Finance

What is financial market? What are its type? Please explain it.

The market (platform) where common people deal with bonds, debenture, share, commodities, foreign exchange and precious metal is known as financial market. To the point, a market where any individual is involve in trading with financial instrument is called financial market, in general. Moreover, a institution, arrangement or market which provides the space for both seller and buyer to exchange financial instruments and securities is financial market.

Commonly there are two kinds of financial market in Nepal, namely, organised and un organised financial market. The structure of financial market is as follow:

                                    Financial Market

A. Organised Market                                                                B. Un Organised Market

                    

a. Capital Market                                                            a. Chit funds

b. Money Market                                                             b. Pawn broker

                                                                                           c. Indigenous banker

                                                                                           d. Private companies

Now lets go to the explanation of both organised and un organised market. Lets get started from un organised market since, there is very little to know about it.

B. Un Organised Market: Absence of regulatory bodies is one character of un organised market. Money lender, indigenous banker and traders, etc who lend money to public. Indigenous banker also collect deposit from the public. Private finance companies, chit-funds etc whose activities are not controlled by Nepal Rastra Bank (NRB). NRB yearly comes up with different policy with the aim to bring this players of un organised market under the regulation of NRB.

A. Organised Market: This market has standardized rules and regulations governing their financial dealing. Here high degree of institutionalization and instrumentation is common. These markets are subject to strict supervision and control by the NRB or other regulatory bodies. There are two classification of organised market, they are:

a. Capital Market

b. Money Market

Now,

a. Capital Market: It is the market of financial securities having maturity more than one year. This market can be further explained under three headings:

i. Industrial Securities Market

ii. Government Securities Market

iii. Long-term Loans Market

Again,

i. Industrial Securities Market: It is a market for industrial security namely;

                                                 - equity shares/ordinary shares

                                                 - preference shares

                                                 - debentures or bonds (both are debt instrument)

Markets where industrial concern raise capital or debt by issuing appropriate instrument are sub-divided into; 

                                                  - primary market

                                                  - secondary market

Primary market deals with those securities which are issued to the public for the first time. Three ways to raise capital are:

                                                 - public issue

                                                 - right issue

                                                 - private placement

Secondary market is a market for secondary sale of securities, like: NEPSE does.

ii. Government Securities Market: It is otherwise called Gilt-edged securities market. It is a market where government securities are traded. Government securities are of two kinds:

                                                - short-term securities

                                                - long-term securities

Long term securities are traded in capital market while short term securities are traded in the money market. Example: securities issued by central government, state government, semi-government authorities (Nepal Electricity Authority, State/public owned bank, hydro power etc.)

iii. Long term Loan Market: Development banks and commercial banks play a significant role in this market by supplying long-term loans to corporate customers. Long-term loan market can be classified into:

                                                 - Term Loan Market

                                                 - Mortgage Market

                                                 - Financial Guarantee Market

- Term Loan Market: These are the long term and medium term loans to corporate customers. Example: Loan from NIC ASIA, SANIMA Bank to corporate borrowers. This loan market helps in identifying investment opportunities. 

- Mortgage Market: This market supplies mortgage loan to individual customer against an immovable property. Example: home loan by Global IME bank limited to a individual. While taking home loan there will be fixed interest and floating interest. Floating interest changes to monthly wise. While, fixed interest rate remains same for the whole loan period.

- Financial Guarantee Market: Finance provided against the guarantee of a reputed person in financial circle is called financial guarantee market. On non-repayment, liability falls on the guarantor. This kind of facilities is provided by development banks, commercial banks and other allowed financial institutions by NRB.

b. Money Market: Market for instruments and means of lending and borrowing funds for relatively short period, typically from day one to one year. It is a market for short term securities issued on a negotiable basis.  The instruments of money market are as follows:

source: Internet 

The characteristics of money market are:

i. Short period of time (lending and borrowing fund for relatively short period)

ii. Liquid security (since the financial dealing only last for one year)

iii. Money market consist low risk

iv. Easy to trade

v. Transaction is done through dealer

vi. Closely related with Central bank

vii. Players- NRB, SEBON (security exchange board of Nepal), NBFCs (non-banking financial corporations) and insurance companies etc.

The functions of money market:

i. Provides a balancing mechanism for the demand and supply of short term period.

ii. Plays a Central/major role in monetary policy.

iii. Provides a focal point for central bank intervention for influencing liquidity.

Happy reading!