FINANCIAL MARKET

I. Nature and Purpose of Financial Markets

II. Structure and Role of Financial Markets in
the Financial System
III. Types of Financial Market
a. Physical Market vs Financial Market;
b. Spot vs Future Market;
c. Primary vs Capital Market;
d. Primary and Secondary Market;
e. Private vs Public Markets; and
f. Debt vs Equity Market
 MONEY

Financial market
BUYER & SELLER
Financial Market
• The financial market is a very broad term that primarily refers to a
marketplace where buyers and sellers participate in the trade, i.e.,
buying and selling of assets.
• It is a platform that facilitates traders to buy and sell financial
instruments and securities. These instruments and securities can be
shares, stocks, bonds, commercial papers, bills, debentures, cheques
and more.
Importance
1. Financial markets act as an
intermediary between savers and
investors, or they help savers to
become investors.
2. They also help businesses to
raise money to expand their
business.
3. They also help in lowering
unemployment as these markets
create massive job opportunities.
Investors Financial Borrowers
market
Financial markets serve six basic functions.
These functions are briefly listed below:
• Borrowing and Lending: Financial markets permit the
transfer of funds (purchasing power) from one agent to
another for either investment or consumption purposes.
• Price Determination: Financial markets provide
vehicles by which prices are set both for newly
issued financial assets and for the existing stock of
financial assets.
• Information Aggregation and Coordination: Financial
markets act as collectors and aggregators of information about
financial asset values and the flow of funds from lenders to
borrowers.
Financial markets serve six basic functions.
These functions are briefly listed below:
• Risk Sharing: Financial markets allow a transfer of risk from
those who undertake investments to those who provide funds
for those investments.
• Liquidity: Financial markets provide the holders of financial
assets with a chance to resell or liquidate these assets.
• Efficiency: Financial markets reduce transaction costs and
information costs.
Types of Financial
market
 • PHYSICAL MARKET is a
set up where buyers can
physically meet the sellers
and purchase the desired
merchandise from them in
exchange of money.
• FINANCIAL MARKET is
a broad term describing any
marketplace where trading of
securities including equities,
bonds, currencies, and
derivatives occur.
Physical Asset Market
• are tangible assets that can be seen and touched and can be
liquidated in the event of default in order to pay off debts.

• Physical asset are subject to depreciation, in other words, they

usually experience a reduction in value due to wear and tear of
the asset through continuous use.
Financial Asset Market
• are intangible, they cannot be seen or felt, except for the
documents representing ownership of an asset.

• A financial asset represents a claim on ownership of a company

or legal right to future payments.

• Financial assets do not depreciate or loss value due to wear and

tear like physical assets, it mainly loss value depending on the
market conditions.
 • A SPOT MARKET is a place
where financial instruments like
securities and commodities, like
precious metals or agricultural
produce are bought and sold for
immediate delivery (on a spot
date).

• FUTURE MARKET is an
exchange market where future
contracts are bought and sold.
EQUITIES DEBTS
 BASIS FOR
SPOT MARKET FUTURE MARKET
COMPARISON
Meaning A place where dealing of A place where future
financial instruments is contracts are dealt by
done for immediate people and entities.
delivery.

Time Horizon Normally, trade date + 2 or At a specific future date.

3 days (as the case may
be).
 • MONEY MARKET is part of
financial market where lending
and borrowing takes place for
short-term up to one year.

• CAPITAL MARKET is part of

financial market where lending
and borrowing takes place for
medium-term and long-term.
 BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON
Types of instruments Bills of exchange, Equity shares, bonds,
involved commercial paper, etc. preference shares, etc.

Institutions involved/types Contains financial banks, Involves stockbrokers,

of investors central banks, commercial mutual fund, individual
banks, financial investors, stock exchanges,
companies, etc. insurance companies
 • The PRIMARY MARKET is where
securities are created. It’s in this
market that firms float new stocks and
bonds to the public for the first time.
An initial public offering, or IPO, is an
example of a primary market.

