Financial market

A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.

There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agences, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers

and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.

Definition

In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE, BSE, NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still,

corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges.

Financial markets can be domestic or they can be international.

Types of financial markets

financial markets can be divided into different subtypes:

Capital markets which consist of:o Stock markets , which provide

financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

o Bond markets , which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

Commodity markets , which facilitate the trading of commodities.

Money markets , which provide short term debt financing and investment.

Derivatives markets , which provide instruments for the management of financial risk.

Futures markets , which provide standardized forward contracts for trading products at some future date; see also forward market.

Insurance markets , which facilitate the redistribution of various risks.

Foreign exchange markets , which facilitate the trading of foreign exchange.

The capital markets may also be divided into primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and

investors, while in secondary market transactions exist among investors.

Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value. Securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount.

Raising capital

Financial markets attract funds from investors and channel them to corporations—they thus allow

corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a short term basis, while capital markets allow corporations to gain long-term funding to support expansion.

Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages.

More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where

existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold.The following table illustrates where financial markets fit in the relationship between lenders and borrowers:

Relationship between lenders and borrowers

Lenders

Financial Intermedia

ries

Financial

Markets

Borrowers

Individuals

Companies

BanksInsurance

CompaniesPension

Interbank

Stock Exchan

Individuals

Companies

FundsMutual Funds

geMoney MarketBond

MarketForeig

n Exchan

ge

Central Governme

ntMunicipali

tiesPublic

Corporations

Lenders

Who have enough money to lend or to give someone money from own pocket at the condition of getting back the principal amount or with some interest or charge, is the Lender.

Individuals & Doubles

Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:

puts money in a savings account at a bank;

contributes to a pension plan;

pays premiums to an insurance company;

invests in government bonds; or

invests in company shares.

Companies

Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via

short term markets called money markets.

There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)

Borrowers

Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase.

Companies borrow money to aid short term or long term cash flows. They also

borrow to fund modernisation or future business expansion.

Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector net cash requirement (PSNCR).

Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by

governments to reduce the value of the debt is to influence inflation.

Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council.

Public Corporations typically include nationalised industries. These may include the postal services, railway companies and utility companies.

Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets.

Borrowers having similar needs can form into a group of borrowers. They can also

take an organizational form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their borrowings.

Objective basis for the introduction

The financial markets are inevitable product of market economy, the emergence and existence of this market comes from the objective requirements of the settlement of the conflict between demand and supply capacity in major capital economic development. The economy has always existed two conflicting state between a demand and a party is the ability of capital. This conflict was originally settled by the bank's activities as an intermediary in

relations between the borrowed capital and capital needs. When the commodity economy is highly developed, many forms of raising new capital raised and more flexible development, better contribute to the solution of the balance between supply and demand for financial resources in society, as matched funding tools such as bonds, shares of the business, government bonds ... - It is the papers of value, referred to as securities. And it appears from the need to purchase, sale, transfer between different owners of securities. This causes the appearance of a market to balance supply and demand for capital in the economy as the financial markets.

Therefore, the objective basis for the emergence of financial markets is resolved conflicts between supply and demand for capital in the economy through financial instruments, especially the types of securities, give rise need to purchase, transfer of securities between the different stakeholders in the economy. The development of commodity economy and currency is the peak of the market economy gives rise to a new market is the financial market.

Financial market formation and development associated with the development of market economy. The development of market economy gave rise to the entity to finance and

those who are able to provide financial resources. As the economy growing market, the activities on the issue and sale of securities also developed, formed a separate market to make provision for financial resources to meet more easily and conveniently, that the financial markets.

Tools of the financial markets

To transfer the right to use the financial resources, the main tool used on the financial market as securities. Securities are documents or papers as indicated on the

electronic system confirm the legal rights of certificate holders for which the issuer; or stock certificates or book entries, correct recognize the legitimate rights and interests of the owner of such documents to the issuer.

Securities are many different types; securities can be classified according to different criteria:Based on the time period:

Short-term securities, for less than 1 year;Medium and long term securities. Medium term from 1 to 5 years is more than 5 years term.

Based on the subject of issue:

Securities of central government and local;Securities of banks and credit institutions;Securities of corporation.

Based on income:

Stable income SecuritiesUnstable Income securities

Based on legal standards:

Beares securitiesRegistered Securities

Based on the nature of securities:

Stocks (equity securities);Bonds (debt securities);Derivative securities.

Based on the nature of the issuer:

Primary marketSecondary market

Financial market structure

Based on the time to use funds raised

1.The money market: As financial markets have only short-term instruments (maturity less than 1 year);

2.Thi capital market: The market place for buying and selling long-term debt instruments such as stocks and bonds. Capital markets are divided into three parts as the stock market, mortgage loans and bonds.

Based on the method of raising debt financing 1.The debt market: the most common methods that companies use to borrow on financial markets is to borrow a tool, such as bond or a mortgage loans. The debt instrument is an agreement contract with the nature of fixed interest rate and repayment term capital late period. Maturity is less than 1 year is short, on a year long and medium term. Debt market is a market place for

buying and selling of debt instruments mentioned above;2.The equity market: The second method is to attract companies to issue shares. Shareholders own part of the assets of a company. They would receive dividend from the company net profit after deducting expenses, taxes and payments to creditors (holders of debt instruments).

Based on the flow of financial resources 1.Thi primary market: As the financial market place where buying and selling securities are issued or new securities. The buying and selling securities on a market level is often conducted through intermediary

banks;2.Thi secondary marketl: The market traded securities issued. When the operation takes place to buy or sell securities on the market of securities who has received money from the sale of securities issuers are not paid more, a company which is only collected when it sold the securities of first on the primary market.

The functions and role of financial markets

1.Transfer funds from the owners may be able to provide financial resources to the entity to finance: Financial markets serve as a channel

funds from savers to businesses. Help for the transfer of funds from no profitable investment opportunities to those who have profitable investment opportunities.Financial markets and promote the accumulation of concentrated capital to meet the needs of construction material and technical basis, production and business.Financial markets make effective use of capital, not only for investors who have money but with people who borrow money to invest. The lender will profit through interest rates. Borrowers must calculate capital loans that use the most effective

because they have to repay principal and interest to the lender at the same time to generate income and accumulate for them.Financial markets to create favorable conditions for the implementation of the open-door policy, economic reforms by the Government through means such as issuing bonds abroad, selling shares, attracting FDI in addition to the business sector in the country.Financial markets allow the use of valuable papers, stocks, bonds, money exchange.

2. Providing liquidity for the

securities;3. Providing economic information and assess the value of the business.

The role of financial markets

1. Financial attract and financial resources from local and abroad, encouraging people savings and investment;2.Thi financial contribution to promoting, improving financial efficiency;3.Thi financial performance in fiscal policy, monetary policy of the state.