1. They create and allocate credit.
2. They serve as the intermediaries in the process of mobilization of savings.
3. They provide convenience and benefits tor the lenders and borrowers.
4.They promote economic development through a balanced regional and sectoral allocation of ingestible funds.
Financial markets are credit markets which cater the credit needs of individuals, firms and institutions. Since credit is required and supplied for short period and ling period, the financial markets are broadly divided into two types.
1. Money Market
2. Capital Market
Money market deals with the short period borrowing and lending of funds; in the money market short term securities are exchanged.Capital market deals with the long period borrowing and lending of funds; in the capital market, long term securities are exchanged.
Financial market can also be categorized into;
1. Primary market
2. Secondary Market
Primary market is a market in which newly issued credit instruments are sold and purchased. Secondary market, on the other hand, is market in which previously issued credit instruments are bought and sold.
Financial system consists of financial institutions, financial markets and financial instruments. The whole financial system converts savings into investments which is only possible through financial market. This market may or may not have precise physical location. For example, the Nepal Stock Exchange (NEPSE) is physically located in Kathmandu city and all the secondary transactions conducted in this stock exchange through the channels of the brokers.
Capital Market
The capital market is concerned with long term finance. The market in which financial assets like equity share, long term bonds, debentures, etc are issued and traded for more than one year is called capital market. Capital market consists of a series of channels through which the savings of the community are made available for commercial, industrial and public sectors. The saving institutions like saving banks, investment trusts or government companies, specialized financial corporation and stock exchange are some of the important bodies of capital market.
Money Market
Money market is a market which includes the short term, highly liquid and low risk securities; money market typically involves financial assets that have a life span of one year or less. For example, Treasury bills, Commercial Papers and Certificates of deposits are traded in money market. Nepal Rastra Bank has frequently issued 91 days, 180 days T-bills and other taxable government securities in the market.
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