An Introduction to Financial Market

A market where bonds, stocks, securities, and currencies are exchanged is referred to as a financial market. A small number of financial markets, some of which are smaller and have less activity, deal in securities worth trillions of dollars every day. These are the markets where firms increase their revenue, companies lower their risk, and investors increase their profits.

Meaning and Definition

Definition

Brigham Eugine F has defined a Financial Market as “The place, where people and organizations, wanting to borrow money, are brought together with those having surplus funds, is called Financial Market.”

Meaning 

A financial market is defined as a venue for the trading of securities and financial assets that helps a country's economy allocate its finite resources. It bridges the gap between capital mobilization and investors by acting as a middleman.

The stock market, which is a part of the financial markets, allows investors to purchase and sell shares of publicly traded corporations. The primary stock market is where new stocks are issued, while the secondary market is where stock securities are traded.

Classification of Financial Markets

The financial market can be classified into three different forms:

1. By Nature of Claim

Debt Market – It is a market where investors exchange fixed bonds and debentures or bonds.

Equity Market –It is a location where investors can handle equities.

2. By Maturity of Claim

Money Market –It deals with financial assets and short-term funds that mature in less than a year, like commercial paper, treasury bills, and certificates of deposit.

Capital Market –It deals in long-term and medium-term financial assets.

3. By Timing of Delivery

Cash Market – It's a marketplace where transactions are made instantly.

Futures Market – In this case, the products are delivered or compensated for at the later date that is stated.

4. By Organizational Structure

 Exchange-Traded Market – It features a standardized process and a centralized system.

 Over-the-Counter Market – Its organization is decentralized and its processes are tailored.

What Are the Main Functions of Financial Markets?

Although there are other reasons why financial markets exist, their primary purpose is to facilitate the effective distribution of capital and assets within a financial economy. The financial markets facilitate the flow of capital, financial obligations, and money on a free market, which improves the efficiency of the world economy and enables investors to profit from capital gains over time.

Importance of Financial Markets

There are many things that financial markets make possible, including the following:

• No matter how big or small, investors and debtors will always be treated fairly and properly in the financial markets.

• They give people, businesses, and governmental entities access to capital.

• Because the financial markets provide a large number of job opportunities, they aid in lowering the unemployment rate.

How Do Financial Markets Work?

Diverse players join together to exchange financial assets including stocks, bonds, currencies, and commodities on the complex financial market. The interplay between buyers and sellers determines the pricing of these assets since the market is driven by supply and demand. Individual investors, mutual funds, pension funds, banks, and brokerage firms are some of the different market participants.

Primary and secondary markets are two ways to classify the market. Companies provide new securities on the primary market to raise capital, and investors exchange these securities on the secondary market. Numerous factors, including company performance, investor attitude, geopolitical events, and economic conditions, are reflected in market pricing. With a wide range of financial goods and instruments, including derivatives and options, the market is complicated.

Government rules and monitoring organizations guarantee equity and openness, giving investors access to the data they need to make wise choices. Through the financial market, which connects savers and those in need of money, it is possible to allocate capital and promote economic growth. It has a significant effect on the world economy.

Regulations in Financial Markets

To maintain stability, fairness, and openness in trading, these are heavily regulated. Although they differ from nation to nation and area to region, financial market laws typically fall under the following categories:

Securities and Exchange Commission (SEC)

This US regulatory agency is in charge of the securities sector, which includes the stock and bond markets. It upholds legal requirements on businesses to provide the public with financial disclosures and controls securities trading to maintain openness.

Commodity Futures Trading Commission (CFTC)

In the United States, futures contracts on commodities, currencies, and financial instruments are regulated by this regulatory organization. The CFTC upholds legal requirements for ethical trading conduct and guards against futures market manipulation and fraud.

European Securities and Markets Authority (ESMA)

The European Union's regulatory organization is in charge of the stock and bond markets, among other financial markets. It upholds legal requirements to safeguard investors and advance transparency. In addition, ESMA oversees EU-wide financial market regulation.

Financial Conduct Authority (FCA)

The UK's financial markets, including the stock and FX markets, are regulated by this group. FCA upholds consumer protection and fair competition rules while preserving the integrity of the financial system.

International Organization of Securities Commissions (IOSCO)

The global financial markets are supervised by this international association of regulatory authorities. It strives to maintain the stability of the world's financial markets, fosters international collaboration, and establishes standards for financial market regulation.

Conclusion

The money, participation, and liquidity that financial markets offer are critical for both economic stability and growth. Financial markets are necessary for the efficient allocation of capital, yet they also significantly reduce the amount of economic activity that includes trade, investments, and growth opportunities.

The stock and bond markets are used by businesses to raise funds from investors, making markets a vital component of the economy. Speculators make directional bets on future prices by looking at different asset classes. Hedgers utilize the derivatives markets to offset different risks at the same time that arbitrageurs try to profit from mispricings or anomalies seen in different markets. To get paid a commission or other charge, brokers frequently serve as middlemen between buyers and sellers.