2. FINANCIAL MARKET
A FINANCIAL MARKET IS A MARKET, OR AN
ARRANGEMENT OR AN INSTITUTION THAT
FACILITATES THE EXCHANGE OF FINANCIAL
INSTRUMENTS AND SECURITIES.
THESE INSTRUMENTS INCLUDE SHARES, STOCKS,
BONDS, DEBENTURES, COMMERCIAL PAPERS, BILLS,
CHEQUES ETC.
DEFINITION :
3. The economy must provide a link between savings and
investments. Savings can be turned into investments
through banks or through financial markets.
Through financial markets, the households use their
savings to buy financial instruments and commodities
such as shares, stocks, debentures etc.
When the allocation of funds is done well, there are some
added benefits, such as :
1. The rate of return on their savings will be higher for
householders, than what a bank offers.
2. The resources will be invested in firms that have high
productivity and show great promise in the economy.
CONCEPT OF FINANCIAL MARKET :
4. WORKING OF FINANCIAL
MARKETS -
For example, the company XYZ ltd, which requires the
funds to start a new project but at present, it doesn’t
have such funds. On the other side, there are investors
who have spare money and want to invest in some
areas where they can get the required rate of
expected returns.
So, in that case, the financial market will function
where the company can raise funds from the investors
and the investors can invest their money through the
help of the financial market.
5. FUNCTIONS OF
FINANCIAL MARKETS
(1) MOBILIZATION OF SAVINGS AND THEIR CHANNELIZATION
INTO MORE PRODUCTIVE USES.
(2) FACILITATES PRICE DISCOVERY.
(3) PROVIDES LIQUIDITY TO FINANCIAL ASSETS.
(4) REDUCES THE COST OF TRANSACTIONS.
(5) EASY ACCESS.
(6) RISK SHARING.
(7) CAPITAL FORMULATION.
6. i. For an economy to be successful it is crucial that the money
does not sit idle. Thus, a financial market helps in connecting
those with money with those who require money.
ii. Investors that have savings must be linked with industries that
require investment. So financial markets will enable this
transaction, where investors can invest their savings according
to their choices and risk assessment. This will utilize idle funds
and the economy will boom.
iii. Many financial instruments are made available for transferring
finance from one side to the other side. The investors can invest
in any of these instruments according to their wish.
(1) MOBILIZATION OF SAVINGS AND
THEIR CHANNELIZATION INTO MORE
PRODUCTIVE USES.
7. i. The price of any goods or services is determined by the
forces of demand and supply. Like goods and services, the
investors also try to discover the price of their securities.
The financial market is helpful to the investors in giving
them proper price.
ii. The financial commodities traded in a financial market get
their prices from the rules of demand and supply. The
investors or the household are the suppliers of the funds,
and the industries are the ones demanding them. The
interaction between the two and other market factors will
help determine the prices.
(2) FACILITATES PRICE
DISCOVERY.
8. i. Buyers and sellers can decide to trade their securities anytime.
They can use financial markets to sell their securities or make
investments as they desire.
ii. The instruments sold in the financial market tend to have high
liquidity. This means at any given time the investors can sell their
financial commodities and convert them to cash in a very short
period. This is an important factor for investors who do not want
to invest long term.
iii. This is a market where the buyers and the sellers of all the
securities are available all the times. This is the reason that it
provides liquidity to securities. It means that the investors can
invest their money, whenever they desire, in securities through the
medium of financial market. They can also convert their
investment into money whenever they so desire.
(3) PROVIDES LIQUIDITY TO
FINANCIAL ASSETS.
9. i. The trader requires various types of information while
doing the transaction of buying and selling the securities
in financial markets.
ii. The financial market makes available every type of
information regarding securities without spending any
money. In this way, the financial market reduces the cost
of transactions.
(4) REDUCES THE COST OF
TRANSACTIONS.
10. i. Both investors and industries need each other. The
industries require the investors for raising the funds
and the investors require the industries for investing
its money and earning the returns from them.
ii. The financial market provides a platform where both
the buyers and sellers can find each other easily
without spending too much time, money or effort.
(5) EASY ACCESS.
11. i. Financial market performs the function of the risk-
sharing as the person who is undertaking the
investments are different from the persons who are
investing their fund in those investments.
ii. With the help of the financial market, the risk is
transferred from the person who undertakes the
investments to those persons who provide the funds
for making those investments.
(6) RISK SHARING.
12. i. Producing more goods and services can lead to an increase in
national income levels. To accumulate additional capital, a
country needs to generate savings and investments from
household savings or based on government policy. Countries
with a high rate of household savings can accumulate funds to
produce capital goods faster, and a government that runs a
surplus can invest the surplus in capital goods.
ii. Financial markets provide the channel through which the new
savings of the investors flow in the country which aid in the
capital formation of the country.
(7) CAPITAL FORMULATION.
13. EXAMPLE :
Caterpillar (CAT) is one of the largest producers of
construction equipment in the world. CAT produces
equipment that other companies use to create goods and
services.
The firm is a publicly traded company and raises funds by
issuing stock and debt. If household savers choose to
purchase a new issue of Caterpillar common stock, the
firm can use the proceeds to increase production and to
develop new products for the firm’s customers.
When investors purchase stocks and bonds issued by
corporations, the firms can put the capital at risk to
increase production and create new innovations for
consumers. These activities add to the country's overall
capital formation.
14. CONCLUSION
Financial markets are the backbone of a country’s
economy and are essential for the growth and
development of the nation. It plays a crucial role in the
allocation of the limited resources available in the
economy of any country by acting as an intermediary
between savers and the investors.
These markets involve a massive amount of risk. But
when done wisely and strategically, they are highly
beneficial for the individuals, business firms, financial
institutions, brokers and various other parties involved
in it.