The financial environment consists of financial markets, financial institutions, financial instruments and services. Financial markets are the place where the transaction of financial instruments and services are taking place. It is a broad term describing any marketplace where trading of securities including equities, bonds, currencies and derivatives occur. They are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade. It plays a crucial role in allocating limited resources, in the country’s economy.
Financial markets exist in order to bring buyer and seller of securities and financial services together. They are the mechanism that exists in order to facilitate the exchange of financial assets, thus adding to the liquidity of financial assets. Some of these markets have always been open to private investors; others remained the exclusive domain of major international banks and financial professionals until the very end of the twentieth century. It acts as an intermediary between the savers and investors by mobilising funds between them. People and organizations that need to borrow money are brought together with those having surplus funds in the financial markets.
According to the Federal Reserve Bank of San Francisco, well-developed, properly-run financial markets play a crucial role in contributing to the health and efficiency of a country’s economy.
In financial markets, the corporate managers could raise funds by issuing securities or borrowing from banks. Financial markets help in bringing suppliers and borrowers together with the help of financial intermediaries directly or indirectly. Lenders or suppliers of funds exchange money for other financial assets that tend to provide a better future return.
The development of this markets in an economy determines the degree of success of financial activities. Because these markets add to the liquidity of financial securities, investors are generally interested to buy those securities for which a market exists.