Financial Markets - An Overview

FINANCIAL MARKETS - AN OVERVIEW:

In common parlance, a market is a place where trading takes place. Whenever we think about markets, a picture that flashes across our minds is of a place which is very busy, with buyers and sellers, some sellers, shouting at the top of their voice, trying to convince customers to buy their wares. A place abuzz with vibrancy and energy.

In the early stages of civilization, people were self-sufficient. They grew every thing they needed. Food was the main commodity, which could be very easily grown at the backyard, and for the non-vegetarians, jungles were open with no restrictions on hunting. However, with the development of civilization, the needs of every being grew; they needed clothes, wares, instruments, weapons and many other things which could not be easily made or produced by one person or family. Hence, the need of a common place was felt, where people who had a commodity to offer and the people who needed that commodity, could gather satisfy their mutual needs.

With time, the manner in which the markets functioned changed and developed. Markets became more and more sophisticated and specialized in their transaction so as to save time and space. Different kinds of markets came into being which specialized in a particular kind of commodity or transaction. In today's world, there are markets which cater to the needs of manufacturers, sellers, ultimate consumers, kids, women, men, students and what not. For the discussion of the topic at hand, the different kinds of markets that exist in the present day can be broadly classified as goods markets, service markets and financial markets. The present article seeks to give an overview of Financial Markets.

WHAT IS A FINANCIAL MARKET?

According to Encyclopedia II, 'Financial Markets' mean:

"1. Organizations that facilitate trade in financial products. i.e. Stock Exchanges facilitate the trade in stocks, bonds and warrants.
2. The coming together of buyers and sellers to trade financial product i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc."

Financial Markets, as the name suggests, is a market where various financial instruments are traded. The instruments that are traded in these markets vary in nature. They are in fact tailor-made to suit the needs of various people. At a macro level, people with excess money offer their money to the people who need it for investment in various kinds of projects.

To make the discussion simpler, let's take help of an example. Mr. X has Rupees 10 lacs as his savings which is lying idle with him. He wants to invest this money so that over a period of time he can multiply this amount. Mr. Y is the promoter of ABC Ltd. He has a business model, but he does not have enough financial means to start a company. So in this scenario, Mr. Y can utilize the money that is lying idle with people like Mr. X and start a company. However, Mr. X may be a person in Kolkata and Mr. Y may be in Mumbai. So the problem in the present scenario is that how does Mr. Y come to know that a certain Mr. X has money which he is willing to invest in a venture which is similar to one which Mr. Y wants to start?

The above problem can be solved by providing a common place, where people with surplus cash can mobilize their savings towards those who need to invest it. This is precisely the function of financial markets. They, through various instruments, solve just one problem, the problem of mobilizing savings from people who are willing to invest, to the people who can actually invest. Thus from the above discussion, we can co-relate how financial markets are no different in spirit from any other market.

The next issue that needs to be redressed is what is the distinction between various financial instruments that are floated in the market? The answer to this question lies in the nature or needs of the investors. Investors are of various kinds and hence have different needs. Various factors that motivate investors are ownership of controlling stake in a company, security, trading, saving, etc. Some investors may want to invest for a long time and earn an interest on their investment; others may just want a short term investment. There are investors who want a diverse kind of investment so that their overall investment is safe in case one of the investments fails. Hence, it is the needs of the investors that have brought about so many financial instruments in the market.

There is one more player in the financial market apart from buyers and sellers. As stated above, the one who wants to lend money and the one who wants to invest the money may be situated in different geographical locations, very far from each other. A common place for this transaction will require the meeting of these persons in person to close the transaction. This may again result in a lot of hardship. It may also be the case that the rate at which the lender wants to lend his money or the duration for which he wants his money to incur interest, may not be acceptable to the borrower of the money. This would result in a lot of glitches and latches for closing the transaction. To solve this problem, we have a body called the Intermediaries, which operate in the financial markets. Intermediaries are the ones from whom the borrowers borrow the harbored savings of the lenders. Their chief function is to act as link to mobilize the finances from the lender to the borrower.

Intermediaries may be of different kinds. The basic difference in these intermediaries is based upon the kind of services they provide. However, they are similar in the sense that none of the intermediaries are principal parties to a transaction. They merely act as facilitators. The kinds of intermediaries that operate in financial markets are:

• Deposit-taking intermediaries,
• Non-deposit taking intermediaries, and

• Supervisory and regulatory intermediaries.

Deposit-taking intermediaries are those that accept deposits from a principal. They accept deposits so that the deposits can be utilized for the purpose of advancing loans to the persons who are in need of it. Example - Reserve Bank of India, Private Banks, Agricultural Banks, Post Office, Trust Companies, Caisses Populaires (Credit Unions), Mortgage Loan Companies, etc.

Non-deposit taking intermediaries are those which only manage funds on behalf of the client. They act as agents to the principal. They merely bring together the borrower and the lender with similar needs. Unit Trusts, Insurers, Pension Funds and Finance Companies are an example of this kind of intermediaries.