Financial Markets

A financial market is a place where financial assets are created or transferred. It can be broadly categorized into money markets and capital markets. Money market handles short-term financial assets (less than a year) whereas capital markets take care of those financial assets that have a maturity period of more than a year.

Six Functions of Financial Markets

  • Borrowing and Lending: Financial markets permit the transfer of funds(purchasing power) from one agent to another for either investment orconsumption purposes.
  • Price Determination: Financial markets provide vehicles by which prices are set both for newly issued financial assets and for the existing stock of financial assets.
  • Information Aggregation and Coordination: Financial markets act as collectors and aggregators of information about financial asset values and the flow of funds from lenders to borrowers.
  • Risk Sharing: Financial markets allow a transfer of risk from those who undertake investments to those who provide funds for those investments.
  • Liquidity: Financial markets provide the holders of financial assets with a chance to resell or liquidate these assets.
  • Efficiency: Financial markets reduce transaction costs and information costs.

In attempting to characterize the way financial markets operate, one must consider both the various types of financial institutions that participate in such markets and the various ways in which these markets are structured.

The key functions are:

  • Assist in creation and allocation of credit and liquidity.
  • Serve as intermediaries for mobilization of savings.
  • Help achieve balanced economic growth.
  • Offer financial convenience.

One more classification is possible: primary markets and secondary markets.

Primary markets handle the new issue of securities in contrast secondary markets take care of securities that are presently available in the stock market.

Financial markets catch the attention of investors and make it possible for companies to finance their operations and attain growth. Money markets make it possible for businesses to gain access to funds on a short term basis, while capital markets allow businesses to gain long-term funding to aid expansion.

Without financial markets, borrowers would have problems finding lenders. Intermediaries like banks assist in this procedure. Banks take deposits from investors and lend money from this pool of deposited money to people who need a loan. Banks commonly provide money in the form of loans.