Define Securities Market and Financial Market

Corporate securities and government securities constitute important investment avenues for savers. These are traded in the securities market. Creation of a portfolio and periodic revision of the portfolio involves buying and selling of securities in the securities market. An understanding of the working of securities market is, therefore, essential for practicing portfolio management. However, the functioning of the securities market is too vast a subject to be confined within a single chapter. An attempt is made in this chapter to explain the basic features of securities market.

Financial Market

A market is a place used for buying and selling goods. This is the commonest meaning ohormarket’. Thsuaeatures oarket arlomuyers, somels, some commodity to be exchanged for money or some other commodity. What transpires in a market is an exchange of a commodity between a buyer and a seller. However, such an exchange can take place even without a common meeting place or physical space. Hence, a physical place is not an essential constituent of a market. It is rather the mechanism used for the exchange of goods.

In an ordinary market what is usually exchanged is a physical commodity such as fruits, grains, etc. In modern day markets, these commodities are valued in monetary terms and exchanged for money. A commodity that is in demand is exchanged between buyers and sellers in the market.

In an economy, the various economic units such as individuals in the household sector, business units in the industrial and commercial sector, and government organisations and departments in the government sector are engaged in various economic activities and transactions involving money. Some of them spend more money than they earn and end up in financial deficit while others earn more money than they spend, thus ending up in financial surplus. The deficit generators are usually the units in the industrial, commercial and government sectors. The surplus generators are mostly the units in the household sector. The deficit generators who are known as ultimate borrowers would like to borrow funds from the surplus generators who are the primary lenders. Such transfer of funds is possible and also necessary to sustain the development of the economy.

The transfer of funds between primary lenders and ultimate borrowers takes place through the creation of securities or financial assets. If an individual is not spending all his income on consumption, he will want to find a temporary repository for his current savings until they are required to finance future consumption. This involves the purchase of a financial asset or security. If the investor deposits the money in the fixed deposit of a commercial bank, the bank issues him a fixed deposit receipt which is a financial asset. The individual is purchasing a financial asset and thereby transferring the surplus funds at his disposal to a financial intermediary. The bank, in turn, may lend the money to a business unit through the creation of a loan agreement.

Let us consider another instance of transfer of funds. A company in need of funds may issue shares to mobilize funds. In a public issue of shares, any individual with surplus funds may participate. If shares are allotted to such an individual, the company which is the borrower of funds will issue a share certificate to the investor who is the lender of funds. In such a situation a financial asset in the form of a share certificate is being exchanged. This exchange represents a marketing transaction and presupposes a market which nevertheless has no physical location.

The commodity being exchanged is a financial asset instead of a physical asset. The lender of funds (or investor) is the buyer of the asset and the borrower of funds is the seller of the asset (or issuer of the security). The mechanism or system through which financial assets are created and transferred is known as the financial market. When the financial assets transferred are corporate securities and government securities, the mechanism of transfer is known as securities market.