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What Is Financial Market? Discuss The Components Of Financial Market?

1323 words - 6 pages

A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
The definition may be termed as:
"Financial Markets are generally known as a market where financial securities or/and assets are bought and sold by the buyers and sellers respectively."
Some of the salient features of financial market are:
• Transparent pricing
• Basic regulations on trading
• Low transaction costs
• Market determined prices of traded securities

Basic Functions ...view middle of the document...

2. INSURANCE COMPANIES: Issue contracts to individuals or firms with a promise to refund them in future in case of any event and thereby invest these funds in debt, equities, properties, etc.

3. FINANCE COMPANIES: Engages in short to medium term financing for businesses by collecting funds by issuing debentures and borrowing from general public.

4. MERCHANT BANKS: Funded by short term borrowings; lend mainly to corporations for foreign currency and commercial bills financing.

5. COMPANIES: The surplus funds generated from business operations are majorly invested in money market instruments, commercial bills and stocks of other companies.

6. MUTUAL FUNDS: Acquire funds mainly from the general public and invest them in money market, commercial bills and shares.

7. GOVERNMENT: Authorized dealers basically look after the demand-supply operations in financial market. Also works to fill in the gap between the demand and supply of funds.
Instruments of Financial Markets:
Financial instruments are those securities/items that are being sold in the financial markets. Some of the common financial instruments used in the financial markets are:
• Treasury Bills (T-Bills)
• Commercial Papers
• Certificate of Deposits
• Repurchase Agreements
• Call Loans
• Shares
• Debentures
• Mortgages

Components of Financial Market:
1. Stocks Markets-
Stock Market is a type of Capital market which deals with the issuance and trading of shares and stocks at a certain price. Most people understand that a stock market is a place where shares are bought and sold, and in essence this is true. Most people understand a stock market is dominated by traders who speculate on the price of shares to make a profit on the difference between the buying and selling price, and in essence this is true.

2. Bond Markets -
Most of the times when stock prices moves up, bond prices moves down. However, there are many different types of bonds including Treasury Bonds corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the economy functioning smoothly.
It's important to understand the relationship between Treasury bonds and Treasury bond yields. Basically, when Treasury bond values go down, the yields go up to compensate. When Treasury yields rise, so do mortgage interest rates. Even worse, when Treasury values decline, so does the value of the dollar. This makes import prices rise, which can trigger inflation. Treasury yields can also predict the future an inverted yield curve usually heralds a recession.
3. Commodity Markets-
Commodities are goods that are typically used as inputs in the production of other goods and services. Commodity prices are determined largely by supply and demand interactions in the global marketplace. Supply and demand conditions may be influenced by factors like the weather, geo-political events, and supply-side shocks (e.g., wars, hurricanes). Some examples of commonly traded commodities are...

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