Financial MarketsFinance » Market
In the ordinary sense, a market is a place where buyers and sellers come together to transact good and services. In financial sense, it is a place where financial instruments like commercial bills, commercial papers, treasury bills etc are traded for short-term and long-term in order to meet the financial requirements of the users and the investors of funds. Financial markets play an important role when we talk about developing economies. It comprises of various financial sub-markets and institutions like primary market, secondary market, banks, financial institutions, non-banking financial intermediaries, insurance sector, pension sector, stock market, mutual funds, asset management companies and many more. It is one of the oldest and fastest growing market in the Indian economy. A financial market is broadly classified into money market and capital market. However, there are other types of markets which also form an integral part of the financial market of an economy. Let me inform about the different types of markets in detail.
- Capital Market
Capital market is the market where long-term funds are traded. It refers to all the facilities and the institutional arrangements for borrowings and lending term funds. It does not deal in capital goods, but is concerned with the raising of money capital. Indian capital market has grown rapidly during the last few years. Many factors have contributed towards the growth of the capital market. It has played an important role in India's industrial growth. A capital market is composed of those who demand funds, i.e., borrowers and those who supply funds, i.e., lenders. An ideal capital market will provide capital at a reasonable rate of return for any business or industrial firm. The consistent expansion of the corporate enterprises since 1951 has called for a development of the capital market in India.
- Money Market
Money market is the market where short-term funds are traded. In simple terms it means that all the financial assets or instruments which can be easily converted into money are traded in this market. The short-term money requirement of the borrowers can be easily met with the funds provided by the money market. It is classified into organized sectors which includes indigenous bankers, moneylenders and chit funds; Organized sector which includes RBI, public sector banks, private sector banks, foreign banks, Indian banks, developmental banks and other financial institutions like LIC, IFC, UTI and IDBI The financial transaction of the country are cleared with the help of money market instruments. Hence, they play a vital role for strengthening the financial position of the economy.
- Commodity Market
A commodity market is a market where primary products are bought and sold under legal contracts. The primary products that are traded here can be a part of the FMCG sector, metal sector and energy sector etc. The instruments under this market are exchanged by using certain techniques like spot trading, future contracts, forward contracts, hedging of funds etc. The exchange can be a physical exchange of commodities or it can be done through derivatives trading. Investors who wish to diversify their portfolio must include commodities as a part of their investment. The commodity market in India has opened doors for the retail investors to compete in the economy. It can become a separate class of investment just like shares and mutual funds for the market-savvy investors.
- Derivatives Market
A derivative market is a market where derivatives are exchanged or traded. In simple terms, a derivative is a type of security whose market price is determined with the help of the assets associated with the financial instrument. The value of the derivatives fluctuates with the fluctuation in the assets. The assets associated with the derivatives are mostly shares, bonds, commodities, currencies etc. A contract is formed between two or more parties under the derivative market. It can be classified as Credit Derivatives, Future Contracts, Options, Swaps and Forward Contracts. The two broad classification of derivatives market is the over-the-counter market and exchange traded market. It plays an important role for managing the risk associated with the financial and non-financial institutes.
- Foreign Exchange Market
A foreign exchange market is also known as forex market, currency market or FX market. It is a global market wherein currencies of various countries are traded. This market determines the conversion rate of the currencies. The forex market is considered to be the largest financial market in the world. According to the statistical information, a forex market records a daily transaction of trillions of dollars worth of currencies on an average. The foreign exchange market started operating in the year 1978 in India. It is the most liquid market in the world because the instrument used for trading is currency. The traders of such a market include central banks, financial institutions, institutional investors and currency speculators.
- Insurance Market
An insurance market is a market where insurance policies are bought and sold. The insurance policy is bought by individuals to provide a cover for contingent risks. The product traded in this market is insurance policy. The buyers include individual buyers and group buyers. Insurance is an important part of the financial market of an economy.
A financial market helps in raising capital and managing the monetary risks of an economy. The global financial transactions of a nation can be easily cleared because of the existence of financial markets. These markets have also encouraged and developed international trade over the years. It has greatly contributed in bringing the economies close together and reducing the trade barriers across the globe.