What Are Financial Markets?

- marketplace where the trading of securities occurs.

- market, an arrangement or institution where the traders are involved in the buying and selling of the
financial assets
- facilitates the exchange of financial instruments and financial securities
Example
- shares, bonds, derivatives, commodities, currencies

different types of FM
Over-the-Counter Markets

-An over-the-counter (OTC) market is a decentralized market—meaning it does not have physical
locations, and trading is conducted electronically—in which market participants trade securities directly
between two parties without a broker.
- handles the exchange of publicly traded stocks that are not listed on the NYSE, Nasdaq, or the
American Stock Exchange.
Example
-

Bond Markets
- A bond is a security in which an investor loans money for a defined period at a pre-established interest
rate.
- The bond market sells securities such as notes and bills issued by the United States Treasury, for
example. The bond market also is called the debt, credit, or fixed-income market.
Example
- Treasury Bonds, corporate bonds, and municipal bonds.

Money Markets
Typically the money markets trade in products with highly liquid short-term maturities (of less than one
year) and are characterized by a high degree of safety and a relatively low return in interest.
Example
-

Derivatives Market
A derivative is a contract between two or more parties whose value is based on an agreed-upon
underlying financial asset (like a security) or set of assets (like an index). Derivatives are secondary
securities whose value is solely derived from the value of the primary security that they are linked to.
Example
-

Forex Market
The forex (foreign exchange) market is the market in which participants can buy, sell, exchange, and
speculate on currencies.
Example
- The forex market is made up of banks, commercial companies, central banks, investment management
firms, hedge funds, and retail forex brokers and investors.
The Commodities Market
is where companies offset their futures risks when buying or selling natural resources. Since the prices
of things like oil, corn, and gold are so volatile, companies can lock in a known price today. Since these
exchanges are public, many investors also trade in commodities for profit only. They have no intention
of purchasing large quantities of pork bellies, for example.
Example
- Oil is the most important commodity in the U.S. economy. It is used for transportation, industrial
products, plastics, heating, and electricity generation. When oil prices rise, you'll see the effect in gas
prices about a week later. If oil and gas prices stay high, you'll see the impact on food prices in about six
weeks.
- Another important commodity is gold. It's bought as a hedge against inflation. Gold prices also go up
when there is a lot of economic uncertainty in the world.

Fuctions of FM
#1 – Price Determination
The financial market performs the function of price discovery of the different financial instruments
which are traded between the buyers and the sellers on the financial market. The prices at which the
financial instruments trade in the financial market are determined by the market forces

So the financial market provides the vehicle by which the prices are set for both financial assets which
are issued newly and for the existing stock of the financial assets.
Example: demand and supply in the market.

#2 – Funds Mobilization
the required return out of the funds invested by the investor is also determined by participants in the
financial market. The motivation for persons seeking the funds is dependent on the required rate of
return which is demanded by the investors.

it is signaled that how funds which available from the lenders or the investors of the funds will get
allocated among the persons who are in need of the funds or raise the funds through the means of
issuing financial instruments in the financial market. So, the financial market helps in the mobilization of
the savings of the investors.
Example:

#3 – Liquidity
Liquidity function of the financial market provides an opportunity for the investors to sell their financial
instrument at its fair value
Example:

#4 – Risk sharing
Financial market performs the function of the risk-sharing as the person who is undertaking the
investments are different from the persons who are investing their fund in those investments.

With the help of the financial market, the risk is transferred from the person who undertakes the
investments to those persons who provide the funds for making those investments.
#5 – Easy Access

The industries require the investors for raising the funds and the investors require the industries for
investing its money and earning the returns from them. So the financial market platform provides the
potential buyer and seller easily, which helps them in saving their time and money in finding the
potential buyer and seller.

#6 – Reduction in transaction costs and provision of the Information

The trader requires various types of information while doing the transaction of buying and selling the
securities. For obtaining the same time and money is required.

But the financial market helps in providing every type of information to the traders without the
requirement of spending any money by them. In this way, the financial market reduces the cost of the
transactions.

#7 – Capital Formation
Financial markets provide the channel through which the new savings of the investors flow in the
country which aid in the capital formation of the country.