Diverse Dimensions of Financial Markets: Classification and Functions. Lesson 4

Section 1: Start Your Stock Market Journey: Simple Lessons from A to Z.

Lesson 4: Diverse Dimensions of Financial Markets: Classification and Functions.

Classification of Financial Markets:


💹A simple chart to understand the hierarchy of the Market.

By Nature of Claim:

Debt Market: Involves buying and selling debt instruments like bonds and debentures. These instruments offer a fixed claim on the issuing entity's assets.
Equity Market: Involves trading stocks of public limited companies. Investors become shareholders with a residual claim on company assets.

By Maturity of Claim:

Money Market: Trades short-term monetary assets like treasury bills and certificates of deposit, with an investment horizon not exceeding a year. Low risk and interest-based returns.
Capital Market: Trades medium to long-term assets like equity shares, suitable for holding over an extended period. Divided into primary and secondary markets.

By Timing of Delivery:

Cash Market: Real-time settlement of transactions requiring upfront payment. The investment amount can be from personal funds or borrowed capital (margin money).
Futures Market: Transaction payment is made upfront, but asset delivery occurs later. Margin payments suffice. Assets like options and futures are traded.

By Organisational Structure:

Exchange-Traded Market: Transactions happen through a centralized exchange, with standardized procedures. Buyers and sellers trade via intermediaries, dealing only with standard products.
Over-the-Counter Market: Decentralized markets where direct interaction occurs between buyers and sellers. Customized products can be traded electronically without intermediaries.

Functions of Financial Markets:

Mobilization of Funds: Financial markets enable investors to put their idle money to productive use, allowing funds to circulate in the economy and earn returns.

Fair Pricing: Market forces ensure rational pricing of financial assets, preventing irrational price fluctuations that could harm investors and markets.

Capital Access for Businesses: Companies listing securities in financial markets can easily raise capital for business operations and expansion. 

Liquidity: Financial markets ensure that securities are generally liquid, allowing investors to convert their assets into cash relatively easily.



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