Financial Market: Meaning, Definition, Types, Functions, Example (2024)

A financial market is a word that describes a marketplace where bonds, equity, securities, currencies are traded. Few financial markets do a security business of trillions of dollars daily, and some are small-scale with less activity. These are markets where businesses grow their cash, companies decrease risks, and investors make more cash.

Meaning of Financial Markets

A Financial Market is referred to space, where selling and buying of financial assets and securities take place. It allocates limited resources in the nation’s economy. It serves as an agent between the investors and collector by mobilising capital between them.

In a financial market, the stock market allows investors to purchase and trade publicly companies share. The issue of new stocks are first offered in the primary stock market, and stock securities trading happens in the secondary market.

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Types of Financial Markets

• Over the Counter (OTC) Market – They manage public stock exchange, which is not listed on the NASDAQ, American Stock Exchange, and New York Stock Exchange. The OTC market dealing with companies are usually small companies that can be traded in cheap and has less regulation.
• Bond Market – A financial market is a place where investors loan money on bond as security for a set if time at a predefined rate of interest. Bonds are issued by corporations, states, municipalities, and federal governments across the world.
• Money Markets – They trade high liquid and short maturities, and lending of securities that matures in less than a year.
• Derivatives Market –They trades securities that determine its value from its primary asset. The derivative contract value is regulated by the market price of the primary item — the derivatives market securities, including futures, options, contracts-for-difference, forward contracts, and swaps.
• Forex Market – It is a financial market where investors trade in currencies. In the entire world, this is the most liquid financial market.

Functions of Financial Market

Mentioned below are the important functions of the financial market.

• It mobilises savings by trading it in the most productive methods.
• It assists in deciding the securities price by interaction with the investors and depending on the demand and supply in the market.
• It gives liquidity to bartered assets.
• Less time-consuming and cost-effective as parties don’t have to spend extra time and money to find potential clients to deal with securities. It also decreases cost by giving valuable information about the securities traded in the financial market.

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Classification of Financial Market

The financial market can be classified into three different forms.

1.By Nature of Claim

1. Debt Market – It is a market where fixed bonds and debentures or bonds are exchanged between investors.
2. Equity Market – It is a place for investors to deal with equity.

2. By Maturity of Claim

1. Money Market – It deals with monetary assets and short-term funds such as a certificate of deposits, treasury bills, and commercial paper, etc. which mature within twelve months.
2. Capital Market – It trades medium and long term financial assets.

3. By Timing of Delivery

1. Cash Market – It is a market place where trade is completed in real-time.
2. Futures Market – Here, the delivery or compensation of products are taken in the future specified date.

4. By Organizational Structure

• Exchange-Traded Market – It has a centralised system with a patterned procedure.
• Over-the-Counter Market – It has a decentralised organisation with customised procedures

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What are Financial Markets and Institutions?

Financial markets dispense efficiently flow of investments and savings in the economy and facilitate the growth of funds for producing goods and services. The right blend of financial products and instruments and financial markets and institutions fuels the demands of investors, receiver and the overall economy of a country.

Financial markets (bonds and stocks), instruments (derivatives, bank CDs, and futures), and institutions (banks, pension funds, insurance companies, and mutual funds) give the investors the opportunities to specialize in specific services and markets. As quoted by Demirgcc-Kunt and Levine “Financial markets and financial institutions together contribute to economic growth and not the relative mix of these two factors”.