Financial Markets: Overview, Types and Significance

Capital Markets, Financial Market or simply Markets, whatever you call them, these markets are the place where you can buy and sell financial assets. There can be different types of assets including stocks, bonds, derivatives and commodities. These markets also serve as the platform for businesses to raise capital for growth.

Financial Markets: Overview, Types and Significance

1. What is Financial Markets?
2. Types of Financial Markets
   • Stock Market
   • Bond Market
   • Commodity Market
   • Derivatives Market
   • Forex Market
3. Significance of Financial Markets

What is Financial Markets?

Financial markets play a very crucial role in the allocation of limited resources available in the economy of any country. These markets can range from large markets which have transactions of over a trillion amount of securities on a daily basis while some can be very small with limited amount of activities. Financial markets provide a platform for mobilizing the funds between savers and the investors. They are one of the most sought after platforms where buyers and sellers trade in different assets depending on the market.

Financial markets create liquidity and allow businesses to grow and help them raise money for their ventures. These markets reduce the risk by having information publicly available to traders and investors and also help to calm the economy by instilling confidence amongst the investors. This in turn helps in stabilizing the economy.

2. Types of Financial Markets

Financial markets can be broadly classified into five different types depending on the nature of assets traded in them. Let us now discuss about each one of them in detail.

• Stock Market: The stock market is further classified in two categories namely primary market and secondary market. The primary market is used by the companies for raising fresh capital from the market. Companies roll out Initial Public Offerings or IPOs and offer securities or stocks of their company in the primary markets for raising fresh capital for their growth. Once the company is listed on the stock exchanges, these securities or share are available for traders and investors in the secondary market, where the daily trades take place. You can either trade intraday which involves buying or selling a position in a single trading session or carry long-term positions for extracting profits from long term stock price movements.
• Bond Market: For borrowing large sum of money, organizations go to the bond market. It is usually the inverse of the stocks market which means that when the stock prices go up, bond prices go down. There are numerous bonds available in the market like treasury bills, corporate bonds and municipal bonds. Bonds also provide liquidity which help in smooth functioning of the government.
• Commodity Market: Commodity market, similar to all other financial market functions on the basic principle of Demand and Supply. Any alteration in the supply pattern will have an impact on demand and vice versa. Any goods which is used in commerce and can be interchanged with other goods of same types are known as commodities. Some of the examples of commodities include crude oil, gold, silver, natural gas, soybean etc. Commodity market has been attracting investors and traders from long time because trading and investing in commodities is considered as a great initiative for diversification of portfolio beyond traditional stocks. Traders also rely on commodity market during the times of market volatility to balance out their portfolios.
• Derivatives Market: Derivatives are amongst the most preferred choice of traders and investors due to a number of advantages over conventional stocks. Derivatives are financial securities whose values are derived from an underlying asset or group of assets. Derivatives are contracts between two or more than two parties. Whenever there is a fluctuation in the price of the underlying asset, it affects the price of the derivative contract as well. These underlying assets can be stocks, indices, bonds, currencies or even commodities like silver, gold, crude oil etc. The purpose of risk management is perfectly served by trading in derivatives.

• Forex Market: As per the rules framed by SEBI and RBI, no Indian citizen can undertake forex trading in India through any electronic or online forex trading platform under any circumstance. As per the RBI circular of 2013, forex trading is prohibited in India. Forex trading is only legal when it is done through specified foreign exchange trading platforms and the base currency of all trades is Indian Rupee (INR). Simply, in India, you can only trade in currency pairs which are benchmarked against the Indian Rupee.

3. Significance of Financial Markets

Financial Markets hold a prime significance in the economy of a nation and the world. Financial Markets provide a platform where buyers and sellers can trade in financial assets. The prices of the same are defined by the market force, which is the demand and supply mechanism. The savings of the investors are mobilized so that they can be invested for productive uses.

For traders, it is one of the most sought-after platforms which connects them with the prospective buyer or seller for the trade. Investors can liquidate their financial securities in the financial markets. Financial markets thus provide liquidity to the tradable assets as well.

Conclusion

Financial markets are a very lucrative option for most of the investors. However, it must be noted that they come with their own set of risks. Any unplanned decision can wipe out your capital in seconds. Choosing the right market for you depends on a number of factors. It is recommended to take the services of a certified investment advisor who can help you begin your journey in the world of financial markets.

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