Financial Markets

Financial Markets: Types, Functions & Importance

Financial markets are the driving forces of the global economy, providing investment opportunities and access to capital for individuals, institutions, and corporations. However, it is not just a place to buy and sell stocks; financial markets offer much more than that. This article will discover the different types of financial markets, functions of financial markets, and why they are so important. 

What are Financial Markets?

A financial market is a marketplace where financial securities and commodities are traded. The major function of a financial market is to provide liquidity to investors so they can buy and sell assets easily. Financial markets also play an essential role in assisting the efficient allocation of resources within the economy. 

It covers investments, derivatives, financial instruments, trading strategies, and portfolio management. This course provides an understanding of how the markets operate to give students a better understanding of how money moves from one place to another. It will equip them with skills on how to invest in different types of securities and manage their portfolios. Furthermore, this course encourages critical thinking when analysing risk versus return for various financial decisions.

Types of Financial Markets

1-Stock Markets:

Stock markets are a type of financial market where stocks, or shares in companies, can be bought and sold. They provide an important source of liquidity for investors and businesses seeking to raise capital. Companies use the stock market as a means to increase their value by offering investors ownership in their company through the buying and selling of stock. Stock markets also offer traders the opportunity to speculate on short-term price movements in stocks by engaging in day trading activities.

2-Over The Counter Markets:

Over-the-counter (OTC) markets are not centralized and do not have a physical location. They allow buyers and sellers to transact directly with each other, usually through an electronic network. OTC markets offer greater flexibility than traditional exchanges, allowing easier access to instruments such as derivatives or exotic securities. In addition, they often have lower trading costs since no middleman is involved in the transaction. 

3-Bond Markets:

Bond markets are a type of financial market that allow investors to buy and sell debt securities. Governments, municipalities, or companies typically issue these bonds to raise funds for various projects. Bond prices will vary depending on the issuer’s credit quality and prevailing interest rates. Investors can buy bonds directly from issuers or through intermediaries such as broker-dealers or investment banks.

4-Forex Markets:

Forex markets are one of the most popular types of financial markets. They involve trading currencies worldwide, allowing investors to benefit from exchange rate fluctuations between two currencies. Forex allows traders to profit from price movements and manage risk through arbitrage and hedging.

What Are The Functions of Financial Markets?

Financial markets play a vital role in the economy by facilitating the buying, selling, and pricing of financial assets. They provide an efficient way to transfer funds between buyers and sellers. The main functions of financial markets include: 

  • Facilitating capital formation: Financial markets allow companies to raise fresh capital from investors to finance their operations or expansion plans. This helps businesses grow and create jobs, leading to economic growth.
  • Price discovery: Prices of all financial instruments are determined through market forces like supply-demand dynamics in these markets. This helps buyers and sellers determine fair prices for a given security or asset class at any given time. 
  • Allocating capital efficiently: Financial markets efficiently allocate capital across different sectors by enabling investors to invest in diverse asset classes based on their risk preferences.
  • Risk management tools: These markets also offer sophisticated risk management tools such as derivatives which can be used by institutions or individual traders seeking exposure without taking on too much risk or leverage levels beyond what they can manage effectively.


Financial markets are an essential part of the global economy. Financial markets facilitate trading of securities and commodities, promoting efficient allocation of resources across asset classes and countries. Interconnectivity of these markets allows quick capital movement and easier access to funds for businesses.

By understanding the types of financial markets available, as well as their functions and importance, you can make better-informed decisions when investing or trading in them.

The BBA in Financial Markets program offered by the BSE Institute in collaboration with SNU is designed to prepare students for careers in the financial sector. Students pursuing this course will learn about financial management, investment analysis, risk management, and financial planning.

Upon graduation, students will have a strong understanding of the financial markets and the skills needed to succeed in a variety of roles, including financial analyst, investment banker, portfolio manager, and financial planner. Overall, the BBA in Financial Markets program offered by the BSE Institute and SNU is an excellent choice for students who are interested in pursuing a career in finance and want to gain a comprehensive understanding of the financial industry.

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