Indian Financial Market: Objectives and Functions of Financial Market (For CBSE, ICSE, IAS, NET, NRA 2022)

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Business units have to raise short-term as well as long-term funds to meet their working and fixed capital requirements from time to time. This necessitates not only the ready availability of such funds but also a transmission mechanism with the help of which the providers of funds (investors/lenders) can interact with the borrowers/users (business units) and transfer the funds to them as and when required. This aspect is taken care of by the financial markets which provide a place where or a system through which, the transfer of funds by investors/lenders to the business units is adequately facilitated.

Financial Market

  • Money always flows from surplus sector to deficit sector. That means persons having excess of money lend it to those who need money to fulfil their requirement.
  • Similarly, in business sectors the surplus money flows from the investors or lenders to the businessmen for the purpose of production or sale of goods and services. So, we find two different groups, one who invest money or lend money and the others, who borrow or use the money. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. So, financial market may be defined as ‘a transmission mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated’ .
  • A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. To clarify the meaning let us take an example. Suppose Gopal has given a loan of ₹ 50,000 to Madan, which Madan has to return. Now, Gopal also has to give some money to Madhu. In this case, Gopal can make a document directing Madan to make payment up to ₹ 50,000 to Madhu on demand or after expiry of a specified period. This document is called a bill of exchange, which can be transferred to some other person՚s name by Madhu.
  • A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.


After studying this lesson, you will be able to:

  • Explain the concept and functions of financial markets.
  • State the nature and importance of money market.
  • State the nature and types of capital market.
  • Distinguish between capital market and money market.
  • Explain the nature and functions of a stock exchange.
  • State the advantages of stock exchanges from the points of view of companies, investors and society as a whole.
  • State the limitations of stock exchanges.
  • Explain the concept of speculation and distinguish it from investment.
  • Outline the stock exchanges in India; and
  • Describe the nature of regulation of stock exchanges in India and the role of SEBI.

Functions of Financial Market

Functions of Financial Market

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