Financial Market and its characteristics
Financial Market and its characteristics. In the economic sense, investment means the commitment of funds to capital assets. Accordingly the investors are users of funds which they own or acquire in the market. Investors supply the funds by acquiring debt and equity instruments with their savings and they also transfer these instruments among each other. In this connection investment market includes the markets for funds both short and long term.
A market is a mechanism that brings buyer and seller together to aid in the transfer of goods and services. It is not a physical location where physical commodities are found ready to be bought and sold. Rather it is a process by which buyer and seller can communicate regarding the relevant aspects of the transaction. So financial market is a mechanism that brings buyer and seller of financial assets together for fixing the price of a particular security. Under such mechanism, those who establish and administer the market do not own the assets. They provide a physical location or an electronic system allowing potential buyers and sellers to interact. They provide necessary information and logistic support to transfer the ownership of the securities being traded.
Characteristics of a Market
Individuals enter into the securities markets to buy or sell their securities at a price justified by the prevailing supply and demand. An efficient market is that where the participants must have timely and accurate information on the volume and prices of past transactions and on all currently outstanding bids and offers.
A good security market possesses the following characteristic:
▪ Investors will be able to get accurate and quick information necessary for the security transactions.
▪ A market should operate in a position where the ability to buy or sell an asset at fixed price is not substantially different from the price for prior transaction, assuming no new information is available.
▪ A market should ensure the price continuity meaning that prices do not change much from one transaction to the next unless substantial new information becomes available. A continuous market without large price changes between trades is a characteristic of a liquid market.
▪ The buyers and sellers trade at prices above and below the current market price.
▪ An efficient or good market is one in which the transaction cost is minimum i.e., the market should be internally efficient.
▪ A market should reflect all the information available regarding the supply and demand factors in the market. This condition is refers to as external or informational efficiency.