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BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
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technological innovation are the paraphernalia Financial Market is a mechanism that allows
between financial development and growth. people to buy and sell (trade) financial securities
The allocation of credit through financial system (such as stocks and bonds), commodities (such
works as a channel between financial and real as precious metals or agricultural goods),
sectors, which can be used to finance working and other fungible items of value at low
capital requirements and investment in fixed transaction costs and at prices that reflect the
capital; the former is used to raise production efficient-market hypothesis. Financial Markets
whereas the latter enhances productivity in the are typically defined by having transparent
real sector. pricing, basic regulations on trading, costs and
fees, and market forces determining the prices
A well-developed, efficiently operating financial
of securities that trade.
market plays a very crucial role in adding value
to the health and efficacy of an economy. It is In the financial system, funds flow from those
quite important to notice that there exists a who have surplus funds to those who have
very strong positive relationship between the a shortage of funds, either by direct, market-
development of the Financial Market and the based financing or by indirect, bank-based
growth of an economy. The Financial markets finance. The former British Prime Minister
help to proficiently make a path for the flow William Gladstone expressed the importance
of savings and investment in an economy, of finance for the economy in 1858 as follows:
while facilitating the production of goods and "Finance is, as it were, the stomach of the
services, together with the accumulation of country, from which all the other organs take
capital. Collectively the combination of well- their tone." It is important to note that Financial
developed financial markets and institution Markets facilitate: The raising of capital (in the
benefit society at large because they suit the Capital Markets), The transfer of risk (in the
needs of the borrowers and the lender quite Derivatives Markets), The transfer of liquidity
well, adding to the overall economy. (in the Money Markets) and are used to match
those who want capital to those who have it.
Meaning and the concept of Financial Mar-
kets Roles of financial markets
In Economics, conventionally, the term market Last three decades have witnessed economists’
refers to a place where potential buyers and growing interest in exploring for a possible
sellers of a certain good or service meet to link between financial structure and economic
facilitate transaction or exchange between activities. In more recent years, the horizon of
them. However, one needs to note that the term economists’ inquiry has expanded to include
‘Market’ is often used for more strict exchanges, the interrelationship between financial
for say, a stock exchange or exchange in finance. infrastructure and economic development.
Financial infrastructure of an economy is
Financial markets refer broadly to any defined in this paper to include financial
marketplace where the trading of securities system, legal system, accounting standards, and
occurs, including the stock market, bond
payment and settlement system. The financial
market, forex market, and derivatives market, system consists of financial institutions,
among others. Financial markets are vital to
markets and instruments
the smooth operation of capitalist economies.

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