Free Business Studies - Class 12th (CBSE) - Revision Notes - N10 - Financial Markets

Financial Markets

A Financial Market is a market for the creation and exchange of financial assets.
An economic system consists of two main sectors - households which save funds and business firms which invest these funds.
A financial market helps to link the savers and the investors by mobilizing/Moving funds between them. (Allocative Function)
It allocates or directs funds available for investment into their most productive investment opportunity. The process by which the allocation of funds is done is called financial intermediation.
Financial markets exist wherever a financial transaction occurs.
Financial transactions could be in the form of creation of financial assets such as the initial issue of shares and debentures by a firm or the exchange of existing financial assets like equity shares, debentures and bonds.

Functions of the Financial Markets

Allocative function A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use.
Facilitating Price Discovery In the financial market, households are suppliers of funds and business firms represent the demand. The interaction between the forces of demand and supply helps to establish a price for a financial asset being traded in the financial market.
Providing Liquidity to Financial Assets Financial markets facilitate easy purchase and sale of financial assets. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
Reducing the Cost of Transactions Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. The financial market is thus a common platform where buyers and sellers can meet for the fulfilment of their individual needs.

Types of Financial Markets

Money Market

Money market is a market for short-term funds which deals in assets whose period of maturity is up to one year. It enables the raising of funds for meeting the temporary shortages of cash and obligations and the temporary deployment/usage of excess funds for earning returns.
A money market is a market where low-risk, unsecured and short-term debt instruments that are highly liquid are issued and actively traded every day. It has no physical location, but is an activity conducted over the telephone and through the Internet.
Major Participants in the Money Market are:

Capital Market

Capital market refers to institutional arrangements through which medium and long-term funds, both debt and equity are raised and invested.
It does not deal with channelizing savings for less than one year.
The capital market transfers money from savers to entrepreneurial borrowers/business.
The capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of the capital market and are very important elements of the capital market.

Differences Between the Money Market and The Capital Market

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