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A financial market is a market in which people
trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. An early form of trade, barter, saw the direct exc ...
financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets as commodities. The term "market" is sometimes used for what are more strictly ''exchanges'', organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (such as the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its liste ...
(NYSE), London Stock Exchange (LSE), JSE Limited (JSE), Bombay Stock Exchange (BSE) or an electronic system such as NASDAQ. Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell the stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, to stock exchanges. There are also global initiatives such as the United Nations
Sustainable Development Goal 10 Sustainable Development Goal 10 (Goal 10 or SDG 10) is about reduced inequality and is one of the 17 Sustainable Development Goals established by the United Nations in 2015. The full title is: "Reduce inequality within and among countries".Unit ...
which has a target to improve regulation and monitoring of global financial markets.


Types of financial markets

Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finances. For long term finance, they are usually called the capital markets; for short term finance, they are usually called money markets. The money market deals in short-term loans, generally for a period of a year or less. Another common use of the term is as a catchall for all the markets in the financial sector, as per examples in the breakdown below. * Capital markets which consist of: **
Stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
s, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. ** Bond markets, which provide financing through the issuance of
bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...
s, and enable the subsequent trading thereof. * Commodity markets, The commodity market is a market that trades in the primary economic sector rather than manufactured products, Soft commodities is a term generally referred as to commodities that are grown, rather than mined such as crops (corn, wheat, soybean, fruit and vegetable), livestock, cocoa, coffee and sugar and Hard commodities is a term generally referred as to commodities that are mined such as gold, gemstones and other metals and generally drilled such as oil and gas. * Money markets, which provide short term debt financing and investment. * Derivatives markets, which provide instruments for the management of financial risk. *
Futures market A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
s, which provide standardized forward contracts for trading products at some future date; see also
forward market The forward market is the informal over-the-counter financial market by which contracts for future delivery are entered into. It is mainly used for trading in foreign currencies, where the contracts are used to hedge against foreign exchange ris ...
. * Foreign exchange markets, which facilitate the trading of foreign exchange. * Cryptocurrency market which facilitate the trading of digital assets and financial technologies. * Spot market *
Interbank lending market The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being over day. Such loans are made at the interbank rate (also call ...
The capital markets may also be divided into
primary market :''"Primary market" may also refer to a market in art valuation.'' The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the issuer, with the issuer being paid the proc ...
s and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors. Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value. Securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount.


Raising capital

Financial markets attract funds from investors and channels them to corporations—they thus allow corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a short-term basis, while capital markets allow corporations to gain long-term funding to support expansion (known as maturity transformation). Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as
bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
s, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those who have money to save on the form of savings a/c. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:


Lenders

The lender temporarily gives money to somebody else, on the condition of getting back the principal amount together with some interest or profit or charge.


Individuals and doubles

Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she: * Puts money in a savings account at a bank * Contributes to a pension plan * Pays premiums to an insurance company * Invests in government bonds


Companies

'' Companies'' tend to be lenders of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. Alternatively, such companies may decide to return the cash surplus to their shareholders (e.g. via a share repurchase or
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
payment).


Banks

Banks can be lenders themselves as they are able to create new debt money in the form of deposits.


Borrowers

* ''Individuals'' borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. * ''Companies'' borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion. It is common for companies to use mixed packages of different types of funding for different purposes – especially where large complex projects such as company management buyouts are concerned. * ''
Government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...
s'' often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the
Public sector net cash requirement The Public Sector Net Cash Requirement (PSNCR), formerly known as the Public Sector Borrowing Requirement (PSBR), is the official term for the Government budget deficit in the United Kingdom, that is to say the rate at which the British Government m ...
(PSNCR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed, the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the ''
value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
'' of the debt is to influence ''
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
''. ''
Municipalities A municipality is usually a single administrative division having corporate status and powers of self-government or jurisdiction as granted by national and regional laws to which it is subordinate. The term ''municipality'' may also mean the ...
and
local authorities Local government is a generic term for the lowest tiers of public administration within a particular sovereign state. This particular usage of the word government refers specifically to a level of administration that is both geographically-loca ...
'' may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. '' Public Corporations'' typically include nationalized industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets. Borrowers having similar needs can form into a group of borrowers. They can also take an organizational form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their borrowings.


