INTRODUCTION TO FINANCIAL MARKET

A financial market is a market in which people trade financial securities and

derivatives at low transaction costs. Some of the securities include stocks and
bonds, raw materials and precious metals, which are known in the financial
markets as commodities.

The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock
exchange or commodity exchange. This may be a physical location (such as the
New York Stock Exchange (NYSE), London Stock Exchange (LSE), JSE
Limited (JSE), Bombay Stock Exchange (BSE) or an electronic system such as
NASDAQ. Much trading of stocks takes place on an exchange; still, corporate
actions (merger, spinoff) are outside an exchange, while any two companies or
people, for whatever reason, may agree to sell the stock from the one to the
other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although some

bonds trade on a stock exchange, and people are building electronic systems for
these as well, to stock exchanges. There are also global initiatives such as the
United Nations Sustainable Development Goal 10 which has a target to improve
regulation and monitoring of global financial markets.

What Are Financial Markets?

Financial markets refer broadly to any marketplace where the trading of

securities occurs, including the stock market, bond market, forex market, and
derivatives market, among others. Financial markets are vital to the smooth
operation of capitalist economies.

 Financial markets refer broadly to any marketplace where the trading of

securities occurs.
 There are many kinds of financial markets, including (but not limited to)
forex, money, stock, and bond markets.
 These markets may include assets or securities that are either listed on
regulated exchanges or else trade over-the-counter (OTC).
 Financial markets trade in all types of securities and are critical to the
smooth operation of a capitalist society.
 When financial markets fail, economic disruption including recession and
unemployment can result.
HISTORY OF THE INDIAN FINANCIAL MARKET-

Since historic time period India has always been an agrarian country which is
mainly because of its geographic conditions and its resources which has been
the interests of various people who have tried to take hold of it. The financial
sector India dates back with the establishment of British rule in India. The first
stock exchange was established in Mumbai in 1875, then in Ahmedabad in
1894, Calcutta 1908 and then in Madras in 1937. Though Britishers looted our
country and left us in a miserable state, they established a financial system
which had “clearly defined rules governing listing, trading and settlements, a
well-developed equity culture if only among the urban rich, a banking system
with clear lending norms and recovery procedures, and better corporate laws
than most other erstwhile colonies. The 1956 Indian Companies Act, as well as
other corporate laws and laws protecting the investors’ rights, were built on this
foundation.” 

Though the above mentioned positives stand true the aforementioned negatives
share the same spotlight. “A semi organized and narrow industrial securities
market, devoid of issuing institutions and the virtual absence of participation by
intermediary financial institutions in the long term financing of the industry,
was the state of financial system prior to independence. As a result, the industry
had very restricted access to outside savings. It simply means that the financial
system was not responsive to opportunities for industrial investment. Such a
financial system was clearly incapable of sustaining a high rate of industrial
growth, particularly growth of new and innovating enterprises.” 

After the independence the policy makers adopted for a ‘socialist’ economy to
be practiced in order to drive India to the path of development. ‘Socialist’
economy meant that though the private sector will be present but public sector
will be the major player in the economy. “The Indian financial system remained
a relatively free but unsophisticated market system till the seventies. This
included a private banking sector, fragmented but active stock markets, active
commodity spot and futures markets. The first milestone of India’s socialism
was in the 1950s with the closing of the capital account. More changes came in
the 1960s and 1970s, with the nationalization of financial service providers.
This changed the structure of the financial services industry from a fairly
competitive sector to one dominated by large public sector monopolies. This
period also saw the closure of commodity derivatives markets. This took place
in the latter part of the 1960s, when these markets saw a large number of trader
defaults during a period of three consecutive drought years. At the end of the
seventies, the equity market was the only component of Indian finance that
retained a relatively private sector character. Even here, the State is believed to
have used UTI, the only mutual fund in the country, to influence stock prices.
Also, while secondary market price discovery was relatively free, the Controller
of Capital Issues (CCI) dictated whether, and at what price, firms could sell
shares to the public.” 

