A marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives
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What are Financial Markets?
Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. Often, they are called by different names, including “Wall Street” and “capital market,” but all of them still mean one and the same thing. Simply put, businesses and investors can go to financial markets to raise money to grow their business and to make more money, respectively.
To state it more clearly, let us imagine a bank where an individual maintains a savings account. The bank can use their money and the money of other depositors to loan to other individuals and organizations and charge an interest fee.
The depositors themselves also earn and see their money grow through the interest that is paid to it. Therefore, the bank serves as a financial market that benefits both the depositors and the debtors.
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 some others are internationally known, such as the New York Stock Exchange (NYSE)that 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 the 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
Additional Resources
Thank you for reading CFI’s guide on Financial Markets. To keep learning and advancing your career, the following resources will be helpful:
FAQs
Financial Markets include any place or system that provides buyers and sellers the means to trade financial instruments, including bonds, equities, the various international currencies, and derivatives. Financial markets facilitate the interaction between those who need capital with those who have capital to invest.
What are the four types of financial markets? ›
The 4 types of financial markets are currency markets, money markets, derivative markets, and capital markets. Capital markets are used to sell equities (stocks), debt securities.
What is an example of a financial market? ›
Some examples of financial markets include the stock market, the bond market, and the commodities market.
What are the 2 most common types of financial markets? ›
The two main types of financial markets are Capital Markets and Money Market. The capital market is the market for medium and long term funds. You can read about the Financial Market – Functions, Features, Difference between Money and Capital Market in the given link.
What are the three main financial markets? ›
There are three main types of financial markets for you to understand: money markets, capital markets, and foreign exchange (FOREX) markets.
What are the 3 major types of financial? ›
The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance.
What are the three types of major financial markets today? ›
There are three types of major financial markets today: primary, secondary, and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.
What are the most popular financial markets? ›
Key Takeaways
The largest stock exchange in the world is the New York Stock Exchange. Other large stock exchanges include the Nasdaq, the National Stock Exchange of India, the Hong Kong Stock Exchange, the Singapore Stock Exchange, and the Shanghai Stock Exchange.
Are banks a financial market? ›
When the bank makes a loan, it draws on all the money you and other consumers have deposited. In this way, the bank acts as a financial market place for money. A bank loan can help fuel growth, but one day the loan holder will have pay back the loan with interest — a fee to cover the cost of borrowing.
Can you explain what financial markets do? ›
Financial Markets include any place or system that provides buyers and sellers the means to trade financial instruments, including bonds, equities, the various international currencies, and derivatives.
Key Takeaways
- The credit market brings together the suppliers of credit (households) with those who are demanding credit (other households, firms, and the government). ...
- The labor market is where labor services are traded. ...
- The foreign exchange market brings together demanders and suppliers of foreign currency.
The money market and capital market are often talked about. Together, they make up a large chunk of the global financial market.
Is real estate a financial market? ›
Some examples of financial markets and their roles include the stock market, the bond market, forex, commodities, and the real estate market, among others.
How do money markets work? ›
Money market accounts are a type of savings account. They pay interest, but some issuers offer account holders limited rights to occasionally withdraw money or write checks against the account. (Withdrawals are limited by federal regulations. If they are exceeded, the bank promptly converts it to a checking account.)
What are the basics of financial markets? ›
Financial markets are the places where individuals and firms trade assets such as stocks, bonds, commodities, and derivatives. The prices of all investments are derived from the offers and bids different investors make for them in markets.
Is life insurance a financial service? ›
Other financial services
Conglomerates – A financial services company, such as a universal bank, that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc.
What are the 4 roles of financial markets? ›
Providing loans. Facilitating transactions. Allocating capital to more productive use. Providing a market for equity.
What are the 4 financial sectors? ›
The sector is comprised of many different industries including banks, investment companies, insurance companies, and real estate firms.
What are the 4 types of financial management explain? ›
Most financial management plans will break them down into four elements commonly recognised in financial management. These four elements are planning, controlling, organising & directing, and decision making.
What are the four most common types of financial institutions? ›
The most common types of financial institutions include banks, credit unions, insurance companies, and investment companies.
