Talking in general terms, capital simply means finance. To fuel the economy to get it going, finance is an important component because it propels the economy and lubricates its growth pattern.
Just to take a real life scenario, you may have a hell lot of liquid cash at your disposal; but keeping them locked up in your locker wouldn’t help the money multiply. To generate money with your available money, you should plan to invest such funds into the bank or other financial institutions and various governmental and non-governmental financial schemes. This money will flow in the economy via financial markets and generate money in turn.
Thus, financial markets play a very crucial role in the mobilization of liquid cash for investment purposes.
By providing an efficient platform which facilitates infusing capital in the economy, trading of securities, raising long term finance etc. financial markets plays an indispensible role in keeping the economy rolling.
Financial markets can primarily be divided into following components :
What’s a Securities Market?
Securities market provides an efficient system for financial instruments that are transferable by sale. It, further, branches into two important components, i.e., primary market and secondary market.
Primary markets deal with newly issued stocks and securities whereas secondary markets deal with stocks and securities which are already issued.
Primary markets facilitate mobilizations of public funds by way of issuance of new securities. These funds are basically used for long term plans such as starting of a new project or modification of an old project.
For instance: A particular limited company requires funds. It issues shares in the primary market. When a company issues its shares for the first time in market, it is called Initial Public Offering (IPO). Issue of existing shares is known as Follow on Public Offer (FPO). Primary market consists of both IPO and FPO.
Please check ET Markets website to have a better idea:
Secondary market basically consists of stock exchange which provides a forum to buy or sell securities. Once the securities are listed in the stock exchange, the investor can trade in such securities in secondary market.
For instance: Trading in National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Calcutta Stock Exchange (CSE) etc.
For example: You want to buy shares of Reliance. When you open the NSE website and type Reliance on the search block, you get complete details about that particular stock. Similarly, for any other stock that you wish to trade in or carry it for long term purposes, you can get complete details on the website.
2) Secondary market is further divided into two branches:
• Spot market: The delivery and payment of securities are made immediately without delay.
• Futures Market: Securities are bought and sold for some predetermined future date.
Money Market: The fund seekers and fund lenders can avail short term funds up to a maximum period of one year. Money markets are quite liquid in nature, having low default risk.
Thus, the financial markets initiate the entire process of mobilization of savings and channelize such savings to those sources via the investors. The growth of an economy is gauged by the process of flow of funds through the afore-mentioned markets.
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