Due to the presence of stringencies in the system the cross-check or self-

adjustment mechanism which could have been provided by global capital
markets was absent. The regulatory norms did not provide any room for such
measures. There were huge flaws in the financial system at that point of time.
“Most banks were state owned and had negligible equity capital. Basic concepts
of accounting, asset classifcation, and provisioning were absent. The largest of
the local stock exchanges, Bombay Stock Exchange (BSE), was a closed
market. The exchange focused on the interests of broker members, did not have
outreach across the country, and did not have appropriate structures for
governance and regulation. Financial transactions were controlled by the RBI
(setting interest rates on various products) and the Ministry of Finance
(controlling the price at which securities were issued), with a plethora of price
and quantity restrictions. The financial industry was riddled with entry barriers
in every sub-industry. It was extremely diffcult to start a bank, a mutual fund, a
brokerage firm, an insurance company, a pension fund, a securities exchange or
a broking firm. Apart from banking, foreign firms could not operate in any of
these areas. A comprehensive system of capital controls was in place, which
ensured that domestic households and domestic firms had to go to the domestic
financial system, in order to access financial services. Few areas of the Indian
economy were as dominated by the State as was finance.”  Trying to raise
capital through the means of financial market was not at all feasible due to the
complexities involved.

Apart from the financial sector other sector seemed to be equally constrained
due to the economic policies. The public sector grew very large and the irony
was that it couldn’t generate enough income to meet the requirements of the
country as a result we had large borrowings. By the time the people in the
power came to know about the implication of their decisions, it was too late.
The deficits were huge, the public sector industries were turning out to be
unprofitable and at a point of time the foreign reserves of the country were so
less that it could only have supported countries needs for near about 2 more
weeks. In this case the ‘lender of the last resort’, World bank and IMF were
approached which granted 7 billion dollars as a loan but on the terms that India
would reforms its stringent economic policies and liberalize its economy.

The much needed and awaited reform-

The new economic policy was adopted which focused on three main aspects:
liberalization, privatization and globalization. From being a more socialist than
capitalists it tilted to being majorly capitalists and less socialists. There was a
complete drift in economic policies i.e. basis on which the economic policies
were earlier drafted were no longer in existence and liberal policies were
adopted. This also brought about a sea change in the financial system of the
country. Narsimhan committee was also established which looked at the major
areas in the financial sector which needed reforms such as; reduction in
statutory liquidity ratio and cash reserve ratio (they were astoundingly high
which was also one of the major reasons that few commercial banks were in
existence), the determination of interests rate should be according to the market
forces, the public sector banks should have autonomy.

Due to ease of operation more private players entered the market. There was no
more ‘license raj’ which acted as a stimulus for foreign direct investment. More
and more commercial banks and asset management institutions started emerging
and also utilized the opportunity to raise debt with the backing of insurance
sector. And due to stiff competition in the market there was check and balance
mechanism prevailing with relation to the interests rates. “In addition, foreign
institutional investors (FIIs) were allowed, beginning in 1992; and Indian firms
were allowed to issue global depository rights (GDRs) offshore. These
additional resources provided finance for India’s private sector-led growth in
the mid-1990s, and contributed to a stock market boom.” 

MRTP act was abolished which increased the net quantity of imports and
exports. “Reforms in the stock market were accelerated by a stock market scam
in 1992 that revealed serious weaknesses in the regulatory mechanism. Reforms
implemented include establishment of a statutory regulator; promulgation of
rules and regulations governing various types of participants in the capital
market and also activities like insider trading and takeover bids; introduction of
electronic trading to improve transparency in establishing prices; and
dematerialization of shares to eliminate the need for physical movement and
storage of paper securities. Effective regulation of stock markets requires the
development of institutional expertise, which necessarily requires time, but a
good start has been made and India’s stock market is much better regulated
today than in the past. This is to some extent reflected in the fact that foreign
institutional investors have invested a cumulative $21 billion in Indian stocks
since 1993, when this avenue for investment was opened.” 

