the lending business. It includes indigenous bankers, money lenders, and chit funds. The indigenous bankers are known as shroffs, Multanis, Chettiar’s. The Unorganised sector lacks scientific organization, being orthodox in approach, stagnant and I’ll be organised.

Examples Of Organised Sector :

  1. Reserve Bank of India
  2. Commercial Bank
  3. Regional Rural Banks
  4. Cooperative Bank’s
  5. Discount and Finance House of India, Delhi
  6. NBFIs

Examples Of Unorganised Sector :

  1. Indigenous Bankers
  2. Money Lenders
  3. Nidhis
  4. Chit Funds

Capital Market :

Capital market is composed of those who long term funds and those who supply funds. It is concerned with long term financial requirements not only for the private sector industries but also for government and semi-government bodies as well.

The market facilitates dealings in financial assets (or claims) that have a long or indefinite period of maturity. It consists of channels through which the funds supplied are converted into investments.

Examples of capital market :

  1. Shares
  2. Debentures
  3. Bonds
  4. Long term borrowing

Features Of Capital Market :

The main features of the capital market are as follows :

1. Dealing in Securities: Capital market deals in long term marketable securities and non-marketable securities. Marketable securities include shares and debentures issued by companies, bonds issued by the government, mutual funs instruments etc. Nonmarketable securities include term deposits with banks and companies, loans and advances of banks and financial institutions to industrial organization etc.

2. Segments: The capital market includes both primary and secondary markets. The primary market is meant for the issue of fresh capital and the secondary market facilitates buying and selling of second-hand securities.

3. Investors: Capital market includes both individual inventors and institutional investors.

4. The flow of capital: Capital market facilitates the flow of capital from those who supply capital to those who demand capital.

5. Intermediaries: Capital market functions through intermediaries, such as underwriters, bankers, stockbrokers, etc.

Classification/Types of Capital Market :

The capital market has two segments, as shown below :

  1. Organised Capital Market
  2. Unorganised Capital market

A. Organised Capital market :

It consists of the corporate sector, government and semi-government bodies. It is regulated by the Securities and exchange board of India (SEBI) , The Reserve Bank of India and the central government. The organized capital market can further be divided into the following two segments :

  1. Primary market
  2. Secondary market

1. Primary Capital Market: The primary market is also known as the New issue market (NIM). It is the market where new securities (share, bonds, debentures) are sold or purchased for the first time. The new issue market should be distinguished from the secondary market.

2. Secondary Capital Market: Secondary market deals in existing securities. It deals in existing securities like shares, debentures, bonds, etc. which have been issued for the first time in the primary market. This is why exiting securities are called ” Second Hand” securities. The securities available with the investors can be sold through brokers in the stock exchange.

B. Unorganised Capital Market :

It consists of indigenous bankers, money lenders, private leasing and finance company, investment companies, chit funds. Unorganized capital market is not subject to the direct control of the RBI or SEBI.

Frequently Questions And Answers:

1. What are the four different kinds of financial markets?

Ans: Four Types of Financial Markets are – Foreign Exchange Market, Bonds Market, Stock Market, And Derivatives Market.

2. What is mean by Financial Market?

Ans: Financial market means dealing in financial assets and credit instruments of different types such a currency, cheques, bank deposits, bills, bonds, etc.

3. What are the Examples of the Financial Market?

Ans: Cheques, Bank deposits, bills, And Bonds are the example of the Financial market.

4. What are the two major types of financial markets?

Ans: Mainly there are two types of financial markets – Money Market And Capital Market.

5. Are banks a financial market?

Ans: Yes, a bank is a financial market.

6. Is cash a financial asset?

Ans: Yes, cash is financial assets.

7. What are the financial products?

Ans: Financial products mean the things which help you invest, save, insured or get a mortgage. 

8. What are the International financial markets?

Ans: The market which deals from one country to another country or between two countries.

9. Which is the biggest financial market in the world?

Ans: The biggest Financial market in the world is the international financial market.

10. Is a car a financial asset?

Ans: Yes a car is financial assets.

Related:

WHAT IS MONEY MARKET?

Categories Banking

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