Types of Financial Market

Types of Financial Market

The financial market may be classified as primary market or secondary market depending on whether the securities traded are newly issued securities or securities already outstanding and owned by investors. Private companies and public sector enterprises, in need of money, may issue securities such as shares, debentures, bonds, commercial papers, etc. to raise required capital. Individual investors and institutional investors may invest in these securities. The market mechanism for the buying and selling of new issues of securities is known as primary market. This market is also termed as new issues market because it deals in new issues of securities.

The secondary market, on the other hand, deals with securities which have already been issued and are owned by investors, both individual and institutional. These may be traded between investors. The buying and selling of securities already issued and outstanding take place in stock exchanges. Hence, stock exchanges constitute the secondary market in securities.

Participants in the Financial Market

A financial market is essentially a system by which financial securities are exchanged. This system is composed of participants, securities, markets, trading arrangements and regulations. The major participants are the buyers and sellers of securities or the investors (who are the buyers of securities) and the issuers (who are the sellers of securities). Financial intermediaries are the second major class of participants in the financial system. They play a crucial role in the smooth functioning of the financial system. The investors who are the primars in thinanciatem would prefer to ‘lenhort’havesh surplus for short durations as they generally have a preference for liquidity. On the contrary,

thssecurithrhltimatorrowerould prefer tborrow long’hat is, borrow for long durations as the funds are generally required for financing long-term investment in fixed assets. This situation gives rise to a fundamental problem in the financial tem wh wacribehconstitutionaeaknessf unintermediateinancial

markets by Hicks (1939).’ The problem is to match the preferences of the surplus sector to lend short with those of the deficit sector to borrow long. It is the financial intermediaries who resolve this problem. They borrow for short durations from the primary lenders and lend for long durations to the ultimate borrowers. Through the intervention of the financial intermediaries, the ultimate borrower is able to get long-term funding and the primary lender is able to get liquidity on his lending.

There are two types of financial intermediaries in the financial system, namely banking financial intermediaries and non-banking financial intermediaries such as insurance companies, housing finance companies, unit trusts and investment companies. However, it may be noted that the traditional distinction between banking and non-banking institutions isslowly disappearing. As a result of technological innovations and increasing competitive pressures, the traditional distinction between banking and non-banking activities is rapidly disappearing and a universal banking system in which a single institution provides the complete range of financial intermediation services is slowly emerging.

Another group of participants in the financial system comprises the individuals and institutions who facilitate the trading or exchange process in the system. They are primarily brokers who act as agents for the primary lenders or the ultimate borrowers in the purchase or sale of securities. There are also broker dealers who act on their own account by buying and selling securities for a profit. This group also includes institutions which act as registrars, managers, lead managers, share transfer agents, etc. at the time of issue of shares by companies.

Regulatory Environment

The financial system in a country is subject to a set of regulations in the form of various Acts passed by the legislative bodies. The regulatory environment may differ from one country to another. In each country, the regulatory control of the financial system is exercised by designated regulatory authorities. In India, the Ministry of Finance, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), etc. are the major regulatory bodies exercising regulatory control and supervision over the functioning of the financial system in the country.

A simple diagrammatic representation of how a security is raised or originated in the financial market is attempted in Fig.

The securities thus issued may be traded or exchanged between investors in securities markets with the help of intermediaries, within the regulatory framework approved by the Government and other regulatory bodies.

New securities are directly issued by the issuing companies to the investors. All the participants in this process of issuing new shares to investors together constitute the primary market or new issues market. Let us analyse the functioning of this primary market.