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Financial Market














Financial market is a prime element of financial system and mechanism that raised short, medium and long term finance. ( borrowing, lending, issuing, transforming, managing, trading and organization)(finance-7 components) of funds through various types and various nature of trading financial assets. The main purpose of financial market is to collect scattered small and big savings of public people, make available loans for consumption, investment, trade, distribution for development of various sectors of the economy and payments of debts. Hence, financial market brings together counter-parties through any means like individuals, families, business firms, BFIs, NBFIs, government and foreigners for spot trading, future trading, online trading of given financial assets that is affected by the demand, supply, quantity, quality, price and cost of given financial assets.

Classification of financial market

Financial market can be classified on various ground and generally it is divided into six different categories;

1 On the basis of Structure:( 2 types)

a. Unorganized financial market: It is the informal financing of funds through local, landlord, money lender, goldsmith, friends, relatives, etc like ( hundies, Dhukuties, etc)

b. Organized financial market: It is the formal and institutional financing funds through the legal banking and non-banking FIs like, central bank, commercial banks, DB, FCs, cooperatives etc.

2 On the basis of Maturity period of financial asset: ( 2 types)

a. Money Market: It is short term finance of funds only up-to one year period. It has a small amount of finance and low degree of risk. It has direct influence of central bank and more homogeneous financial asset.

b. Capital Market: It is a mid and long term finance of funds for more than one year. It is heterogeneous financial assets. Generally, big amount of finance with high degree of risk and indirect influence of central bank through the influence of money market.

3 On the basis of Market Level: ( 2 types)

a. Primary Market: It is a system mechanism and process of trading new securities through which the funds users raise funds from the investor for newly established or expansion of business project with the help of issue managers. Hence, it is also known as the new issue market or fund organizing market under the method of IPO and FPO. Primary market is more volatile than the secondary market.

The fund raising process can be shown as below:

                                     Securities                       Securities
                                      --------->>                    ----------->>
Fund raising company                 Issue manager          Fund Suppliers/ Investors
                                     <<----------                  <<-------------
                                     Funds                             Funds

There is no any additional cost or brokerage fee or administration fee to be paid by the fund suppliers or investors.

b. Secondary Market: It is also the system, mechanism and process of trading of old securities among the investors through the concerned security brokers but that securities must be listed in the stock exchange center like NEPSE in Nepal. It is a less volatile than primary market as it is easier to determine the underlying value of securities after it has already began trading. On the other hand, it is required some additional cost, brokerage fee, administration charge in trading of securities in secondary market.

Process of secondary share market trading


                              Securities                                         Securities

Investors              ----------->>                                  ------------------>>            
                              Funds                Brokers                 Funds                          Investors
Public                   <<-----------                                    <<--------------              Public



4 On the basis of sect-oral development:

like, agriculture sector, industrial, mineral, hydro, tourism, trade and commerce, banking and insurance, etc



5 on the basis of spot and future transaction:


a. Spot transaction: Spot market is a system mechanism and process of trading of financial assets on the spot with direct interaction between counter parties at given market price of given financial asset like foreign currencies, stock, fixed deposit certificates, government bills and bonds, bill of exchange, pro-missionary notes, debenture, etc.


b. Derivative Market: It is a system, mechanism and process of trading financial asset and other precious commodities. On the basis of present contract between two counter parties for a specified quantity, quality, price, place and date of delivery in the future. So it is also known as the future market at present contract under the uncertainty of adverse change in price, availability on both quantity and quality, etc. Due to the problem of transportation, communication, government policy, political instability, natural commodities and other internal and external bottlenecks. However, the price of financial asset and precious commodities depends upon the foreign exchange rate, various stock exchanges indices, CPI, inflationary rate, interest rates, etc.


Generally, there are four types of derivatives markets namely 1 forward 2 future 3 swaps and 4 options.


6 On the basis of foreign exchange market (Forex):


Forex market is a system, mechanism and process of trading financial asset and other finance in foreign currencies are traded on various ways like in-convertible, convertible( buying and selling, only buying, only selling) and no convertible ( no buying, no selling). The foreign exchange rate is the prime matter for functioning of Forex market. Foreign exchange rate is made under two system like fixed exchange rate regime which is determined by the policy and floating rate regime, under which the exchange rate is determined by market forces of demand and supply of given foreign currencies.


The foreign exchange rate is to be quoted on two different ways. It is the rate at which home currencies is converted into foreign currencies and vice-versa. Under the directed quoted, it is the required units of home currency for one unit of foreign currencies like 160 NC = 100 IC (year 2019). Similarly, under the indirect quoted it is the availability of the unit of foreign currencies for one unit of home currency i.e. 62.50 IC = 100 NC









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