Market

A market as defined by economists is an institution or arrangement that facilitates the purchase and sale of goods and services, and other things

Financial Markets

Financial Market
A financial market is an institution or arrangement that facilitates the exchange of financial instruments, including deposits and loans, corporate stocks and bonds, government bonds, and more exotic instruments such as options and futures contracts. A market wherein financial instruments such as financial claims, assets and securities are traded is known as a 'financial market'. According to Brigham, Eugene F, "The place where people and organizations wanting to borrow money are brought together with those having surplus funds is called a financial market."

Financial Market
Financial market transactions may take place either at a specific place or location, e.g. stock exchange, telephone, telex, or other electronic media.

Reward
In financial markets, the price for the use of investible funds is the interest paid on the funds transacted.

LOCATION

A financial market may or may not have a particular physical existence. For instance, the New York Stock Exchange (NYSE) is physically located on Wall Street in New York City. Lahore Stock Exchange is Located at Khayaban-e-Aiwan-eIqbal Alternatively, the over-the-counter (OTC) market for stocks, called the National Association of Securities Dealers (NASD) has no fixed place of existence. It consists of brokers throughout the country who track prices via computer and telecommunication lines. NASD is best known for the newspaper quotes of stock prices it generates called NASDAQ (National Association of Securities Dealers Automatic Quotation System).

ROLE
One of the important requisites for the accelerated development of an economy is the existence of a dynamic and a resilient financial market. A financial market is of great use for a country as it helps the economy in the following manner

ROLE
Savings Mobilization Obtaining funds from the savers or 'surplus' units such as household individuals, business firms, public sector units, Central Government, State Governments, Local Governments, etc is an important role played by Financial markets. Investment Financial markets play a key role in arranging to invest funds thus collected, in those units which are in need of the same. National Growth An important role played by financial markets is that they contribute to a nation's growth by ensuring an unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible.

ROLE
Entrepreneurship Growth Financial markets contribute to the development of the entrepreneural class by making available the necessary financial resources, etc. Industrial Development The different components of financial markets help an accelerated growth of industrial and economic development of a country thus contributing to raising the standard of living and the society's well-being.

FUNCTIONS

Intermediary Functions
Transfer of resources Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. Enhancing income Financial markets allow lenders earn interest/dividend on their surplus investible funds, thus contributing to the enhancement of the individual and the national income. Productive usage Financial markets allow for the productive use of the funds borrowed, thus enhancing the income and the gross national production. Capital formation Financial markets provide a channel through which new savings flow to aid capital formation of a country.

Intermediary Functions
Price determination Financial markets allow for the determination of the price of the traded financial asset through the interaction of buyers and sellers. They provide a signal for the allocation of funds in the economy, based on the demand and supply, through the mechanism called 'price discovery process'. Sale mechanism Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefits of marketability and liquidity of such assets. 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 oi transaction of financial assets.

Financial Functions
Providing the borrowers with funds so as to enable them to carry out their investment plans Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in productive ventures Providing liquidity in the market so as to facilitate trading of funds

CONSTITUENTS
Primary Market Secondary Market Money Market Capital Market Debt Market Eurobond Market Equity Market Financial Services Market Depository Market Non-depository Market

Primary Market
Primary market deals with the issue of new securities. In this market, the government or corporate sector issues securities that change hands from the issuer to the investor. Also, new issue of financial assets are bought and sold. For instance, if L&T issues new shares, the shares are sold in the primary market.

Secondary market
Secondary market deals with existing claims. There is no new flow of funds for instruments in this market. No fresh capital is made available to the producers on account of the transactions in the secondary market, as they deal only in existing securities Secondary market renders a very important service to the primary market by providing a ready market for trading in securities The volume and the magnitude of the transactions taking place in the secondary market influence the activities in the primary market The presence of a secondary market helps lower the transaction costs

Money Market
Meaning Money market is a market where short-term instruments that mature in a year or earlier are traded. Features 1. Short-term financing Money market facilitates short-term financing and assures the liquidity of short-term financial assets. Money market meets the working capital (short-term) requirements of industry, trade and commerce. 2. Nerve center Money market acts as the nerve center of all the operations of the central bank of a country. It reflects the changes in short-term parameters such as interest rates, monetary policy, availability of short-term credit, etc. 3. Liquidity adjustment Money market provides a mechanism of liquidity adjustment between individuals, institutions, and government. It serves as a medium of exchange between the holders of temporary cash surpluses and temporary cash deficits. Borrowers are assured that short-term funds can be quickly obtained and lenders are assured that their short-term financial assets can be quickly converted into cash.

Money Market
4.Central bank The central bank that is responsible for regulating and controlling the money supply in an economy conducts most of its operations in the money market. The central bank occupying a pivotal position in money market is responsible for its promotion and development. The flow of money and credit in the money market is regulated and controlled by the central bank through a plethora of qualitative and quantitative measures. 5. Risk Money market offers a low capital loss (money risk), as instruments traded are short-term in nature, besides offering a low risk of default (credit risk). This is because money market instruments are mostly in the form of the liabilities of the government, central bank and commercial banks. F 6. Sub-markets A developed money market consists of specialized sub-markets such as central banks, commercial banks, cooperative banks, saving banks, discount houses, bill market, bullion market, etc.

