Definition of Financial Market
A financial market is a marketplace where financial assets such as stocks, bonds, currencies, and derivatives are bought and sold. It facilitates the exchange of capital between investors and businesses, helping allocate resources efficiently in an economy (Mishkin & Eakins, 2018).
Difference Between Primary and Secondary Market
| Feature | Primary Market | Secondary Market |
|---|---|---|
| Definition | Where new securities are issued and sold for the first time. | Where previously issued securities are traded among investors. |
| Purpose | Helps companies raise capital by issuing new shares or bonds. | Provides liquidity by allowing investors to buy and sell securities. |
| Participants | Issuing company, underwriters, and institutional investors. | Individual and institutional investors, brokers, and dealers. |
| Examples | Initial Public Offerings (IPOs), Bond Issuance. | Stock exchanges (e.g., NYSE, NASDAQ), Over-the-Counter (OTC) markets. |
Financial Intermediation and Its Role
Financial intermediation refers to the process by which financial institutions (such as banks, mutual funds, and insurance companies) act as intermediaries between savers and borrowers, facilitating the efficient allocation of capital in the economy (Freixas & Rochet, 2008).
Role of Financial Intermediaries
- Pooling Savings – Collect funds from various investors and allocate them to productive investments.
- Risk Management – Diversify investments to minimize risks for individual investors.
- Liquidity Provision – Allow savers to access their funds when needed while ensuring long-term investment stability.
- Credit Allocation – Assess creditworthiness and provide loans to businesses and individuals.
- Efficient Capital Allocation – Ensure capital flows to the most productive sectors, supporting economic growth.
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