Financial Market Concept Explained [BCS 2/15]

If you keep the money with you, then even after years, it will remain the same as it is now, but if you want to increase it or use its value properly, then you have to bring it to the financial market.

In this article, we will discuss the financial market in a simple and easy way and try to understand its various important aspects.

Note – If you want to understand the basics of share market from zero level then you should start with Part 1. – Share Market and Related

| What is market?

Simply put, a place where goods and services are bought and sold is called a market. In any economy,  money moves in a circle. Money is only in a certain quantity, while roaming there, sometimes it comes to you and sometimes come to me.

Everyone needs some profit in this system. And how does this profit come? Profit is when we get more than what we invest. 

Now if we invest somewhere, only then there will be profit, someone will sell it and someone else will buy it, then only there will be profit. 

Where we do all these things, that is called the market . If the exchange and creation of financial assets take place in this market, then it is called financial market.

| What is financial market?

The financial market is the market for the exchange and creation of financial assets. It helps in channelizing the savings to the most productive uses and in finding the value of financial assets.

It can be understood in simple language in this way- you think about any economy, you will find two types of people there. 

One would be the people who have the extra money, and the other would be the people who needed the money. The market which helps in carrying out the transactions between these two groups is called the financial market.

Transactions will take place only when there is some kind of benefit to both the parties. Obviously, the person who gives money will either want interest or share in the business, then he will get the benefit in that form.

 At the same time, the one who is taking money will do something so that he can profit, such as he can do business or increase it.

This is the financial market, it can be organized as well as unorganized . For example, if a person takes money from a village moneylender, then it has become unorganized because it does not come under the purview of any specific rules and regulations. 

At the same time, the transaction which is completed within the purview of a particular law is called organized financial market.

| How does the financial market work?

Through the picture given below, the financial market can be easily understood how it works.

Here we can see two types of process by which money is being exchanged –

(1) The person who has surplus money can keep it in the bank. The bank will give the same money in the form of loan to a company, that company will grow its business with it, create new assets and finally return that money to the bank with interest. 

The bank will give some of the money received in interest to the person who deposited the money. In this way the market will continue to operate.

(2) The person who has surplus money can give it to the same company through the financial market. The company will get the money and the person giving the money will get some shares of the company in return. The proportion in which the company will grow, in the same proportion the price of that person’s share will also increase.

One thing you can see here is that the bank and the financial market are acting as a medium and providing an option to the savers or investors from where they want to grow their savings.

| What does the financial market do?

Financial markets perform the following important functions;

(1) Mobilize the remaining money and put it to more and more productive use – where the saver’s money is stagnant, there is no increase in it; The finance market makes it dynamic. And provides the saver with a plethora of options to be a part of this market. 

In this way his surplus money becomes part of any productive work so that creation of new resources becomes possible.

(2) Help in setting the price – Just as the principle of demand and supply helps to determine the price of goods or services in the market, in the same way, when there is an interaction like transaction, then there is an interaction between those financial assets. It helps in deciding the price which is to be traded in this specific market.

(3) Providing liquidity for financial assets – Financial market facilitates easy selling and buying of a financial asset and provides liquidity to it. This helps in converting financial assets into cash easily.

(4) Reducing transaction cost – If there is no financial market then you can imagine how much time and money can be wasted doing the same transaction. 

The financial market eliminates the problems like where to sell, whom to sell etc. and makes available various types of necessary information in one place.

| classification of financial markets

Financial market can be mainly classified into two parts – 1. Money Market 2. Capital Market .

A part of the financial market where transactions take place for a short period of time. That is, if it is less than one year then it is called money market and if the transaction takes place for more than 1 year then it is called capital market.

Money market and capital market both are covered in separate articles. Although the stock market is mainly related to the capital market, but still for a better understanding, first understand the money market .

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| Share Market Basic Concept Series (BCS)