There are a lot of people who think that the term “financial market” is very complex and cannot be easily understood, so they do not bother to stress or go through the headache of trying to study it on their own, talk more of understanding how it works.
Well, in this post, we hope to help you change that thought as we will structure, break down and explain in very plain, simple terms, what the financial market is, the types, its importance, and how it works.
So what is a Financial Market?
A financial market is simply any marketplace where trading (buying and selling) of securities occurs. That’s it!
What are the Types of Financial Markets?
There are different types of financial markets but these are the most common (not limited to) types.
- Stock markets.
- Bond markets.
- Money Markets.
- Forex Markets.
- Derivatives Markets.
Stock Markets
These are markets where corporations list their shares and where traders and investors can buy and sell them.
Companies use stock markets, also known as equities markets, to obtain capital through an Initial Public Offering (IPO), with shares then traded among numerous buyers and sellers in what is known as a secondary market.
Bond Markets
A bond, also called a fixed-income market, is a financial instrument in which an investor lends money for a set period at a fixed interest rate.
A bond can be thought of as an agreement between the lender and the borrower that describes the loan and its installments. Bonds are used to finance projects and operations by firms, states, and sovereign governments.
Money Markets
Money markets typically trade in highly liquid short-term maturities (less than one year) and are characterized by a high level of safety and a low rate of interest return.
Money markets feature large-volume trading between institutions and traders at the wholesale level.
They equally include money market mutual funds purchased by private investors and money market accounts opened by bank customers at the retail level.
Forex Market
The forex (Foreign Exchange) market is a market where people can buy, sell, hedge, and speculate on currency pairs’ exchange rates.
Because cash is the most liquid of assets, the FX market is the most liquid in the world. The currency market handles more daily transactions than the futures and stock markets combined, totaling more than $6.6 trillion.
Derivatives Market
A derivative is worthless in itself.
Derivatives are secondary securities that derive their value solely from the value of the original security to which they are tied.
A derivatives market, rather than trading stocks directly, trade futures and options contracts, as well as other advanced financial products that are based on fundamental instruments such as bonds, commodities, currencies, interest rates, and stocks.
How does the Financial Market work?
It is important to note that, financial markets exist for a variety of purposes, but the most basic of which is to facilitate the efficient allocation of money and assets in a financial economy.
Simply, all financial markets function by bringing buyers and sellers of some asset or contract together and allowing them to trade with one another.
This is frequently accomplished through a form of auction or price discovery technique.
Financial markets make the global economy work more smoothly by permitting a free market for the flow of capital, financial obligations, and money, while also allowing investors to partake in capital gains over time.
Why is the Financial Market Important?
Without the financial market, capital will not be allocated efficiently, and economic activities such as commerce and trade, investment, and growth potential will be reduced substantially, so it is essential to have the financial market running for these economic activities to be met.
There you have it!
Understanding the financial market and how it works doesn’t have to be a complex situation for you and we hope that having read this, you now understand what the financial market is, and how it works.