To keep a check on the functioning of the stock market and also due to the scam
of 1992, in 1992 SEBI (securities exchange board of India) was established.
Though it was established in 1988 but in 1992 it became a separate body.
Establishment of SEBI had put a check on illicit activities such as insider
trading etc. and also provided a sense of security among investors. It provided a
uniform code of discipline to be followed by the exchanges. It was a major
transformation that took place because of the reform. SEBI also abolished
‘badla’ system which was unique to Indian stock market which was a way of
settlement among traders.

Financial Markets Classification

Financial Markets is a marketplace where creation and trading of financial

assets including shares, bonds, debentures, commodities, etc take place is
known as Financial Markets. Financial markets act as an intermediary between
the fund seekers (generally businesses, government, etc.) and fund providers
(generally investors, households, etc.). It mobilizes funds between them, helping
in the allocation of the country’s limited resources. Financial Markets can be
classified into four categories –

1. By Nature of Claim
2. By Maturity of Claim
3. By Timing of Delivery
4. By Organizational Structure

#1 – By Nature of Claim

Markets are categorized by the type of claim the investors have on the assets of
the entity in which they have made the investments. There are broadly two
kinds of claims, i.e. fixed claim and residual claim. Based on the nature of the
claim, there are two kinds of markets, viz.
Debt Market

Debt market refers to the market where debt instruments such as debentures,
bonds, etc. are traded between investors. Such instruments have fixed claims,
i.e. their claim in the assets of the entity is restricted to a certain amount. These
instruments generally carry a coupon rate, commonly known as interest, which
remains fixed over a period of time.

Equity Market

In this market, equity instruments are traded, as the name suggests equity refers
to the owner’s capital in the business and thus, have a residual claim, implying,
whatever is left in the business after paying off the fixed liabilities belongs to
the equity shareholders, irrespective of the face value of shares held by them.

#2 – By Maturity of Claim

While making an investment, the time period plays an important role as the
amount of investment depends on the time horizon of the investment, the time
period also affects the risk profile of an investment. An investment with a lower
time period carried lower risk as compared to an investment with a higher time
period.

There are two types of market-based on the maturity of claim:

Money Market

Money market is for short term funds, where the investors who intend to invest
for not longer than a year enter into a transaction. This market deals with
Monetary assets such as treasury bills, commercial paper, and certificates of
deposits. The maturity period for all these instruments doesn’t exceed a year.

Since these instruments have a low maturity period, they carry a lower risk and
a reasonable rate of return for the investors, generally in the form of interest.

Capital Market

Capital market refers to the market where instruments with medium- and long-
term maturity are traded. This is the market where the maximum interchange of
money happens, it helps companies get access to money through equity capital,
preference share capital, etc. and it also provides investors access to invest in
the equity share capital of the company and be a party to the profits earned by
the company.
This market has two verticals:

 Primary Market – Primary Market refers to the market, where the

company lists security for the first time or where the already listed
company issues fresh security. This market involves the company and the
shareholders to transact with each other. The amount paid by
shareholders for the primary issue is received by the company. There are
two major types of products for the primary market, viz. Initial Public
Offer (IPO) or Further Public Offer (FPO).
 Secondary Market – Once a company gets the security listed, the
security becomes available to be traded over the exchange between the
investors. The market that facilitates such trading is known as the
secondary market or the stock market.

In other words, it is an organized market, where trading of securities takes place

between investors. Investors could be individuals, merchant bankers, etc.
Transactions of the secondary market don’t impact the cash flow position of the
company, as such, as the receipts or payments for such exchanges are settled
amongst investors, without the company being involved.

