The role of the securities market is a key facet in contributing to the economy by offering an orderly manner in which buying and selling of financial instruments can take place. The market ensures liquidity, price discovery, capital formation, and risk management, which enable businesses and investors to grow their wealth. Companies would find it hard to raise capital if the securities market did not exist, and investors would have a hassle in trading securities.
A securities market acts as a linking bridge between the investor and a company. In exchange for the necessary funding, it provides avenues for investors to earn returns on investments. It encompasses all forms of financial instruments, such as stocks, bonds, and derivatives. These are tools used for various economic purposes. The markets operate in exchanges as well as over-the-counter markets in a controlled yet open manner.
Securities Market Meaning
It can be defined as a marketplace in which stocks, bonds, and even derivatives of financial instruments are bought or sold.
It involves knowing market trends, the performance of companies, and managing risk. Some of the tools used to predict price movements include technical analysis, stock charts, and market indicators. There are different strategies, such as intraday trading, swing trading, and options trading.
- Primary Market: The companies raise funds by issuing new securities.
- Secondary Market: Existing securities are traded among investors.
Examples of Securities Market
The securities market is quite huge and includes a variety of financial instruments and institutions that allow for trading.
- Stock Exchange: Stock exchanges are organized platforms where securities are bought and sold. Examples include the New York Stock Exchange (NYSE), one of the largest stock exchanges in the world, and the Bombay Stock Exchange (BSE), which is the oldest stock exchange in Asia.
- Government Securities Market: This market includes the security which goes out by the government, including Treasury Bills (T-Bills), Government Bonds, and Inflation-Indexed Bonds.
- Exchange-Traded Funds (ETFs): Marketable securities offer liquidity and form the core of every investment portfolio.
Instruments in Securities Market
The securities market comprises various financial instruments that serve unique purposes. Such instruments are broadly categorized into equity securities, debt securities, and derivative instruments.
- Equity Securities: Equity securities represent a form of ownership in a company. Common Stocks – Represent ownership in a company with voting rights. Preferred Stocks – Give fixed dividends but generally no voting rights.
- Debt Securities: Debt securities are the securities that express a loan issued by an investor to an entity. Such securities give interest periodically and return the principal at maturity. Corporate Bonds given by a company to raise funds; Government Bonds – Issued by the government to raise funds for public projects.
- Derivative Instruments: A derivative’s value is derived from an underlying asset, which could be stocks, commodities, or interest rates. Futures Contracts – This refers to the agreements to buy or sell assets at a later date. Options Contracts – Give the holder the right to buy or sell assets at a set price. Swaps – An exchange of cash flows or interest rates.
Functions of Securities Market
The functions of the securities market contribute to financial stability, economic growth, and efficient allocation of resources. Below is a general detailed explanation of the key functions of the securities market.
Capital Formation and Economic Growth
The securities market allows the mobilization of funds for business expansion and development. In the primary market, companies issue stocks and bonds to attract investments from individuals and institutions. The inflow of capital fuels business growth, job creation, and economic development.
Liquidity and Marketability of Securities
The smoother the securities market is, the easier it makes to invest in securities, that is, buying and selling securities. Liquidity can be defined as the ease of transforming assets into cash.
Risk Management and Portfolio Diversification
Investors use various financial instruments to hedge risks and diversify portfolios. Availability of Government Securities Market Instruments, Corporate bonds and derivatives provides investors with good hedging against portfolio risks.
Regulatory Framework and Investor Protection
The securities market is strictly regulated, prevents fraud, and protects investors. It inspires people to save more and invest. Instead of idling, the saver invests in the stock market, mutual funds, and bond markets for the eventual amassing of wealth.
Facilitating Mergers and Acquisitions
Firms raise capital to enhance the process of mergers and acquisitions sought at every industry level through the securities market for mergers and acquisitions to expand and consolidate a business.
Functions of Securities Market FAQs
What is the meaning of securities market?
The meaning of securities market refers to a financial marketplace where securities like stocks, bonds, and derivatives are bought and sold.
What are the functions of security exchange market?
The functions of the security exchange market include capital formation, liquidity provision, price discovery, risk management, and regulatory compliance. It ensures that securities are traded transparently and efficiently.
What is the role of National Institute of Securities Markets NISM?
The National Institute of Securities Markets NISM trains and certifies financial professionals. It encourages investor education and sets high standards in the securities market.
What are government securities?
The government securities market consists of government issued securities like bonds and treasury bills.
What is the security market line?
The security market line represents the risk and return relationship in the securities market. The capital asset pricing models (CAPM) determine the expected returns from investments given their risk level using the SML.
