Wednesday, 28 May 2008

Financial Markets - The Need

Why do we need a market?
There are a lot factors that contribute towards the need of a Financial market. Some of them are:
  • Price Discovery and Asset valuation
    • There is a golden rule to the market: The value of an asset is no more than somebody is willing to pay for it. As markets bring people together, it allows "price discovery".Now you may understand why SEBI allows 1 day(the day of listing or re-listing) for price discovery. Some stocks like KGN may take undue advantage nevertheless. However, they are shown the real value in subsequent days.
  • Capital Opportunities
    • Financial instruments like Equities, and Debt help raise money to fulfill capital opportunities(of firms or governments) like building a factory or providing civic amenities(trains, roads, electricity etc.).
  • Short term financing
    • Its required for fulfilling any immediate cash requirement.
  • Investment opportunities
    • People who have surplus cash can invest in various products thus building their own asset portfolio.
  • Risk Management
    • The market always innovate and offer new products that may minimize various risks.

There are two types of Financial markets: Primary and Secondary. The former takes care of issuance of Securities(a common stock!) and the latter takes care of trading of those issued securities.

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