Financial Markets

Lesson

Part 1 — the financial market, its functions, and the money market with its five instruments.

In this lesson you will

Explain the meaning of a financial market and its four functions
Describe the money market and its participants
Explain treasury bills, commercial paper, call money, certificates of deposit and commercial bills
Choose the right money market instrument for a given business need

Part 1 at a glance

Concept

What is a financial market?

A financial market is a market for the creation and exchange of financial assets such as shares, debentures, bonds and bills.

Households are mainly savers: they supply funds.
Business firms are mainly investors: they use funds.
The market performs an allocative role: savings go to their most productive use.

The financial market links savers and investors

Diagram

Table of the four functions of financial markets, their meaning and an imagined example of each: mobilisation of savings, price discovery, liquidity, and reducing the cost of transactions
Function	What it means	Imagined example
Mobilisation of savings	Idle savings are collected and sent to productive uses	A teacher in Ajmer buys bonds of a road company
Price discovery	Demand and supply settle the price of a financial asset	Shares of a tea company rise as buyers outnumber sellers
Liquidity	Financial assets can be turned into cash quickly	A shopkeeper sells his bonds to pay for a wedding
Reducing cost of transactions	Ready information saves time, effort and money	Prices are visible on the broker's app, so no search is needed