#3 – By Timing of Delivery

In addition to the above-discussed factors, such as time horizon, nature of the

claim, etc, there is another factor that has distinguished the markets into two
parts, i.e. timing of delivery of the security. This concept generally prevails in
the secondary market or stock market. Based on the timing of delivery, there are
two types of market:

Cash Market

In this market, transactions are settled in real-time and it requires the total
amount of investment to be paid by the investors, either through their own funds
or through borrowed capital, generally known as margin, which is allowed on
the present holdings in the account.

Futures Market

In this market, the settlement or delivery of security or commodity takes place

at a future date. Transactions in such markets are generally cash-settled instead
of delivery settled. In order to trade in the futures market, the total amount of
assets is not required to be paid, rather, a margin going up to a certain % of the
asset amount is sufficient to trade in the asset.

#4 – By Organizational Structure
Markets are also categorized based on the structure of the market, i.e. the
manner in which transactions are conducted in the market. There are two types
of market, based on organizational structure:

Exchange-Traded Market

Exchange-Traded Market is a centralized market, that works on pre-established

and standardized procedures. In this market, the buyer and seller don’t know
each other. Transactions are entered into with the help of intermediaries, who
are required to ensure the settlement of the transactions between buyers and
sellers. There are standard products that are traded in such a market, there
cannot need specific or customized products.

Over-the-Counter Market

This market is decentralized, allowing customers to trade in customized

products based on the requirement.

In these cases, buyers and sellers interact with each other. Generally, Over-the-
counter market transactions involve transactions for hedging of foreign currency
exposure, exposure to commodities, etc. These transactions occur over-the-
counter as different companies have different maturity dates for debt, which
generally doesn’t coincide with the settlement dates of exchange-traded
contracts.

Over a period of time, financial markets have gained importance in fulfilling the
capital requirements for companies and also providing investment avenues to
the investors in the country. Financial markets provide transparent pricing, high
liquidity, and investor protection, from frauds and malpractices.

Types of financial markets:

Within the financial sector, the term "financial markets" is often used to refer
just to the markets that are used to raise finance. For long term finance, the
Capital markets; for short term finance, the Money markets. Another common
use of the term is as a catchall for all the markets in the financial sector, as per
examples in the breakdown below.

 Capital markets which consist of:

o Stock markets, which provide financing through the issuance of
shares or common stock, and enable the subsequent trading thereof.
 o Bond markets, which provide financing through the issuance of
bonds, and enable the subsequent trading thereof.
 Commodity markets, The commodity market is a market that trades in the
primary economic sector rather than manufactured products, Soft
commodities is a term generally referred as to commodities that are
grown, rather than mined such as crops (corn, wheat, soybean, fruit and
vegetable), livestock, cocoa, coffee and sugar and Hard commodities is a
term generally referred as to commodities that are mined such as gold,
gemstones and other metals and generally drilled such as oil and gas.
 Money markets, which provide short term debt financing and investment.
 Derivatives markets, which provide instruments for the management of
financial risk.
 Futures markets, which provide standardized forward contracts for
trading products at some future date; see also forward market.
 Foreign exchange markets, which facilitate the trading of foreign
exchange.
 Cryptocurrency market which facilitate the trading of digital assets and
financial technologies.
 Spot market
 Interbank lending market

The capital markets may also be divided into primary markets and secondary
markets. Newly formed (issued) securities are bought or sold in primary
markets, such as during initial public offerings. Secondary markets allow
investors to buy and sell existing securities. The transactions in primary markets
exist between issuers and investors, while secondary market transactions exist
among investors.

Liquidity is a crucial aspect of securities that are traded in secondary markets.

Liquidity refers to the ease with which a security can be sold without a loss of
value. Securities with an active secondary market mean that there are many
buyers and sellers at a given point in time. Investors benefit from liquid
securities because they can sell their assets whenever they want; an illiquid
security may force the seller to get rid of their asset at a large discount.

Raising capital
Financial markets attract funds from investors and channel them to corporations
—they thus allow corporations to finance their operations and achieve growth.
Money markets allow firms to borrow funds on a short-term basis, while capital
markets allow corporations to gain long-term funding to support expansion
(known as maturity transformation).