Capital Market/Securities Market

Meaning The market where long-term funds are borrowed and lent is known as a capital market, the primaly purpose being directing the flow of savings into long-term investments (mostly for a period of one year and above). Features Demand for funds Individuals, institutions, central government, provincial government, local self government and private corporate sector make the demand for long-term funds. Instruments Funds are raised through issue of shares, debentures and bonds, which constitute the new issues market. Besides raising funds from public issues, public financial institutions and investment institutions are also used for obtaining long-term funds. Supply of funds Individuals (household sector), institutions, banks and industrial financial institutions are the main sources of supply of long-term funds. Ideal conduit The capital market acts as an ideal conduit for the transmission of savings of surplus units to deficit units which demand long-term funds.

Capital Market/Securities Market

Economic growth Capital market plays a significant role in the financial system by promoting savings and investments, which are vital for development and growth of an economy. It accelerates the pace of economic development. The primary capital market helps government and industrial concerns in raising funds by issuing various kinds of securities. The secondary market provides liquidity to the outstanding/existing securities. Price mechanism The price mechanism prevalent in the active capital market ensures optimal allocation of scarce financial resources to the most productive sectors of the economy. Accordingly, companies that operate efficiently can sell securities at premium (incentives). Conversely, companies with poor performance face problems in selling their securities and may have to issue securities at a discount to raise additional funds or offer higher rates of interest.

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 (called the principal) plus some specified amount of interest.

Debt Market
The use of debt markets is different for different people. For instance, individual; use debt markets to borrow funds to finance purchases such as new cars and houses; corporate use them for obtaining working capital and new equipment;

Debt Market
federal, state, and local governments use them to acquire funds to finance various public expenditures. Issue of new funds occurs in the primary debt market, and purchase and sale of debt instruments in the secondary debt market.

Equity Markets
A market where ownership securities are issued and subscribed is known as 'equity market'. An example of a secondary equity market for shares is the Bombay Stock Exchange.

Financial Services Market

A market that comprises participants such as commercial banks etc that provide various financial services like ATM, credit cards, credit rating, factoring, leasing, stock-broking etc is known as 'financial services market'. Individuals and firms use financial services markets to purchase services that enhance the working of debt and equity markets.

Depository Market
A depository market consists of depository institutions 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 etc. It is a special type of loan market in which depositors "loan" money to depository institutions, which in turn use the funds to purchase other financial assets.

Depository Market
The major types of depository institutions are: commercial banks, savings and loan associations, mutual savings banks, and credit unions.

Commercial banks
Commercial banks comprise the largest and most important depository institutions. They have the largest and most diverse collection of assets among all depository institutions. Their main source of funds is demand deposits and various types of savings deposits (including time deposits and certificates of deposit).

Savings and loan associations

Savings and loan associations were originally designed as mutual associations, (i.e. owned by depositors) to convert funds from savings accounts into mortgage loans. The purpose was to ensure a market for financing housing loans.

Mutual savings banks

Mutual savings banks are similar to savings and loans associations, but are owned cooperatively by members with a common interest, such as company employees, union members, or congregation members. Originally they accepted deposits and made mortgage loans.

Credit unions
Member-owned financial co-operative. These institutions are created and operated by its members and profits are shared amongst the owners. A cooperative depository financial institution whose members can obtain loans from their combined savings. A credit union operates similarly to a bank, but is owned and controlled by people who use its services.

Credit unions
A financial co-operative similar to a bank but normally restricted to a local area or a single profession As soon as you deposit funds into a credit union account, you become a partial owner and participate in the union's profitability. Credit unions are formed by large corporations and organizations for their employees and members.

Non-depository Market
Non-depository market comprises of institutions that do not accept cheques to liquidate deposits. They carry out various functions in financial markets, ranging from financial intermediation to selling insurance. Mutual Funds Insurance Brokerage Pension Funds

Mutual funds
Firms that sell units to investors and invest the proceeds in a variety of financial assets are called mutual funds. Some mutual funds, called money market mutual funds, invest in short-term, safe assets such as U.S. treasury bills and large bank certificates of deposit.

Insurance companies
Companies that protect individuals against risk are called insurance companies. Life insurance companies accept regular payments from individuals in exchange for contracted payments in the event of the death of the insured. They hold long-term assets, like long-term bonds and substantial quantities of commercial real estate. Other insurance companies, called fire and casualty insurance companies, insure cars, houses etc against loss from fire, theft, and accident.

Pension funds
Funds that are operated by the private and government employers (including federal, state, and local) and that which provide retirement income to employees are called pension funds. Money is collected by regular contribution from employees, usually via, payroll deduction. The funds flowing in, are in the nature of fixed deposits..

Pension funds
Like Life insurance companies, these institutions can accurately predict payouts and hence can hold long-term assets They hold portfolios consisting mostly of stock and bonds. The return on these assets are paid out to participating individuals when they reach retirement age.

Brokerage firms
Brokerage firms bring buyers and sellers of stock together for the purchase and sale of financial assets. They function as intermediaries, earning a fee for each transaction. Their main function is to serve as brokers in the secondary debt and equity markets.