Introduction to Financial Markets

What is a Financial Market?

Any type of financial transaction that you can think of that helps businesses grow and investors make money.

Different Terms for Financial Markets

• Capital markets,• Wall Street,• Stock Market, or• just the “Market”

Types of Financial Markets:• Capital Market--consists of a primary market and a

secondary market:• Primary (Bond) Market—newly issued bonds and

stocks are exchanged; and in• Secondary (Stock) Market—buying and selling of

already existing bonds and stocks take place.• Bond Market—provides financing by bond issuance

and bond trading• Stock Market—provides financing by shares or stock

issuance and by share trading.• Facilitates raising of capital.

Types of Financial Markets:• Money Market—facilitates short term debt financing

and capital (i.e. treasury bills, certificates of deposit)• Derivatives Market—provides instruments which

help in controlling financial risk.• Foreign Exchange Market—facilitates the foreign

exchange trading.• Insurance Market—helps in relocation of various

risks.• Commodity Market—organizes trading of

commodities.

Contribution of Financial Markets:• They are essential for fund raising• Borrowers can find suitable lenders• Banks work as intermediaries—they use the money,

which is saved and deposited by a group of people; for giving loans to another group of people who need it

• Banks provide financing in the form of loans and mortgages

• More complicated transactions of the financial market take place in stock exchange—where a company can buy others’ company’s shares or can sell own shares to raise funds

.

Basis of Financial Market:• Borrowers—of the financial market can be

individual persons, private companies, public corporations, government and other local authorities like municipalities.• Individual persons generally take short term or

long term mortgage loans from banks to buy property.

• Private companies take short term or long term loans for expansion of business or for improvement of the business infrastructure.

Basis of Financial Market:• Lenders—are actually the investors. Their invested

money is used to finance the requirements of borrowers.

• Types of Investments:• Depositing money in savings bank account• Paying premiums to insurance companies• Investing in shares of different companies• Investing government bonds • Investing in pension funds and mutual funds