Without financial markets, borrowers would have difficulty finding lenders

themselves. Intermediaries such as banks, Investment Banks, and Boutique
Investment Banks can help in this process. Banks take deposits from those who
have money to save. They can then lend money from this pool of deposited
money to those who seek to borrow. Banks popularly lend money in the form of
loans and mortgages.

More complex transactions than a simple bank deposit require markets where
lenders and their agents can meet borrowers and their agents, and where
existing borrowing or lending commitments can be sold on to other parties. A
good example of a financial market is a stock exchange. A company can raise
money by selling shares to investors and its existing shares can be bought or
sold.

The following table illustrates where financial markets fit in the relationship
between lenders and borrowers:

Relationship between lenders and borrowers

Lenders Financial Intermediaries Financial Markets Borrowers

Interbank Individuals
Banks
Individuals Stock Exchange Companies
Insurance Companies
Companies Money Market Central Government
Pension Funds
Banks Bond Market Municipalities
Mutual Funds
Foreign Exchange Public Corporations

Lenders

The lender temporarily gives money to somebody else, on the condition of

getting back the principal amount together with some interest or profit or
charge.

Individuals and doubles

Many individuals are not aware that they are lenders, but almost everybody
does lend money in many ways. A person lends money when he or she:

 Puts money in a savings account at a bank

 Contributes to a pension plan
 Pays premiums to an insurance company
  Invests in government bonds.

Companies

Companies tend to be lenders of capital. When companies have surplus cash

that is not needed for a short period of time, they may seek to make money from
their cash surplus by lending it via short term markets called money markets.
Alternatively, such companies may decide to return the cash surplus to their
shareholders (e.g. via a share repurchase or dividend payment).

Banks

Banks can be lenders themselves as they are able to create new debt money in
the form of deposits.

Borrowers

 Individuals borrow money via bankers' loans for short term needs or
longer term mortgages to help finance a house purchase.
 Companies borrow money to aid short term or long term cash flows.
They also borrow to fund modernization or future business expansion. It
is common for companies to use mixed packages of different types of
funding for different purposes – especially where large complex projects
such as company management buyouts are concerned.
 Governments often find their spending requirements exceed their tax
revenues. To make up this difference, they need to borrow. Governments
also borrow on behalf of nationalized industries, municipalities, local
authorities and other public sector bodies. In the UK, the total borrowing
requirement is often referred to as the Public sector net cash requirement
(PSNCR).

Governments borrow by issuing bonds. In the UK, the government also borrows
from individuals by offering bank accounts and Premium Bonds. Government
debt seems to be permanent. Indeed, the debt seemingly expands rather than
being paid off. One strategy used by governments to reduce the value of the
debt is to influence inflation.

Municipalities and local authorities may borrow in their own name as well as
receiving funding from national governments. In the UK, this would cover an
authority like Hampshire County Council.
Public Corporations typically include nationalized industries. These may
include the postal services, railway companies and utility companies.

Many borrowers have difficulty raising money locally. They need to borrow
internationally with the aid of Foreign exchange markets.

Borrowers having similar needs can form into a group of borrowers. They can
also take an organizational form like Mutual Funds. They can provide mortgage
on weight basis. The main advantage is that this lowers the cost of their
borrowings.

Derivative products

During the 1980s and 1990s, a major growth sector in financial markets was the
trade in so called derivatives.

In the financial markets, stock prices, share prices, bond prices, currency rates,
interest rates and dividends go up and down, creating risk. Derivative products
are financial products that are used to control risk or paradoxically exploit risk.
It is also called financial economics.

