Financial Markets

Concept

A financial market is the mechanism through which lenders and borrowers exchange their money with the help of intermediaries. In other words, a financial market is the place where fund suppliers and fund borrowers are brought together, with the help of financial intermediaries, directly or indirectly. It is the market in which people trade financial securities like shares, bonds, debentures, etc. The financial market facilitates capital formation through the transfer of scattered savings into productive investments.

Household savers, the surplus units acting as lenders, supply their funds into the financial market, and the financial market in turn channels those funds onward to business firms, the deficit units acting as borrowers.

Types of financial market

A financial market consists of two sectors: the money market and the capital market.

1. Money market

A money market is a market for short term instruments that are close substitutes for money. These short term instruments are highly liquid, easily marketable, and carry little chance of loss. The money market provides for the quick and dependable transfer of short term debt instruments maturing in one year or less. Money market instruments include Treasury bills, certificates of deposit, commercial paper, commercial bills, etc.

2. Capital market

The capital market is a broad term for the market in which buyers and sellers link up to exchange financial securities. Generally, capital markets are the markets where investors can purchase bonds from companies, and common shares and preferred stock from companies and government entities. Such securities normally have a maturity period of more than one year. In Nepal, NEPSE represents the capital market.

Difference between money market and capital market

Types of capital market

The capital market has two independent and inseparable segments: the primary market and the secondary market.

1. Primary market

The primary market is a market where newly issued securities are traded. It exclusively deals with the issue of new securities, that is, securities that are issued to investors for the very first time. It helps investors invest their savings and extra funds in companies starting new projects or looking to expand. The issue of securities can take place through methods such as the Initial Public Offer (IPO), in which the company invites investors to invest via an advertisement.

2. Secondary market

The secondary market is a market where existing or already issued securities are traded. Activities in the secondary market are usually carried out on the floor of the stock exchange, where buyers and sellers of securities meet to deal through stock brokers who are dealing members of the exchange. The defining characteristic of the secondary market is that investors trade among themselves.

Difference between primary market and secondary market

Types of secondary market

• Organized market: This is the market where only listed securities are traded. The price of securities is determined by demand and supply, so it is also called an auction market. In this market the physical location, time for trading and commission are fixed. Examples of organized markets are the New York, Tokyo and London stock exchanges, and the NYSE. Minimum requirements for listing include the number of years in business, past record of earnings, total value of assets, number of shares outstanding, etc.
• Over the counter (OTC) market: Securities which are not traded in an organized market, usually due to an inability to meet listing requirements, are traded in the OTC market. For such securities, brokers and dealers negotiate directly with one another over a computer network, and their activities are monitored by the National Association of Securities Dealers (NASD). In this market the price of securities is determined on the basis of negotiation. The OTC market has been operating since Jestha 2065 B.S. for delisted securities (as stated in the source).