Derivative products

During the 1980s and 1990s, a major growth sector in financial markets was the trade in so called derivatives. In the financial markets, stock prices, share prices, bond prices, currency rates, interest rates and dividends go up and down, creating ''
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
''. Derivative products are financial products that are used to ''control'' risk or paradoxically ''exploit'' risk. It is also called financial economics. Derivative products or instruments help the issuers to gain an unusual profit from issuing the instruments. For using the help of these products a contract has to be made. Derivative contracts are mainly 4 types: # Future # Forward # Option # Swap Seemingly, the most obvious buyers and sellers of
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...
are importers and exporters of goods. While this may have been true in the distant past, when international trade created the demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to the Bank for International Settlements. The picture of foreign currency transactions today shows: * Banks/Institutions * Speculators * Government spending (for example, military bases abroad) * Importers/Exporters * Tourists


Analysis of financial markets

: ''See
Statistical analysis of financial markets Financial modeling is the task of building an abstract representation (a model) of a real world financial situation. This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or portfolio ...
'', ''
statistical finance Statistical finance, is the application of econophysics to financial markets. Instead of the normative roots of finance, it uses a positivist framework. It includes exemplars from statistical physics with an emphasis on emergent or collective p ...
'' Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and
The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
, enunciated a set of ideas on the subject which are now called Dow theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the
random walk hypothesis The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk (so price changes are random) and thus cannot be predicted. History The concept can be traced to French broker Jules Regnault who ...
, which states that the next change is not correlated to the last change. The role of human psychology in price variations also plays a significant factor. Large amounts of volatility often indicate the presence of strong emotional factors playing into the price. Fear can cause excessive drops in price and greed can create bubbles. In recent years the rise of algorithmic and high-frequency program trading has seen the adoption of momentum, ultra-short term moving average and other similar strategies which are based on technical as opposed to fundamental or theoretical concepts of market behaviour. For instance, according to a study published by the European Central Bank, high frequency trading has a substantial correlation with news announcements and other relevant public information that are able to create wide price movements (e.g., interest rates decisions, trade of balances etc.) The scale of changes in price over some unit of time is called the volatility. It was discovered by Benoit Mandelbrot that changes in prices do not follow a
normal distribution In statistics, a normal distribution or Gaussian distribution is a type of continuous probability distribution for a real-valued random variable. The general form of its probability density function is : f(x) = \frac e^ The parameter \mu ...
, but are rather modeled better by Lévy stable distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a normal distribution with an estimated standard deviation.


Financial market slang

* Poison pill, when a company issues more shares to prevent being bought out by another company, thereby increasing the number of outstanding shares to be bought by the hostile company making the bid to establish majority. *Bips, meaning "bps" or
basis point A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. The related term ''permyriad'' means one hundredth of 1 percent. Changes of interest rates are often stated in basis points. If ...
s. A basis point is a financial unit of measurement used to describe the magnitude of percent change in a variable. One basis point is the equivalent of one hundredth of a percent. For example, if a stock price were to rise 100bit/s, it means it would increase 1%. * Quant, a quantitative analyst with advanced training in
mathematics Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. These topics are represented in modern mathematics ...
and statistical methods. * Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of high complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they are physicists and engineers by training. * IPO, stands for initial public offering, which is the process a new private company goes through to "go public" or become a publicly traded company on some index. *
White Knight A white knight is a mythological figure and literary stock character. They are portrayed alongside a black knight as diametric opposites. A white knight usually represents a heroic warrior fighting against evil, with the role in medieval literatu ...
, a friendly party in a takeover bid. Used to describe a party that buys the shares of one organization to help prevent against a hostile takeover of that organization by another party. * Round-tripping * Smurfing, a deliberate structuring of payments or transactions to conceal it from regulators or other parties, a type of money laundering that is often illegal. * Bid–ask spread, the difference between the highest bid and the lowest offer. * Pip, smallest price move that a given exchange rate makes based on market convention. *Pegging, when a country wants to obtain price stability, it can use pegging to fix their exchange rate relative to another currency. *Bearish, this phrase is used to refer to the fact that the market has a downward trend. *Bullish, this term is used to refer to the fact that the market has an upward trend.