Derivative products or instruments help the issuers to gain an unusual profit

from issuing the instruments. For using the help of these products a contract has
to be made. Derivative contracts are mainly 4 types:

1. Future
2. Forward
3. Option
4. Swap

Seemingly, the most obvious buyers and sellers of currency are importers and
exporters of goods. While this may have been true in the distant past, when
international trade created the demand for currency markets, importers and
exporters now represent only 1/32 of foreign exchange dealing, according to the
Bank for International Settlements.

The picture of foreign currency transactions today shows:

 Banks/Institutions
 Speculators
 Government spending (for example, military bases abroad)
 Importers/Exporters
 Tourists
Analysis of financial markets
Much effort has gone into the study of financial markets and how prices vary
with time. Charles Dow, one of the founders of Dow Jones & Company and The
Wall Street Journal, enunciated a set of ideas on the subject which are now
called Dow theory. This is the basis of the so-called technical analysis method
of attempting to predict future changes. One of the tenets of "technical analysis"
is that market trends give an indication of the future, at least in the short term.
The claims of the technical analysts are disputed by many academics, who
claim that the evidence points rather to the random walk hypothesis, which
states that the next change is not correlated to the last change. The role of
human psychology in price variations also plays a significant factor. Large
amounts of volatility often indicate the presence of strong emotional factors
playing into the price. Fear can cause excessive drops in price and greed can
create bubbles. In recent years the rise of algorithmic and high-frequency
program trading has seen the adoption of momentum, ultra-short term moving
average and other similar strategies which are based on technical as opposed to
fundamental or theoretical concepts of market behaviour.

The scale of changes in price over some unit of time is called the volatility. It
was discovered by Benoit Mandelbrot that changes in prices do not follow a
normal distribution, but are rather modeled better by Lévy stable distributions.
The scale of change, or volatility, depends on the length of the time unit to a
power a bit more than 1/2. Large changes up or down are more likely than what
one would calculate using a normal distribution with an estimated standard
deviation.

Financial market slang

 Poison pill, when a company issues more shares to prevent being bought
out by another company, thereby increasing the number of outstanding
shares to be bought by the hostile company making the bid to establish
majority.
 Bips, meaning "bps" or basis points. A basis point is a financial unit of
measurement used to describe the magnitude of percent change in a
variable. One basis point is the equivalent of one hundredth of a percent.
For example, if a stock price were to rise 100bit/s, it means it would
increase 1%.
 Quant, a quantitative analyst with advanced training in mathematics and
statistical methods.
  Rocket scientist, a financial consultant at the zenith of mathematical and
computer programming skill. They are able to invent derivatives of high
complexity and construct sophisticated pricing models. They generally
handle the most advanced computing techniques adopted by the financial
markets since the early 1980s. Typically, they are physicists and
engineers by training.
 IPO, stands for initial public offering, which is the process a new private
company goes through to "go public" or become a publicly traded
company on some index.
 White Knight, a friendly party in a takeover bid. Used to describe a party
that buys the shares of one organization to help prevent against a hostile
takeover of that organization by another party.
 Round-tripping
 Smurfing, a deliberate structuring of payments or transactions to conceal
it from regulators or other parties, a type of money laundering that is
often illegal.
 Bid–ask spread, the difference between the highest bid and the lowest
offer.
 Pip, smallest price move that a given exchange rate makes based on
market convention.
 Pegging, when a country wants to obtain price stability, it can use
pegging to fix their exchange rate relative to another currency.
 Bearish, this phrase is used to refer to the fact that the market has a
downward trend.
 Bullish, this term is used to refer to the fact that the market has an
upward trend.

