Concept and Nature of Financial Markets

Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources in the country’s economy.

A financial market is a market, or an arrangement or an institution that facilitates the exchange of financial instruments and securities. These instruments include shares, stocks, bonds, debentures, commercial papers, bills, cheques etc. The price of these instruments is determined by the laws of demand and supply in the market.

The financial market serves an allocative function and mobilises idle funds to be put to more productive use. When the allocation of funds is done well, there are some added benefits:

• The rate of return on their savings will be higher for householders, than what a bank offers.
• The resources will be invested in firms that have high productivity and show great promise in the economy.

A business is a part of an economic system that consists of two main sectors:

1) households which save funds and

2) business firms which invest these funds

It actually acts as an intermediary between the savers and investors by mobilising funds between them. Hence, a financial market helps to link the savers and the investors by mobilising funds between them.