Liboon, Waynie FM3A 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 agencies, 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. Financial Market, in very crude terms, is a place where the savings from various sources like households, government, firms and corporate are mobilized towards those who need it. Alternatively put, financial market is an intermediary which directs funds from the savers (lenders) to the borrowers. In other words, financial market is the place where assets like equities, bonds, currencies, derivatives and stocks are traded.

Basic Functions of Financial Market: Financial market has emerged as one of the biggest markets in the world. It is engaged in a wide range of activities that cater to a large group of people with diverse needs. Six key functions of Financial Market are: 1. Borrowing & Lending: Financial market transfers fund from one economic agent (saver/lender) to another (borrower) for the purpose of either consumption or investment. 2. Determination of Prices: Prices of the new assets as well as the existing stocks of financial assets are set in financial markets. 3. Assimilation and Co-ordination of Information: It gathers and co-ordinates information regarding the value of financial assets and flow of funds in the economy. 4. Liquidity: The asset holders can sell or liquidate their assets in financial market. 5. Risk Sharing: It distributes the risk associated in any transaction among several participants in an enterprise. 6. Efficiency: It reduces the cost of transaction and acquiring information.

Major Players in Financial Market: The main participants in the financial market are as follows:
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BANKS: Largest provider of funds to business houses and corporate through accepting deposits. INSURANCE COMPANIES: Issue contracts to individuals or firms with a promise to refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc.

Liboon, Waynie FM3A FINANCE COMPANIES: Engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public. MERCHANT BANKS: Funded by short term borrowings; lend mainly to corporations for foreign currency and commercial bills financing. COMPANIES: The surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies. MUTUAL FUNDS: Acquire funds mainly from the general public and invest them in money market, commercial bills and shares. GOVERNMENT: Authorized dealers basically look after the demand-supply operations in financial market. Also works to fill in the gap between the demand and supply of funds.

Components of Financial Market The financial market can be classified into several sub-types. The components are:

1. CAPITAL MARKET: It consists of stock market and bond market. Works by issuing common stock or bonds. 2. COMMODITY MARKET: Provides for trading in commodities. 3. MONEY MARKET: Facilitates short-term debt financing and investment. 4. DERIVATIVES MARKET: Specializes in financial risk sharing and risk management. 5. FUTURES MARKET: Issues contracts for trading commodities at some future date. 6. INSURANCE MARKET: Also specializes in re-distribution of various risks. 7. FOREIGN EXCHANGE MARKET: Specializes in trading of foreign exchange and international currencies.

Liboon, Waynie FM3A Capital Market is a market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Capital Market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market instruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting. Significance, Role or Functions of Capital Market Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development. 1. Mobilization of Savings: Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activates the ideal monetary resources and puts them in proper investments. 2. Capital Formation: Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. 3. Provision of Investment Avenue: Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. 4. Speed up Economic Growth and Development: Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. 5. Proper Regulation of Funds: Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. 6. Service Provision: As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.

Liboon, Waynie FM3A 7. Continuous Availability of Funds: Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy. The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the over all development of an economy.

Money Market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos). The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgageand asset-backed securities.[1] It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. Common money market instruments
 

  

  

Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit unions. Repurchase agreements - Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States. Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association. Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate. Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.

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Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future. Short-lived mortgage- and asset-backed securities

Functions of Money Market Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors. The major functions of money market are given below: 1. To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions. 2. To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. 3. To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. 4. To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy. 5. To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy. 6. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this dose not leads to increases in the prices. Apart from those, money market is an arrangement which accommodates banks and financial institutions dealing in short term monetary activities such as the demand for and supply of money.