Financial market
Also written Financial markets
The market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred — a mechanism for dealing in financial securities and commodities at low cost.
In plain language
Households save more than they spend. Companies and governments want to spend more than they have. The financial system is the whole set of arrangements that moves money from the first group, the surplus units, to the second, the deficit units, on terms both sides accept.
The financial market is one of the three parts of that system — the other two being financial instruments and financial intermediaries. It is the place, physical or electronic, where a financial asset is created (a company issues a share, the government issues a bond) or transferred (one investor sells that share to another).
The workbook adds a quality test to the definition: a financial market lets traders deal at low costs, and that low cost "reflects the efficiency of the market". A market where it is expensive to buy or sell is doing its job badly, even if it exists.
How it works
The subtypes (Chapter 1). The workbook classifies the financial market into five:
| Market | What happens there |
|---|---|
| Money market | Short-term funds and instruments with a maturity of one year or less — bankers' acceptances, negotiable certificates of deposit, repos, Treasury Bills, call/notice money and commercial papers |
| Capital market | Long-term funds, for periods longer than a year. Sub-classified into the stock market (shares) and the bond market (bonds issued by the Central and State Governments, corporations and municipal bodies), plus the subsequent trading of both |
| Forex market | Multicurrency requirements met by the exchange of currencies at the applicable exchange rate; one of the most developed and integrated markets across the globe |
| Credit market | Banks, financial institutions and NBFCs provide short, medium and long-term loans to corporates and individuals |
| Insurance market | Transfer of risks from individuals, business houses and bodies corporate to insurance companies |
Primary and secondary. Both the capital market and the money market have two interdependent and inseparable segments. In the primary market issuers raise fresh capital through IPOs, rights issues or offers for sale, and the issuer has direct contact with the investor. In the secondary market the instruments are traded and settled on stock exchanges between two investors, and the issuer does not come into the picture. An active secondary market promotes the primary market, because primary investors know they can exit.
Who regulates which part (Chapter 2). The workbook's list of financial market regulators includes the Ministry of Finance and the Ministry of Corporate Affairs; SEBI for the capital (securities), commodities and futures markets; RBI for the banking sector; and IRDAI for insurance — with PFRDA among the regulators the chapter sets out to cover.
A worked example
Illustrative figures. Follow one household's ₹10 lakh of savings through the five markets.
| Where the money goes | Market | Maturity or nature |
|---|---|---|
| ₹1,00,000 in a liquid fund that buys 91-day Treasury Bills | Money market | One year or less |
| ₹3,00,000 applied in an IPO of a manufacturing company | Capital market — primary segment | Long term; issuer receives the money |
| ₹2,00,000 of listed shares bought on a stock exchange | Capital market — secondary segment | Long term; the seller receives the money, not the company |
| ₹2,50,000 in a 10-year government bond | Capital market — bond market | Longer than a year |
| ₹1,50,000 as a fixed deposit that the bank lends to an NBFC borrower | Credit market | Loan |
| Total | ₹10,00,000 |
Separately, the household pays a ₹25,000 health insurance premium — the insurance market, where the family's risk is transferred to an insurer — and a family member studying abroad needs euros, bought in the forex market.
Only one of the ₹10 lakh's six destinations above actually hands new capital to a company: the ₹3,00,000 IPO application. The ₹2,00,000 secondary-market purchase moves money from one investor to another. That is the workbook's primary/secondary distinction in rupees — and it is also why the secondary market matters: the IPO investor would not have put in ₹3 lakh without knowing she could later sell on the exchange.
Why NISM asks about it
Chapter 1 (Introduction to the Financial System) lists "Financial Market" as its first learning objective and defines it before anything else. Chapter 2 (Regulatory Framework – General View) is built around "Financial Market Regulators and their role" and the "Legislative framework governing the financial markets".
Chapter 1's own review question 1 reads: "Financial systems consist of banks, non-banks and ______." — the option offered is Financial Markets. Expect the one-year dividing line between money and capital markets, and the primary/secondary distinction, as direct questions.
Common exam traps
- One year is the line. Money market: one year or less. Capital market: longer than a year.
- The capital market is not only shares. The workbook splits it into the stock market and the bond market.
- Both the capital market and the money market have primary and secondary segments.
- In the secondary market the issuer does not come into the picture. Money passes between two investors.
- The financial market is one component of the financial system, not a synonym for it. The chapter's definition of the system is market + instruments + intermediaries; its review question phrases it as banks, non-banks and financial markets. Know both phrasings.
- Credit and insurance are financial markets too in the workbook's classification — not only securities.
- Low cost is part of the definition. The workbook ties low dealing costs to market efficiency.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Capital marketThe market in which companies and governments raise long-term funds — for periods longer than a year — through shares and bonds, together with the secondary market where those securities later trade.
- Financial systemThe whole set of institutional arrangements that move funds from surplus units (households) to deficit units (companies and governments) — made up of financial markets, instruments and intermediaries.
- DepositoryAn institution that holds investors' securities in electronic form and provides the services needed to transact in them — the securities equivalent of a bank holding money rather than cash.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Secondary marketThe market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
- Money Market InstrumentsDebt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.