Functions of financial markets

* Intermediary functions: The intermediary functions of financial markets include the following: ** Transfer of resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. ** Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. ** Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. ** Capital formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. ** Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and to the supply through the mechanism called price discovery process. ** Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. ** Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets. * Financial Functions ** Providing the borrower with funds so as to enable them to carry out their investment plans. ** Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. ** Providing liquidity in the market so as to facilitate trading of funds. ** Providing liquidity to commercial bank ** Facilitating credit creation ** Promoting savings ** Promoting investment ** Facilitating balanced economic growth ** Improving trading floors


Components of financial market


Based on market levels

* Primary market: A primary market is a market for new issues or new financial claims. Therefore, it is also called new issue market. The primary market deals with those securities which are issued to the public for the first time. * Secondary market: A market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities. Simply put, primary market is the market where the newly started company issued shares to the public for the first time through IPO (initial public offering). Secondary market is the market where the second hand securities are sold (security Commodity Markets).


Based on security types

* Money market: Money market is a market for dealing with the financial assets and securities which have a maturity period of up to one year. In other words, it's a market for purely short-term funds. * Capital market: A capital market is a market for financial assets that have a long or indefinite maturity. Generally, it deals with long-term securities that have a maturity period of above one year. The capital market may be further divided into (a) industrial securities market (b) Govt. securities market and (c) long-term loans market. ** Equity markets: A market where ownership of securities are issued and subscribed is known as equity market. An example of a secondary equity market for shares is the New York (NYSE) stock exchange. ** Debt market: The market where funds are borrowed and lent is known as debt market. Arrangements are made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some specified amount of interest. * Derivative markets: A market where financial instruments are derived and traded based on an underlying asset such as commodities or stocks. * Financial service market: A market that comprises participants such as commercial banks that provide various financial services like ATM. Credit cards. Credit rating, stock broking etc. is known as financial service market. Individuals and firms use financial services markets, to purchase services that enhance the workings of debt and equity markets. * Depository markets: A depository market consists of depository institutions (such as banks) that accept deposits from individuals and firms and uses these funds to participate in the debt market, by giving loans or purchasing other debt instruments such as treasury bills. * Non-depository market: Non-depository market carry out various functions in financial markets ranging from financial intermediary to selling, insurance etc. The various constituencies in non-depositary markets are mutual funds, insurance companies, pension funds, brokerage firms etc. *Relation between Bonds and Commodity Prices: With the increase in commodity prices, the cost of goods for companies increases. This increase in commodity prМжЙч ices level causes a rise in inflation. *Relation between Commodities and Equities: Due to the production cost remaining same, and revenues rising (due to high commodity prices), the operating profit (revenue minus cost) increases, which in turn drives up equity prices.


