Financial markets are the institutional arrangements for trading various types of financial assets and credit instruments such as currency, cheque, bank deposits, bills, bonds, and so on. The financial system of an economy operates through financial markets and institutions.
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Functions of Financial Markets
These are the major functions of Financial Markets
- To make credit and liquidity creation and allocation easier.
- Act as intermediaries for the mobilization of savings.
- To contribute to the process of balanced economic growth.
- To make financial life easier.
- To meet the various credit requirements of businesses.
Types of Financial Markets
These organized financial markets are further divided into two types:
Capital Market
The capital markets are the financial markets for long-term or indefinite-maturity financial assets. In general, it deals with long-term securities with maturities greater than one year. The capital market is further subdivided into three parts:
Industrial securities market
Industrial securities market is, as the name suggests, one of the financial markets for industrial securities, specifically:
- Equity shares or ordinary shares,
- Preference shares and
- Debentures or bonds.
These are the financial markets in which businesses raise capital or debt by issuing appropriate instruments. It is further subdivided into two parts. They are as follows:
Primary market or New issue market
The primary market are the financial markets for new financial issues or claims. As a result, it is also known as the New Issue market. The primary market is concerned with securities that are being issued to the public for the first time. Borrowers exchange new financial securities for long-term funds in the primary market.
As a result, the primary market facilitates capital formation. In a primary market, a company can raise capital in three ways. They are as follows:
- Public issue
- Rights issue
- Private placement
The most common way for new companies to raise capital is through the sale of securities to the general public. It is known as a public issue. When an existing company wants to raise more capital, securities are first offered to existing shareholders on a first-come, first-served basis. It’s known as a rights issue. A private placement is a method of selling securities to a small group of investors privately.
Secondary market or Stock exchange
A secondary market are the financial markets for the purchase and sale of securities. In other words, this market trades securities that have already passed through the new issue market. In general, such securities are quoted on the Stock Exchange, which provides a continuous and consistent market for buying and selling securities. This market includes all stock exchanges recognized by the Indian government.
The Securities Contracts (Regulation) Act of 1956 governs stock exchanges in India. The Bombay Stock Exchange is India’s primary stock exchange, setting the tone for the country’s other stock exchanges.
Government securities market
It is also known as the Gilt-edged securities market. It is a market for trading government securities. Short-term and long-term government securities are available in India. This market trades long-term securities, whereas the money market trades short-term securities.
This market deals in securities issued by the Central Government, State Governments, semi-government authorities such as City Corporations, Port Trusts, Improvement Trusts, State Electricity Boards, All India and state-level financial institutions, and public sector enterprises.
Loans market
Development and commercial banks play an important role in this market by providing long-term loans to corporate clients. The market for long-term loans is further subdivided into:
Term loans market
Many industrial financing institutions have been established in India by the government at both the national and regional levels to provide long-term and medium-term loans to corporate customers, both directly and indirectly. In India, these development banks dominate industrial finance. This category includes institutions such as IDBI, IFCI, ICICI, and other financial corporations.
Mortgage market
A mortgage loan is a loan against the security of immovable property like real estate. The transfer of an interest in a specific immovable property to secure a loan is called a mortgage. This mortgage may be an equitable mortgage or a legal one.
Money Market
The money market is a market for financial assets and securities with maturities of up to one year. In other words, it is a market for only short-term investments. The money market can be divided into four categories. They are as follows:
Call money market
The call money market is a market for loans with terms ranging from one day to fourteen days. As a result, it is extremely liquid. The loans are repayable on demand at the lender’s or borrower’s discretion. Call money markets in India are associated with the presence of stock exchanges and are thus located in major industrial towns such as Bombay, Calcutta, Madras, Delhi, and Ahmedabad. The unique feature of this market is that interest rates fluctuate from day to day, and even from hour to hour.
Commercial bills market
It is a market for Bills of Exchange resulting from legitimate trade transactions. The seller may draw a bill of exchange on the buyer in the case of a credit sale. The buyer accepts such a bill, promising to pay on the specified later date. The seller is not required to wait until the bill’s due date. Instead, by discounting the bill, he can obtain immediate payment.
Treasury bills market
It is a market for treasury bills with “short-term” maturities. A treasury bill is a government-issued promissory note or finance bill. It is highly liquid because the government guarantees its repayment. It is an important tool for the government’s short-term borrowing. Treasury bills are classified into two types: ordinary or regular treasury bills and ad hoc treasury bills, also known as “ad hoc.”
Ordinary treasury bills are issued to the general public, banks, and other financial institutions in order to raise funds for the Central Government’s short-term financial needs. Ad hoc treasury bills are only issued in the name of the RBI. They are not offered for sale by tender or auction. They can only be purchased by the RBI. Ad hoc bills are not marketable in India, but holders can sell them back to the RBI.
Short-term loan market
It is a market where corporate customers can obtain short-term loans to meet their working capital needs. Commercial banks are important players in this market. Short-term loans are made available by commercial banks in the form of cash credit and overdrafts. Overdraft facilities are primarily available to businesses, whereas cash credit is available to industrialists. Overdraft is a temporary accommodation that is provided in the current account. Cash credit, on the other hand, is valid for one year and is authorized in a separate account.