A good Financial Market helps in wealth creation and provides connectivity between savings and Investments that enables meeting the short-term and Long term financial needs of the household and corporate sector. In this blog, we will discuss the Basics of the Financial Market.
Before knowing what Financial Market is, let's discuss what is Market?
A market is an area where goods and services are bought and sold. In any economy, money rotates at various places. Everyone wants to earn money and profit . And where does this come from? The simple answer is an investment in the market. A market is a structure of institutions, structures, procedures, social relations, or infrastructures whereby parties engage in exchange.
The financial market is the market for exchanging and creating financial assets. Therefore, it helps channel the savings to the most productive uses and find the value of financial assets. If you think about any economy, you will find two types of people there- People having extra money, and people who require money.
The market that helps carry our transactions between these groups is called the financial market. The transaction will occur only when there is some benefit to both parties. The person offering money will either want interest or share in the business in profit or benefits. The person taking money will do something to earn a profit, such as he can do a business.
This financial market can be categorized in two ways-
Organized Financial Market
The organized Financial Market is mainly composed of-
- The commercial banks,
- Cooperative banks and discount houses,
- Acceptance houses and
- Land mortgage banks.
Example- The transaction completed within the purview of a particular law is called an organized financial market.
Unorganized Financial Market
The unorganized sector is outside the jurisdiction of the Central Bank. However, it is characterized by a lack of uniformity in their business dealings. For instance, if an individual takes money from a moneylender, it has become unorganized because it does not fall under specific rules and regulations.
Financial markets perform the following essential functions-
Mobilize the remaining money and put it for more productive use-
Where the saver's money is stagnant, there is no increase; The finance market makes it dynamic and provides the saver with various options to be a part of the financial market. In this manner, the surplus money becomes part of some productive work that helps in creating new resources.
Liquidity for financial assets
Financial market provides easy selling and buying of a financial asset and provides liquidity. Financial Market helps in converting financial assets into cash quickly.
Lowering the Cost of Transaction
If there is no financial market, a person can imagine how much funds and time can be wasted doing the same marketing. The financial market reduces the problems like where to sell, whom to sell etc., and makes various necessary information available.
A capital market is a place where different entities trade various financial instruments. These places may include the stock market, currency, foreign exchange markets, bond markets, etc. It is a place where savings and investments are managed between suppliers who have capital and need capital. Entities that have capital include retail and institutional investors. At the same time, those who need capital include businesses, governments, and ordinary people.
The capital market is categorized into two parts-
I. Primary Market
When a company raises money from investors for the first time by selling some of its stakes through the stock exchange, it has to present an Initial Public Offer. This is called the primary market. Companies reach investors through the primary market by listing on the stock exchanges (BSE, NSE, etc.). If a company wants to bring an Initial Public Offer, it has to give information about its finance, promoter, business, number of shares, price, etc.
II. Secondary Market
A secondary market is a market where shares of a listed company are bought and sold. In this market, another person buys shares in real-time at the market price of a person. Then, an investor gets the facility to exit the market by selling his shares to someone else.
An investor can trade in securities through a stock exchange. Brokers are registered members of the recognized stock exchange in which the investor is trading his securities. In addition, brokers are allowed to trade on the advanced trading system. SEBI issues a certificate of registration to the member brokers.
As far as the difference between the primary market and secondary market is concerned, the points given below are noteworthy:
Securities are first issued in a market known as the primary market, which is then listed for trading on a recognized stock exchange, known as the secondary market.
Prices are fixed in the primary market, while prices in the secondary market vary depending on the demand and supply of the securities traded.
The primary market provides new and older companies financing for expansion and diversification. In contrast, the secondary market does not offer funding to companies, as they are not involved in transactions.
In the primary market, the investor can buy shares directly from the company. Unlike the secondary market, investors buy and sell stocks and bonds among themselves.
Category of Secondary Market
Now we will discuss the category of Secondary Market.
The Secondary market is categorized into two parts :
- Stock exchange and
- Over-the-counter market.
Stock exchanges are centralized platforms where securities are traded. Transactions in the stock exchanges are subject to strict regulations. A stock exchange acts as a guarantor. There is almost negligible counterparty risk. Such a safety net is achieved through the high transaction costs levied on the Investment in the form of commission and exchange fees.
Over the Counter (OTC) Market
Over-the-counter markets are decentralized, in which the participants are linked for trading among themselves. For example, the OTC market reduces the risk of fraud between the participants, where both parties deal with each other. The Foreign Exchange Market (Forex) is an example of an over-the-counter market. There is intense competition in an OTC market to achieve high volumes. Due to this factor, the price of securities varies from seller to seller.
In a nutshell, we can say that the Financial Market leads to lower search and transaction costs in the economy by providing a diversified collection of Financial products. The financial markets regulate the allocation of credit throughout the economy and facilitate the production of goods and services.