Financial Market - CBSE Class 12 Business Studies
Introduction
A financial market is a marketplace where financial securities, such as shares, bonds, and
debentures, are traded. It facilitates the exchange of funds between investors and
businesses, ensuring the efficient allocation of resources in the economy.
Functions of Financial Market
Financial markets perform several key functions:
1. **Mobilization of Savings and Channeling to Productive Uses:** It encourages individuals
to save and invest their money in productive areas like businesses and infrastructure.
**Example:** People investing their savings in mutual funds instead of keeping them idle
in bank accounts.
2. **Facilitating Price Discovery:** The market helps determine the price of financial assets
based on demand and supply.
**Example:** If demand for a company's stock increases, its price rises in the stock
market.
3. **Providing Liquidity:** Financial markets ensure that investors can buy and sell assets
easily.
**Example:** An investor can sell shares on the stock exchange anytime and convert them
into cash.
4. **Reducing Transaction Costs:** The financial market provides a platform for buyers and
sellers to trade efficiently, reducing the cost of searching for potential investors or
investments.
Types of Financial Markets
Financial markets are broadly classified into two types:
1. Capital Market
The capital market is a market for long-term securities, such as stocks and bonds. It
provides businesses with funds for expansion and development.
The capital market is divided into two categories:
• **Primary Market:** Where new securities are issued for the first time.
**Example:** A company launching its Initial Public Offering (IPO) to raise capital.
• **Secondary Market:** Where existing securities are traded among investors.
**Example:** Buying and selling of shares on the Bombay Stock Exchange (BSE).
2. Money Market
The money market deals with short-term financial instruments that have a maturity period
of less than one year. It helps businesses and governments meet short-term liquidity needs.
**Example:** A company issuing Commercial Paper to raise funds for short-term working
capital requirements.
Stock Exchange
A stock exchange is a platform where securities like shares and bonds are bought and sold.
It ensures transparency, liquidity, and investor protection.
Functions of Stock Exchange:
• **Providing Liquidity:** Investors can convert securities into cash easily.
• **Fair Price Determination:** Prices are determined by market demand and supply.
• **Encouraging Investment:** Offers investment opportunities to individuals and
institutions.
SEBI (Securities and Exchange Board of India)
SEBI is the regulatory authority for the securities market in India. It ensures fair trading
practices and protects investor interests.
Objectives of SEBI:
• **Protecting Investors:** Preventing fraudulent activities in the stock market.
• **Regulating Market Operations:** Ensuring transparency in transactions.
• **Promoting Market Development:** Encouraging new financial instruments and
technologies.
Conclusion
The financial market plays a crucial role in economic growth by providing a platform for
investment and capital formation. Proper regulation and efficient functioning of financial
markets ensure stability and growth in the economy.
