In an economy, money flows in circles. Savings are turned into investments. When a business needs funds to get started and to run in the long-term, where do the funds come from? They are made available through various functions of the financial market. Let’s learn more about the concept of the financial market.
In this lesson, let's learn about financial markets.
A market is a place to sell and buy goods and services. It is also a sum total of demand and supply of any particular good or service. On this basis, we can define the financial market as a market or an arrangement or an institution that facilitates the exchange of financial instruments and securities. These financial instruments include shares, stocks, bonds, debentures, commercial papers, bills, cheques, etc. The laws of demand and supply in the financial market determines the price of these instruments.
Financial markets are also known as Wall Street, Capital Market, etc.
Let us imagine a bank where a person maintains a savings account. The bank uses this money from the savings account of depositors to loan to other individuals and organizations. Bank charges interest on loans. The depositors also earn interest on their savings. Thus, the bank serves as a financial market that benefits both depositors and the debtors.
Both the money market and the capital market are the two different types of financial markets.
With regard to the type of instrument traded, different types of financial markets are
A stock market is a cluster and loose network of economic transactions that trade shares of ownership of public companies. Here each share comes with a price, and investors make money with the stocks when they perform well in the market.
The word Trade commonly used in the stock market defines the transfer of a stock or security from a seller to a buyer and this requires both parties to agree on a price.
There are various indices that investors can use to monitor how the stock market is doing so that they can buy at a low rate and earn high profit by selling it.
It is also known as debt or credit market. It offers opportunities to private and government companies 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. Unlike other financial markets, it is fixed for a certain period of time. Its primary goal is to provide long-term funding for public and private expenditure.
This is where traders and investors buy and sell natural resources or commodities. Commodities are commonly classified in two subgroups:
Their price is unpredictable therefore a specific market is created for these resources. 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.
It facilitates trading in financial instruments such as futures contracts and options used to help control financial risk. The instruments derive their value mostly from the value of an underlying asset that can come in many forms – stocks, bonds, commodities, currencies, or mortgages.
It is a type of financial market which is made up of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors. It is a global online network, here buyers and sellers are involved in the purchase and buying of foreign currencies.
This market determines foreign exchange rates for every currency. The foreign exchange market works through financial institutions and operates on several levels. The forex market is the backbone of international trade and global investing. It is critical to support imports and exports, which are necessary to gain access to resources and to create additional demand for goods and services.
1. Price determination – Demand and supply of an asset in a financial market helps to determine their price. Investors are the supplier of the funds, while the industries are in need of the funds. These market forces help to determine the price.
2. Mobilization of savings – For an economy to be successful it is critical that the money does not sit idle. Thus, a financial market helps in connecting those with money with those who require money.
3. Ensures liquidity – Assets that buyers and sellers trade in the financial market have high liquidity. It means that investors can easily sell those assets and convert them into cash whenever they want. Liquidity is an important reason for investors to participate in trade.
4. Saves time and money – Financial markets serve as a platform where buyers and sellers can easily find each other without making too much effort or wasting time. Also, since these markets handle so many transactions it helps them to achieve economies of scale. This results in lower transaction costs and fees for the investors.
