Financial markets, as the name suggests, are a kind of marketplace that gives you an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives.
They offer an opportunity for you to invest money in shares (also known as equities) to build up money for the future.
In addition to that, some call them by different names, like “Wall Street” and “capital market,” but they all mean the same thing.
In simple terms, businesses and investors can go to financial markets and institutions to raise money to grow their business and profit more.
For easy understanding, imagine owning a savings account in a bank. The bank can use your money and that of other depositors to loan to other individuals and organizations at an interest fee.
Likewise, as a depositor, you can earn and see their money grow through the interest that is paid to it. Therefore, the bank here serves as a financial market that benefits both the depositors and the debtors.
Types of Financial Markets
Globally, financial markets are many today, although they vary in size. Some financial markets are small while others are internationally known.
The New York Stock Exchange (NYSE) trades trillions of dollars daily and is recognized internationally as a leading financial market institution.
Below are some of the types of financial markets.
1. Stock market
The stock market trades shares of ownership of public companies. Every share comes with a price, and investors make money with the stocks when they perform well in the market.
Often, it is easy to buy stocks. The only real challenge comes in choosing the right stocks that will earn you money.
However, there are various platforms 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.
The investor earns when stocks are bought at a cheaper price and are sold at a higher price.
2. Bond market
This kind of market offers opportunities for companies and governments to get money to finance a project or investment.
Additionally, 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
In this market, traders and investors buy and sell natural resources or commodities like wheat, petroleum, iron ore, and gold.
Equally important, 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 examples of a derivative.
Functions of the Markets
The success and strength of an economy is depending on financial markets. In most cases, the following are four of its important functions:
1. Puts savings into more productive use
As stated above, money in a savings account should not just sit in there. Thus, financial markets like banks open it up to individuals and companies that need loans.
2. Determines the price of securities
In most cases, 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
This is where buyers and sellers have the power to decide to trade their securities anytime. Secondly, they have a choice to use financial markets to sell their securities or make investments as they desire.
4. Lowers the cost of transactions
In this field, you can acquire information regarding securities without the need to spend, even a single cent.
Importance of Financial Markets
- Most Financial markets provide fair and proper treatment for investors and debtors, regardless of their size.
- They necessitate individuals, companies, and government organizations with access to capital.
- Financial markets offer many job opportunities it offers.
