Money, Banking & Financial Market

Financial Market:

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:

  1. Direct Transfer:  Business sells its assets directly to investors.
  2. Indirect Transfer through Investment Bankers: Investment banker acts as middleman and facilitates issuance of securities by reselling the securities to savers.
  3. Indirect Transfer through Financial Intermediary: Bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities.

Financial Assets:

A financial asset is an unsubstantial asset that derives value because of a contractual claim.

Classification of financial Assets:

  • Equity

Equity is the residual interest in the assets of the entity after deducting all the liabilities. For instance, ordinary share capital, retained earnings.

  • Debt

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.

  • Hybrid:

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:

  • Maturity:

Money Market: Financial assets with maturity one or less then one year.

Capital Market: Financial assets with maturity more then one year.

  • Claim:

Debt Market: Financial assets with fixed claim.

Equity Market: Financial assets having residual claim.

  • Issue:

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.

  • Structure:

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.