Financial Markets include any place or system that provides buyers and sellers the means to trade financial instruments, including bonds, equities, various international currencies, and derivatives. Financial markets facilitate the interaction between those who need capital with those who have the capital to invest.
Definition:
Financial Market is a mechanism that brings buyers and sellers of financial assets together for fixing the price of a particular security. 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.
Key Notes:
- Financial markets refer broadly to any marketplace where the trading of securities occurs.
- There are many kinds of financial markets, including (but not limited to) forex, money, stock, and bond markets.
- These markets may include assets or securities that are either listed on regulated exchanges or else trade over the counter (OTC).
- Financial markets trade in all types of securities and are critical to the smooth operation of a capitalist society.
- When financial markets fail, economic disruption including recession and unemployment can result.
Types of Financial Markets
There are so many financial markets, and every country is home to at least one, although they vary in size.
Some are small while others are internationally known, such as the New York Stock Exchange (NYSE) which trades trillions of dollars on a daily basis. Here are some types of financial markets.
1. Stock market
The stock market trades shares of ownership of public companies. Each share comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to buy stocks.
The real challenge is in choosing the right stocks that will earn money for the investor.
There are various indices that investors can use to monitor how the stock market is doing, such as the Dow Jones Industrial Average (DJIA) and the S&P 500.
When stocks are bought at a cheaper price and are sold at a higher price, the investor earns from the sale.
2. Bond market
The bond market offers opportunities for companies and the government to secure money to finance a project or investment.
In a bond market, investors buy bonds from a company, and the company returns the amount of the bonds within an agreed period, plus interest.
3. Commodities market
The commodities market is where traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold.
A specific market is created for such resources because their price is unpredictable.
There is a commodities futures market wherein the price of items that are to be delivered at a given future time is already identified and sealed today.
4. Derivatives market
Such a market involves derivatives or contracts whose value is based on the market value of the asset being traded. The futures mentioned above in the commodities market is an example of a derivative.
Functions of Financial Markets
The role of financial markets in the success and strength of an economy cannot be underestimated. Here are four important functions of financial markets:
1. Puts savings into more productive use
As mentioned in the example above, a savings account that has money in it should not just let that money sit in the vault.
Thus, financial markets like banks open it up to individuals and companies that need a home loan, student loan, or business loan.
2. Determines the price of securities
Investors aim to make profits from their securities. However, unlike goods and services whose price is determined by the law of supply and demand, prices of securities are determined by financial markets.
3. Makes financial assets liquid
Buyers and sellers can decide to trade their securities anytime. They can use financial markets to sell their securities or make investments as they desire.
4. Lowers the cost of transactions
In financial markets, various types of information regarding securities can be acquired without the need to spend.
Importance of Financial Markets
There are many things that financial markets make possible, including the following:
- Financial markets provide a place where participants like investors and debtors, regardless of their size, will receive fair and proper treatment.
- They provide individuals, companies, and government organizations with access to capital.
- Financial markets help lower the unemployment rate because of the many job opportunities it offers
Frequently Asked Questions (FAQs)
What is a financial market?
A financial market is a platform that connects buyers and sellers of securities and ensures that trading activities are efficiently accomplished.
It offers both short-term and long-term schemes to investors to invest in or raise capital for the businesses to grow.
Are financial markets efficient?
These markets are efficient given the strict rules and regulations framed by authorities for the traders and investors to follow.
However, if an individual or company is found violating the laws, they are likely to face heavy penalties. In addition, the violation might lead to the cancellation of the license.
Why do financial markets exist?
These markets exist as they help set up the prices for securities made available to traders and investors.
Plus, these act as a platform to let individuals and institutions use their savings in the best possible way to build finances for future use.
In short, it keeps the assets liquid and keeps the capitalist economies active.
