What is Financial Market?

Financial markets are the avenues which transact financial securities and help connect investors and financial assets. It includes different markets such as capital market, forex market, commodities market, etc. Therefore, understanding what is financial market can be crucial to navigate through the investing journey. 

As per a report, 45% of the young investors in India prefer stock market investment. This trend and inclination towards financial markets like stock market, debt market, etc., is a key feature of modern-day investing. Let’s understand the different types of financial market and their examples to better ascertain the suitability.

How does the Financial Market Work?

Exchange is a crucial part of human history, and most innovations are set in the background of this objective. Such exchange activity underscored the importance of the market. 

• Financial markets are also the virtual place for the exchange of financial instruments, which allows fractional ownership of corporate organisations.
• The financial market meaning is associated with an avenue for connecting investors with those who need capital. This space allows individuals to buy, sell or trade financial assets. 
• The investors, their demand-supply force, economic cycle, government policies, geopolitical situations, etc., contribute significantly to the financial market. Based on instruments, the financial market meaning has a wider scope.

In India, a person needs to open a dematerialised (Demat) account to transact such securities. As of November 2024, there are nearly 18 crores active demat accounts in India. It shows how people are growingly inclined towards financial markets in India. 

Example of Financial Market

Investors can clarify the financial market definition and its scope by seeing different types of financial markets and selecting the suitable ones. Let’s explore some common examples of financial markets:

1. Stock Exchange: It includes both the stock exchanges and the debt market. The former is a crucial income source for the corporations. Mainly there are two types of issues in the stock exchange setup – Primary (IPO market) and Secondary (regular exchange). Two of the most prominent stock indices in India are Nifty 50 and BSE Sensex. 

These indices belong to two prominent exchanges in the country – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The stock market does not prescribe a minimum investment limit and is an attractive avenue for earning direct market returns. However, due to this feature, the risk factor of this market is very high.

2. Bond Market: Another part of the capital market is debt. It includes bonds, debentures, Securitised Debt Instruments (SDIs), etc. It can be considered a more secure market as debt becomes a mandatory obligation for the entities. In FY24, the total bond market in India is valued at ₹217 trillion.
3. Commodity Market: This is one of the markets that have the closest effect on human activities and life. It trades commodities like raw materials, agri produce, minerals, metals and more. Therefore, prices decided in this market by these necessary commodities become a part of the expense for humans. 

What are the Different Types of the Financial Market?

Due to the availability of different instruments, there are varied types of financial markets, such as:

• Capital Markets

In these platforms usually, long-term securities are traded, and companies raise funds by issuing instruments like stocks and bonds. Here supply and demand of these securities determine the price levels. 

Here, the financial market meaning is associated mainly with the stock market and bonds market. Investors are part owners of the issuing entity with these instruments.

• Money Market

It is a short-term asset market where instruments have less than a year of maturity. Even overnight tenured assets are categorised under the money market. It includes instruments like treasury bills, commercial papers, repurchase agreements, etc. However, this market may prescribe specific entry or exit barriers for the investors.

• Forex Market

These are the platforms for transacting currencies. Based on these transactions, demand-supply is determined, and foreign exchange is decided. Due to global exposure, their effect on overall economic policies and conditions in a country can be significant. Investors with a potential risk appetite may find it a suitable avenue.

• Derivatives Market

These are contracts based on the price movement of the underlying. In this category, futures will have delivery facilities, but options are only binding contracts. Here, market forces are more crucial rather than exchange.

• Commodity Market

In this market, commodities like agricultural produce, metals, finished raw materials, etc., are transacted. It has derivatives contracts and affects the prices of these commodities a lot.

• Over-the-Counter Market: Popularly abbreviated as OTC, the market is responsible for trading unlisted securities. Due to this missing regulatory feature, the risk is significantly high, but investors can get exposure to different market instruments through it.

What Are the Functions of Financial Markets?

Financial markets can play a crucial role in providing investment opportunities to the investors and financial resources to the companies. Some of the common functions of financial market are:

• It helps investors invest their savings, and mobilises this savings to their desired companies.
• Provides most liquidity to the investment.
• Acts as a meeting point for buyers and sellers.
• Reduces overall time and effort due to being the one-stop destination for a particular financial security.
• Helps in price-discovery with the help of market forces.

Conclusion

Understanding what is meant by financial market is not enough, its horizon is wide enough to accommodate a range of instruments, such as commodities, stocks, derivatives, bonds, currencies, etc. Understanding it thoroughly can help investors align the suitable market with their financial and investment objectives. 

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FAQs on What is the Financial Market

1. What are the factors that influence financial markets?

The price movements and market forces are the result of multiple factors together. Geopolitical events, natural disasters, government policies, domestic crises, economic events, investor sentiment, etc., can affect the financial markets and instruments.

2. What are some probable risks that influence financial markets?

Market exposure is considered risky due to the heavy influence of different factors. Some of the common risks in the market are default, liquidity, demand-supply factors, operational, etc. Assessing their levels is crucial to sailing through the investment journey.

3. Are financial markets the stock exchanges?

Usually, these two terms are used synonymously. However, they differ as stock exchange or stock market is a type of financial market. Mainly, financial market is a large term and includes different types of asset markets.

4. What is a forex market?

It is a decentralised market format that allows trading currencies to determine the value in comparison with one another. It is a crucial market affecting exchange rates, government policies, trade between the governments, etc. It is mainly done for speculation and hedging.

5. What are different types of derivatives?

Derivatives are a contract to transact a particular asset at future date and price. Mainly there are 4 types of derivatives such as futures, options, forwards and swaps. These are further classified based on their nature of buy or sell.