Financial Market and Its functions

Financial Market is the market for the creation and exchange of Financial Assets. Financial market exists wherever a financial transaction occurs. Financial transaction may be the issuance of short term and long term securities or purchase or sale of these securities.

Functions of financial market are

  • Mobilisation of saving and channeling them into the most productive uses.
  • Price Discovery through the forces of demand and supply.
  • Financial markets facilitates easy purchase and sale of financial assets means it provide liquidity to assets.
  • It reduces the cost of transaction.

Financial markets are classified into two parts

  • Money Market
  • Capital Market

Money Market: It is a market where low risk, unsecured and short term debt instrument that are highly liquid are issued and actively traded everyday. It enables the raising of short term funds for meeting the temporary shortages of cash and obligations and the temporary deployment of excess funds for earning returns. The major participants in the market are the Reserve Bank of India, Commercial Banks, Non Banking Finance Companies, State governments, Large Corporate Houses and Mutual Funds.

Capital Market: The term capital Market refers to facilities and institutions arrangements through which long-term funds; both debt and equity are raised and invested. The Capital Market consists of development banks, commercial Banks and stock exchanges. The Capital market can be divided into two parts (a) Primary Market (b) Secondary Market