• The SECONDARY MARKET is commonly referred to as the

stock market. The securities are firstly offered in the primary
market to the general public for the subscription where a
company receives money from the investors and the investors get
the securities; thereafter they are listed on the stock exchange for
the purpose of trading.
• The securities are initially issued in a market known as Primary Market,
which is then listed on a recognized stock exchange for trading, which is
known as a Secondary Market.
• The prices in the primary market are fixed whereas the prices vary in the
secondary market depending upon the demand and supply of the traded
securities.
• In the primary market, the investor can purchase shares directly from the
company. In Secondary Market, investors buy and sell the stocks and
bonds among themselves.
• In the primary market, security can be sold only once, whereas in the
secondary market it can be done an infinite number of times.
 • In PRIVATE MARKET, the
transactions are negotiated
directly between two parties.

• In PUBLIC MARKET,
standardized contracts are
traded on organized
exchanges.
• Bank loans and private debt
placements with insurance
companies are examples of private
market transactions. Because these
transactions are private, they may be
structured in any manner to which
the two parties agree.
• Securities that are traded in public
markets (for example, common stock
and corporate bonds) are held by a
large number of individuals. These
securities must have fairly
standardized contractual features
because public investors do not
generally have the time and expertise
to negotiate unique, non-standardized
contracts.
 • The DEBT MARKET is the market
where debt instruments are traded.
Debt instruments are assets that require
a fixed payment to the holder, usually
with interest. Examples of debt
instruments include bonds (government
or corporate) and mortgages.

• The EQUITY MARKET (often referred to as the stock

market) is the market for trading equity instruments. Stocks are
securities that are a claim on the earnings and assets of a
corporation (Mishkin 1998). An example of an equity
instrument would be common stock shares, such as those
traded on the New York Stock Exchange.
• Equity financing allows a company to acquire funds (often for
investment) without incurring debt. On the other hand, issuing a
bond does increase the debt burden of the bond issuer because
contractual interest payments must be paid.
• Those who purchase equity instruments (stocks) gain ownership
of the business whose shares they hold (in other words, they gain
the right to vote on the issues important to the firm). In addition,
equity holders have claims on the future earnings of the firm. In
contrast, bondholders do not gain ownership in the business or
have any claims to the future profits of the borrower. The
borrower’s only obligation is to repay the loan with interest.
• The debt market is vital for economic activity because it is the market
where interest rates are determined. Interest rates are important on a
personal level, because they guide our decisions to save and to finance
major purchases (such as houses, cars, and appliances, to give a few
examples).
• The equity market is equally important for economic activity because it
affects both investment spending and consumer spending decisions. The
price of shares determines the amount of funds that a firm can raise by
selling newly issued stock.
ACTIVITY TIME!!!!!!
1.It is a platform that facilitates
traders to buy and sell
financial instruments and
securities
2. Function of financial markets
where it provide vehicles by
which prices are set both for
newly issued financial assets
and for the existing stock of
financial assets.
3. is part of financial market where
lending and borrowing takes place
for short-term up to one year.
4. allows a company to acquire funds
(often for investment) without incurring
debt.
5. is where securities are created. It’s in this
market that firms float new stocks and
bonds to the public for the first time.
6. In the primary market,
security can be sold only
______.
7. In this market, securities must have fairly
standardized contractual features because
public investors do not generally have the
time and expertise to negotiate unique, non-
standardized contracts.
8. Give 3 functions of financial
market.
REFERENCES
Borad, S.B. (2019). Financial markets – functions, importance, and types. Retrieved from https://efinancemanagement.com/financial-
management/financial-markets-functions-importance-and-types.
Cayabyab, D.
Educba. (n.d.). Difference between primary market vs secondary market. Retrieved from https://www.educba.com/primary-market-
vs-secondary-market/.
Federal Reserve Bank of San Francisco. (2005) .What are the differences between debt and equity markets?. Retrieved from
https://www.google.com/amp/s/www.frbsf.org/education/publications/doctor-econ/2005/october/debt-equity-market/%3famp
Norm Wells. (2018). What is the difference between the physical asset market and the financial asset market? Retrieved from
https://www.quora.com/What-is-the-difference-between-the-physical-asset-market-and-the-financial-asset-market.
Surbhi, S. (2018). Differences between cash market and future market. Retrieved from https://keydifferences.com/difference-
between-cash-market-and-future-market.html.
Tesfatsion, L. (2012). Introductory notes on financial markets. Retrieved from https://www2.econ.iastate.edu/tesfatsi/finintro.htm.
WallStreetMojo. (n.d.). Money market vs capital market differences. Retrieved from httpa://www.wallstreetmojo.com/money-
market-vs-capital-market/.

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