Functions of financial markets

 Intermediary functions: The intermediary functions of financial markets
include the following:
o Transfer of resources: Financial markets facilitate the transfer of
real economic resources from lenders to ultimate borrowers.
o Enhancing income: Financial markets allow lenders to earn
interest or dividend on their surplus invisible funds, thus
contributing to the enhancement of the individual and the national
income.
 o Productive usage: Financial markets allow for the productive use
of the funds borrowed. The enhancing the income and the gross
national production.
o Capital formation: Financial markets provide a channel through
which new savings flow to aid capital formation of a country.
o Price determination: Financial markets allow for the
determination of price of the traded financial assets through the
interaction of buyers and sellers. They provide a sign for the
allocation of funds in the economy based on the demand and to the
supply through the mechanism called price discovery process.
o Sale mechanism: Financial markets provide a mechanism for
selling of a financial asset by an investor so as to offer the benefit
of marketability and liquidity of such assets.
o Information: The activities of the participants in the financial
market result in the generation and the consequent dissemination of
information to the various segments of the market. So as to reduce
the cost of transaction of financial assets.

 Financial Functions
o Providing the borrower with funds so as to enable them to carry out
their investment plans.
o Providing the lenders with earning assets so as to enable them to
earn wealth by deploying the assets in production debentures.
o Providing liquidity in the market so as to facilitate trading of funds.
o Providing liquidity to commercial bank
o Facilitating credit creation
o Promoting savings
o Promoting investment
o Facilitating balanced economic growth
o Improving trading floors

Components of financial market

Based on market levels

 Primary market: A primary market is a market for new issues or new

financial claims. Therefore, it is also called new issue market. The
primary market deals with those securities which are issued to the public
for the first time.
  Secondary market: A market for secondary sale of securities. In other
words, securities which have already passed through the new issue
market are traded in this market. Generally, such securities are quoted in
the stock exchange and it provides a continuous and regular market for
buying and selling of securities.

Simply put, primary market is the market where the newly started company
issued shares to the public for the first time through IPO (initial public offering).
Secondary market is the market where the second hand securities are sold
(security Commodity Markets).

Based on security types

 Money market: Money market is a market for dealing with the financial
assets and securities which have a maturity period of up to one year. In
other words, it's a market for purely short-term funds.
 Capital market: A capital market is a market for financial assets that
have a long or indefinite maturity. Generally, it deals with long-term
securities that have a maturity period of above one year. The capital
market may be further divided into (a) industrial securities market (b)
Govt. securities market and (c) long-term loans market.
o Equity markets: A market where ownership of securities are
issued and subscribed is known as equity market. An example of a
secondary equity market for shares is the New York (NYSE) stock
exchange.
o Debt market: The market where funds are borrowed and lent is
known as debt market. Arrangements are made in such a way that
the borrowers agree to pay the lender the original amount of the
loan plus some specified amount of interest.
 Derivative markets: A market where financial instruments are derived
and traded based on an underlying asset such as commodities or stocks.
 Financial service market: A market that comprises participants such as
commercial banks that provide various financial services like ATM.
Credit cards. Credit rating, stock broking etc. is known as financial
service market. Individuals and firms use financial services markets, to
purchase services that enhance the workings of debt and equity markets.
 Depository markets: A depository market consists of depository
institutions (such as banks) that accept deposits from individuals and
firms and uses these funds to participate in the debt market, by giving
loans or purchasing other debt instruments such as treasury bills.
 Non-depository market: Non-depository market carry out various
functions in financial markets ranging from financial intermediary to
selling, insurance etc. The various constituencies in non-depositary
 markets are mutual funds, insurance companies, pension funds, brokerage
firms etc.

Conclusion

Financial markets have particular characteristics that make them unique. They
are considered to have Cardinal regulations on trading, clear pricing strategy
and as well as costs and fees which are well defined. Financial markets are
institutions and procedures that facilitate transactions in all types of
financialsecurities. If the financial markets did not exist, the wealth of the
economy would decrease and the rate of capital formation would not be as high.
They exist in order to allocate the supply of savings from those economic units
with a surplus to those with a deficit. The economy would suffer without a
developed financial market system because the wealth of the economy would be
less without them. Rate of capital formation would not be as high, followed by
the slowed rate ofstock contribution to (1) dwellings, (2) productive plant and
equipment, (3) inventory, and (4) consumer durables. Normal business activities
would be funded slowly or not at all.