Financial Market: An Introduction

The term financial market refers to the place where financial transactions take place through the network of borrowers and lenders of funds. In other words, financial market within the economy brings borrowers and lenders together to place buying and selling orders with the help of brokerage and other financial intermediaries. However, there is the need for infrastructure to encourage better arrangements for trading in securities. Financial market is the mechanism created to facilitate the exchange of financial assets. This market may or may not have a precise physical location. For instance, the Nepal Stock Exchange (NEPSE) is physically located on singh Durbar Plaza in kathmandu City and all the secondary transaction conducted in this stock exchange through channel of the brokers.
In Nepal, Over-The-Counter (OTC)market for stocks is important to be developed for all companies not listed in the stock exchange. In practice, there is out of the floor transactions taking place in Nepal Stock Market. There is a need for the development of professional brokers who have the capacity to connect such transactions throughout the country to manage track prices via computer and telecommunication lines.
Financial market is the hallmark of any modern business enterprise economy. Activity in financial market takes place through the exchange of one financial asset or instrument with another. This is done with the help of market players called the financial intermediaries. The major participants of financial markets serve in different capacities as savers, investors, borrowers and users of funds. In the most modern economies, participation in financial markets is widespread. Directly or indirectly, most individuals, businesses and institutions are involved in the securities in the financial market and are supported by financial intermediaries and facilitators. Individuals, corporate bodies, non-profit organisations and the government are the participants in these transactions of buying and selling of financial assets.
Financial securities exist in an economy when the savings perform different functions from that of investment. Suppose savings and investments are equal, there would be no lending and borrowing in the financial market. However, in real life situation, it is not possible. Some individuals and firms have savings less than their need for investment in real assets so they demand funds to meet their funds deficit from the financial market. In addition, some individuals and firms having their saving greater than their current expenditures so they want to lend their funds in financial assets. Thus, a financial market is a mechanism for transferring funds from the savers to the users.
Financial market is the most important factor that influences the financial activities of the companies whose shares are traded in the financial market.. So, financial markets are mechanisms for channeling savings for investment in real assets. The role of financial markets and financial institutions channel the flow of funds in the economy. Commercial banks, insurance companies, finance companies, and other financial institutions like Employee Provident Fund and Citizen Investment Trust work as intermediaries in the financial market.
However, at present, they are dormant and inactive due to limitations imposed by there acts and thge internal bylaws. Different financial institutions provide and facilitate this process of transfer of funds by creating varieties of financial assets. They sell their own liabilities to raise funds by creating liabilities on their own account to to help the surplus units for investment and purchase securities of the deficit units that supply funds for the users. Thus, these institutions provide very important intermediary service by matching the demand for and supply of funds between savers and users without which capital market is not possible to function. The main ingredients used in financial market consist of money market, capital market, primary market and secondary market. They strongly affect financing decisions of the companies and corporate bodies having independent entities.
In highly developed financial systems, the domestic financial market may mobilize funds not just for domestic needs but also for foreign businesses and governments. Foreign parties may borrow directly in the domestic market through bond issues, etc or may borrow from domestic financial intermediaries. Alternatively, there may be direct overseas investment by domestic business enterprises of individuals. Transactions of this type provide a link with the national markets. All these are the outcome of growing dimensions of financial globalization.
The concept of financial market can be explained with the help of thought provoking ideas generated from the leading contributors and writes well renowned in international perspective. As such, in the words of Charles N. Henning and William Pigott and Robert Hanney Scott (1975), "Financial market is defined as a place where fund suppliers and fund borrowers are brought together with the help of financial intermediaries directly or indirectly. These intermediaries channel nation's savings into most productive uses. Lenders or suppliers of funds exchange money for other financial assets that tend to provide a better future return. The net effect of such a transaction is that they but a claim against some one's money holding at some future date. In fact, they create loanable funds in the financial market."
According to Peter E. Rose (1997), "Financial system is synonymous with financial market that implies collection of market, institutions, laws, regulation and techniques through which bonds, stocks, and other securities are traded through proper determination of interest rate and efficient delivery of the financial services around the world."
Likewise, in the words of David S. Kidwell and Richard L. Peterson (1981), "Financial market in functional perspective is a rational system of collection savings and allocating them efficiently to the ultimate users for investment in productive assets or current consumption."
Anthony saunders and Marcia Milton Cornett_2005), they define that financial markets are arenas through which funds flow.
All the above definitions agree in common viewpoint that financial market is a rational process of transferring the funds from savers to users of funds to facilitate the efficient allocation and growth of financing and investment in financial assets transformation to generate income to savers and users.