The Role of Financial Markets


What is a Financial Market?

A financial market is a term that describes any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets typically have transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of that trade.

Financial markets can be found in almost every nation in the world. Some are very small, with only a few participants, while others trade trillions of dollars daily. One of the larger financial markets is the New York Stock Exchange (NYSE).

Types of Markets

Capital- A market where individuals and institutions trade financial securities. Institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds.

Stock- A market where people can buy and sell shares in publicly traded companies. It is split into the primary and secondary markets. The primary market is where new issues are offered first, and the secondary market is where all of the following trading happens.

Bond- A bond is where an investor loans money to an entity and is paid back over time at a fixed interest rate. The main types of bonds are corporate, municipal, and U.S. Treasury bonds.

Money- This market is used for borrowing and lending in the short term. It can range from a couple days to just under a year. The money that is borrowed or lend has a high liquidity and very short maturities.

Cash or Spot- This is a sophisticated market with a chance of a big gain or a big loss. In this market, goods are sold for cash and are delivered immediately. Prices are settled in cash "on the spot" at current market prices

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The Main Purpose for Financial Markets

Financial markets help firms raise money. They can do this by taking out a loan from a bank and repaying it with interest, issuing bonds to borrow money from investors that will be repaid at a fixed interest rate, or offering investors partial ownership in the company and a claim on its residual cash flows in the form of stock. Financial markets are a key part in our economy, and without them, our economy would crumble.
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