FINANCIAL MARKET

AND ITS ROLES

Presented By:
Menuka Watankachhi

Financial Market
Any marketplace where
buyers and sellers
participate in the trade of
financial securities,
commodities, and other
fungible items of value at
low transaction costs and
at prices that reflect
supply and demand.

In finance, financial markets facilitate:

The raising of capital (in the capital
markets)
The transfer of risk (in the derivatives
markets)
Price discovery
Global transactions with integration of
financial markets
The transfer of liquidity (in the money
markets)
International trade (in the currency
markets)

Exchange between the

two groups of agents is
settled in financial
markets.

The first group is

commonly referred to as
lenders, the second group
is commonly referred to
as the borrowers of funds.

In financial market, typically a borrower issues a receipt to the

lender promising to pay back the capital. These receipts are
securities which may be freely bought or sold. In return for lending
money to the borrower, the lender will expect some compensation
in the form of interest or dividends. This return on investment is a
necessary part of markets to ensure that funds are supplied to them.

Relationship Between Lenders And Borrowers

Lenders

Individual
Companie
s

Financial
Intermedi
ary

Financial
Markets

Banks

Interbank

Insurance
Companie
s

Stock
Exchange

Pension
Funds
Mutual
Funds

Money
Market
Bond
Market
Foreign
Exchange

Borrowers

Individuals
Companies
Central
Government
Municipaliti
es
Public
Corporations

Company Logo

Diagram
FINANCIAL
MARKET

PRIMARY
MARKET

SECONDA
RY
MARKET

Company Logo

Primary Market
Primary

markets
facilitate the issuance
of new securities
e.g., the sale of new
corporate stock or new
Treasury securities

Secondary Market
Secondary

markets
facilitate the trading
of existing Securities
e.g., the sale of
existing stock
Securities traded in
secondary markets
should be liquid

The Importance Of Financial Markets

Well-functioning financial markets facilitate the flow of

capital from investors to the users of capital.

Markets provide savers with returns on their money

saved/invested, which provides them money in the future.
Markets provide users of capital with the necessary funds to
finance their investment projects.

Well-functioning markets promote economic growth.

Economies with well-developed markets perform better
than economies with poorly-functioning markets.

Segments Of Financial Markets

Direct Financing

Funds are transferred directly from ultimate savers to

ultimate borrowers

Indirect Financing

A financial "intermediary" transforms financial claims

with one set of characteristics into financial claims
with other characteristics e.g. deposits are used to
make loans.

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Roles Of Financial Market

Saving mobilization
Investment

National Growth

Entrepreneurship growth

Industrial development