Question

1. Define the term Financial Market and provide an example of a Financial Market. Discuss the primary role of Financial Markets and the people and institutions that interact in these markets.

Answer 1

Financial Market - A financial market is a place where financial securities like stocks bonds, gold etc will be traded . Simply we can say that a financial market is a place where financial assets are exchanged.

Example of financial markets - Stock exchanges like New york stock exchange (NYSE)

Primary role of the financial market -

a) To facilitate trading of financial securities - Financial markets help in buying and selling of stocks bonds etc .

It is a one stop solution which provides liquidity to financial assets

b) To helps entities raise funds - Financial markets help entities raise equity and debt funds by offering the securities for sale in the market.

c) To help business to hedge their funds - Derivatives like futures , options and forwards were generally used as a tool for businesses to hedge their contracts .These are generally traded in the financial markets.

d) Regulating the dealings in securities - Finacial markets are guided by the various laws enacted by the government hence they tend to protect the investors rights and regulate the prices , and prevent the manipulations of financial assets.

Some of the people and institutions that interact in financial markets.

The following are various users of financial markets.

- Government

- Corporate entities

- Investment Banks

- General Public or retail investors

- Foreign institutional investors etc