See also


References


Further reading

* * *''
Rich Dad Poor Dad ''Rich Dad Poor Dad'' is a 1997 book written by Robert T. Kiyosaki and Sharon Lechter. It advocates the importance of financial literacy (financial education), financial independence and building wealth through investing in assets, real estate ...
: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!'', by
Robert Kiyosaki Robert Toru Kiyosaki (born April 8, 1947) is an American entrepreneur, businessman and author. Kiyosaki is the founder of Rich Global LLC and the Rich Dad Company, a private financial education company that provides personal finance and busine ...
and
Sharon Lechter Sharon L. Lechter (born January 12, 1954) is an American accountant, author, and businesswoman. She is the co-author of '' Rich Dad Poor Dad'', and the founder and CEO of Pay Your Family First, a financial education organization. In January 2008, ...
.
Warner Business Books Hachette Book Group (HBG) is a publishing company owned by Hachette Livre, the largest publishing company in France, and the third largest trade and educational publisher in the world. Hachette Livre is a wholly owned subsidiary of Lagardère Gro ...
, 2000. * * * * * * * * * * * MCCARTY, NOLAN. “TRENDS IN FINANCIAL MARKET REGULATION.” After the Crash: Financial Crises and Regulatory Responses, edited by SHARYN O’HALLORAN and THOMAS GROLL, Columbia University Press, 2019, pp. 121–24, . * GROLL, THOMAS, et al. “TRENDS AND DELEGATION IN U. S. FINANCIAL MARKET REGULATION.” After the Crash: Financial Crises and Regulatory Responses, edited by THOMAS GROLL and SHARYN O’HALLORAN, Columbia University Press, 2019, pp. 57–81, . * Polillo, Simone. “COLLABORATIONS AND MARKET EFFICIENCY: The Network of Financial Economics.” The Ascent of Market Efficiency: Finance That Cannot Be Proven,
Cornell University Press The Cornell University Press is the university press of Cornell University; currently housed in Sage House, the former residence of Henry William Sage. It was first established in 1869, making it the first university publishing enterprise in ...
, 2020, pp. 60–89, . * Abolafia, Mitchel Y. “A Learning Moment?: JANUARY 2008.” Stewards of the Market: How the Federal Reserve Made Sense of the Financial Crisis, Harvard University Press, 2020, pp. 49–70, . * MacKenzie, Donald. “Dealers, Clients, and the Politics of Market Structure.” Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets,
Princeton University Press Princeton University Press is an independent publisher with close connections to Princeton University. Its mission is to disseminate scholarship within academia and society at large. The press was founded by Whitney Darrow, with the financial ...
, 2021, pp. 105–34, . * Polillo, Simone. “HOW FINANCIAL ECONOMICS GOT ITS SCIENCE.” The Ascent of Market Efficiency: Finance That Cannot Be Proven,
Cornell University Press The Cornell University Press is the university press of Cornell University; currently housed in Sage House, the former residence of Henry William Sage. It was first established in 1869, making it the first university publishing enterprise in ...
, 2020, pp. 119–42, . * * * * Williams, John C. “The Rediscovery of Financial Market Imperfections.” Toward a Just Society: Joseph Stiglitz and Twenty-First Century Economics, edited by Martin Guzman, Columbia University Press, 2018, pp. 201–06, . * QUIGGIN, JOHN. “Market Failure: Information, Uncertainty, and Financial Markets.” Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly,
Princeton University Press Princeton University Press is an independent publisher with close connections to Princeton University. Its mission is to disseminate scholarship within academia and society at large. The press was founded by Whitney Darrow, with the financial ...
, 2019, pp. 214–36, . * BAKLANOVA, VIKTORIA, and JOSEPH TANEGA. “MONEY MARKET FUNDS AFTER THE ONSET OF THE CRISIS.” After the Crash: Financial Crises and Regulatory Responses, edited by SHARYN O’HALLORAN and THOMAS GROLL, Columbia University Press, 2019, pp. 341–59, . * CEBALLOS, FRANCISCO, et al. “Financial Globalization in Emerging Countries: Diversification versus Offshoring.” New Paradigms for Financial Regulation: Emerging Market Perspectives, edited by MASAHIRO KAWAI and ESWAR S. PRASAD, Brookings Institution Press, 2013, pp. 110–36, . * LiPuma, Edward. “Social Theory and the Market for the Production of Financial Knowledge.” The Social Life of Financial Derivatives: Markets, Risk, and Time,
Duke University Press Duke University Press is an academic publisher and university press affiliated with Duke University. It was founded in 1921 by William T. Laprade as The Trinity College Press. (Duke University was initially called Trinity College). In 1926 ...
, 2017, pp. 81–115, . * Scott, Hal S. “Liability Connectedness: Money Market Funds and Tri-Party Repo Market.” Connectedness and Contagion: Protecting the Financial System from Panics, The MIT Press, 2016, pp. 53–58, . * Sornette, Didier. “MODELING FINANCIAL BUBBLES AND MARKET CRASHES.” Why Stock Markets Crash: Critical Events in Complex Financial Systems, REV-Revised,
Princeton University Press Princeton University Press is an independent publisher with close connections to Princeton University. Its mission is to disseminate scholarship within academia and society at large. The press was founded by Whitney Darrow, with the financial ...
, 2017, pp. 134–70, . * Morse, Julia C. “A PRIMER ON INTERNATIONAL FINANCIAL STANDARDS ON ILLICIT FINANCING.” The Bankers’ Blacklist: Unofficial Market Enforcement and the Global Fight against Illicit Financing,
Cornell University Press The Cornell University Press is the university press of Cornell University; currently housed in Sage House, the former residence of Henry William Sage. It was first established in 1869, making it the first university publishing enterprise in ...
, 2021, pp. 19–29, . * * * * * * * * *


External links


Financial Markets with Yale Professor Robert Shiller
{{Authority control Private sector