Financial market is a marketplace where entities can trade financial securities (stocks & bonds), commodities (precious metals & agricultural goods) at low transactions costs and at prices that reflect supply and demand. In other words, financial market is a place where buyers and sellers participate in the trade of assets such as stocks & bonds, currencies, commodities, equities etc.
Functions of Financial Market:
- Interaction of buyer and seller
- Helps in raising capital
- Provides liquidity
- Reduces transacting cost
Flow of Funds:
- Direct Transfer: Business sells its assets directly to investors.
- Indirect Transfer through Investment Bankers: Investment banker acts as middleman and facilitates issuance of securities by reselling the securities to savers.
- Indirect Transfer through Financial Intermediary: Bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities.
A financial asset is an unsubstantial asset that derives value because of a contractual claim.
Classification of financial Assets:
Equity is the residual interest in the assets of the entity after deducting all the liabilities. For instance, ordinary share capital, retained earnings.
When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. For instance, bonds.
An investment product that combines the attributes of an equity security with a debt security. Examples of hybrid instruments are preferred stocks.
Classification of Financial Market:
Money Market: Financial assets with maturity one or less then one year.
Capital Market: Financial assets with maturity more then one year.
Debt Market: Financial assets with fixed claim.
Equity Market: Financial assets having residual claim.
Primary Market: Financial markets in which financial assets first time offer for sale.
Secondary Market: Financial markets in which share are offer for sale ones they are issued.
Exchange Market: Financial markets that operates from a central location.
Over the Counter Market: Financial markets which doesn’t operates from a specific central locations, transactions are made via telephones, computers etc.