In a business environment, generally there is involvement of two parties: one who invests money or lends money and other one who borrows or uses money. Financial markets acts as link between these two parties.
Financial market can be defined as transmission medium between investors and borrowers through which funds transfer is facilitated. It consists of individual investors, intermediaries, financial institutions.
Functions of financial market
The financial market is primarily divided into two types:
Money market is the market for short-term funds which deals in financial assets whose period of maturity is up to one year. It provides market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. It helps the business units, other organisations and the Government to borrow the funds to meet their short-term requirement.
Money market is network of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The Reserve Bank of India is the regulator of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, UTI, etc. also operate in the Indian money market.
Money Market Instruments
Capital market is the market dealing with medium-term and long-term funds. It constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. Securities Exchange Board of India (SEBI) is the regulator of capital market in India. Capital market is further divided into two categories:
It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market. The major players in this market are merchant bankers, mutual funds, financial institutions, and the individual investors.
The secondary market is also known as stock market or stock exchange. It is that market in which the buying and selling of the previously issued securities is done. The major players in this market are merchant bankers, mutual funds, financial institutions, individual investors and stockbrokers.
Read next: Foreign Exchange Market in India ››
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