1. Meaning of Financial Market:
A financial market is a platform that facilitates the exchange of financial assets like shares, bonds, debentures, etc. It brings together buyers and sellers of financial instruments.
2. Functions of Financial Market:
Mobilization of savings and channeling them into productive uses
Facilitates price discovery
Provides liquidity to financial assets
Reduces the cost of transactions
Facilitates trading of securities
3. Types of Financial Markets:
There are two main types:
A. Money Market
Deals in short-term funds (maturity < 1 year)
Instruments: Treasury bills (T-bills), Commercial paper (CP), Certificate of deposit (CD), Call money, etc.
Participants: RBI, commercial banks, mutual funds, etc.
B. Capital Market
Deals in long-term securities (maturity > 1 year)
Comprises two parts:
Primary Market (New Issue Market): Where companies issue new securities to raise capital
Secondary Market (Stock Exchange): Where existing securities are traded among investors
4. Difference Between Capital Market and Money Market:
| Basis | Capital Market | Money Market |
|---|---|---|
| Duration | Long-term funds | Short-term funds |
| Instruments | Shares, Debentures, Bonds | T-bills, CP, CD, Call money |
| Participants | Investors, companies | RBI, banks, financial institutions |
| Returns | Generally higher | Comparatively lower |
5. Stock Exchange:
A stock exchange is an organized marketplace for buying and selling shares and other securities.
Provides a regulated, safe, and transparent platform for trading.
Functions of Stock Exchange:
Provides liquidity and marketability of securities
Helps in price determination through demand and supply
Ensures safety and fairness in transactions
Contributes to capital formation
Acts as a barometer of economic health
6. SEBI (Securities and Exchange Board of India):
Established: 1992 (statutory body)
Objective: To protect investor interest and regulate the securities market.
Functions of SEBI:
A. Protective Functions:
Prohibiting insider trading
Educating investors
Regulating unfair trade practices
B. Regulatory Functions:
Regulating stock exchanges
Registering brokers and mutual funds
Monitoring corporate takeovers
C. Developmental Functions:
Promoting fair practices
Investor education programs
Training of intermediaries
Conclusion:
The financial market plays a vital role in economic development by efficiently allocating resources and ensuring smooth capital flow in the economy. Institutions like SEBI ensure the integrity and trustworthiness of these markets.