Financial Markets - Overview, Structure, and Types

 What is Financial Market?

A market is defined as a place where goods and services are bought and sold. Along similar lines, a financial market is one where financial products and services are bought and sold regularly. Financial markets deal in the purchase and sale of different types of investments, loans, financial services, etc. The demand and supply of financial instruments determine their price, and the price is, therefore, quite dynamic.

Financial markets form a bridge between investors and borrowers. It brings together individuals and entities that have surplus funds and those who are in a deficit of funds so that funds can be transferred between them. This transfer of funds is done through different types of financial instruments that operate in the financial markets.

Structure of the Indian financial market

The Indian financial market is divided into two main types – the money market and capital market. The capital market is further sub-divided into different types of financial markets. Let's understand –

 

Let’s understand each type of financial market in details –

Money market

The money market is a marketplace for short-term borrowing and lending. Securities that have a maturity period of less than a year are traded on money markets. The assets traded in money markets are usually risk-free and are very liquid. Since the maturity period is low, the risk of volatility is low, and the returns are also low. Money market instruments are debt oriented instruments with fixed returns. Some common examples of money market instruments include Treasury Bills, Certificates of Deposits, Commercial Papers, etc.

Capital market

Contrary to the money market is the capital market, which deals in long-term securities. Securities whose maturity period is more than a year are traded on the capital market. Capital market trades in both debt and equity-oriented securities. Individuals, companies, financial institutions, NRIs, foreign institutional investors, etc. are participants of the capital market. The capital market is divided into two sub-categories which are as follows –

• Primary market

Also called the New Issue Market, the primary market is that part of the capital market, which is engaged in the issuance of new securities. The newly issued securities are then purchased from the issuer of such securities directly. For instance, if a company offers an IPO (Initial Public Offering) and sells its shares to the public, it forms a part of the primary capital market. Investors directly buy the shares from the company, and no middlemen are involved. Similarly, if an already listed company issues more shares, called Follow-on Public Offerings (FPO), such shares can be bought by investors directly from the company.

• Secondary market

The secondary capital market is where the securities bought in the primary capital market are traded between buyers and sellers. Stock trading is a very common example of a secondary capital market wherein investors sell their owned stocks to interested buyers for a profit. A secondary market is characterised by an intermediary and the trading of securities takes place with the help of such intermediary. While securities in the primary market can be traded only once, securities in the secondary market can be traded any number of times. The stock exchange is a part of the secondary market wherein you can trade in stocks of different companies that have already been offered by the company at an earlier date.

Other types of financial markets

Besides the above-mentioned types of financial markets, there are other types of financial markets operating in India. These include the following –

• Commodity market

This market deals in the trading of a commodity like gold, silver, metals, grains, pulses, oil, etc.

• Derivatives market

Derivative markets are those where futures and options are traded.

• Foreign exchange market

Under a foreign exchange market, currencies of different countries are traded. This is the most liquid financial market since currencies can be easily sold and bought. The rate fluctuations of currencies make them favourable for traders who look to book profits by buying at a lower rate and selling at a higher one.

• Bond market

Bond market deals in trading of Government and corporate bonds, which are offered by Governments and companies to raise capital. Bonds are debt instruments that have a fixed rate of return. Moreover, bonds also have a specific tenure, and the bond market is, thus, not very liquid.

• Banking market

The banking market consists of banks and non-banking financial companies which provide banking services to individuals like the collection of deposits, the opening of bank accounts, offering loans, etc.

Financial market and services

The services offered by financial markets today are as follows –

• They provide a platform for buyers and sellers to trade on financial products
• The financial market determines the price of financial instruments traded on it. This price is based on the demand and supply mechanism of the instrument and can move up and down frequently
• The market provides liquidity to investors when they need to sell off their investments for funds
• The market provides funds to borrowers when they need financial assistance
• The Indian financial market is influential in the economic growth of India as a whole
• The financial market helps in mobilization of funds from investors to borrowers

Thus, the financial market and its services are varied, and that makes the financial market an important component of the Indian economy.

Regulators of financial markets

Financial markets and services offered by them should be regulated so that the participants of the market follow the laws of trading. As such, there are different regulators of the market that ensure that all participants trade fairly. These regulators are as follows –

• Reserve Bank of India

RBI is the regulator for banks and non-banking financial companies. It is the central bank of India entrusted with the formulation of monetary policies, credit policies, and foreign exchange policies, among others. Banks and financial institutions have to abide by RBI's rules and regulations to work in the financial market.

• Securities and Exchange Board of India

SEBI is the primary regulator of the capital market, which consists of both the primary as well as the secondary capital market. Trading done in the capital market is governed under SEBI's rules and laws.

• Insurance Regulatory and Development Authority

IRDA governs the rules and regulations which are to be followed by insurance companies and their intermediaries. Thus, IRDA is a regulator of the insurance market, both life, and general insurance market.

Financial markets today have evolved and have become quite competitive with the participation of multiple players. They directly play a part in the growth of India's economy and allows investors and borrowers to trade in financial products and services in an easy and smooth manner. To take advantage of the Financial markets and varied investing opportunities, consider the team at IndiaNivesh, which is well-versed with types of markets and regulatory bodies.

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

Ref: https://www.indianivesh.in/kb-blog/what-is-financial-market