Financial markets
   HOME

TheInfoList



OR:

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 (economics), market. An early form of trade, barter, s ...

trade
financial
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
and derivatives at low
transaction cost In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavi ...
s. Some of the securities include
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...

stock
s and bonds, raw materials and
precious metals Precious metals are rare, naturally occurring metallic chemical elements of high Value (economics), economic value. Chemically, the precious metals tend to be less reactivity (chemistry), reactive than most elements (see noble metal). They ...
, which are known in the financial markets as
commodities In economics, a commodity is an economic goods, good, usually a resource, that has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to who Production ...
. 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 A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
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 New York, often called New York City or NYC, is the List o ...

New York Stock Exchange
(NYSE),
London Stock Exchange London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Paul ...
(LSE), JSE Limited (JSE),
Bombay Stock Exchange BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange. It is located on Dalal Street in Mumbai. Established in 1875 by cotton merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange in ...

Bombay Stock Exchange
(BSE) or an electronic system such as
NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City New York, often called New York City or NYC, is the ...

NASDAQ
. Much trading of stocks takes place on an exchange; still,
corporate action A corporate action is an event initiated by a public company that brings or could bring an actual change to the Security (finance), securities—Stock, equity or debt—issued by the company. Corporate actions are typically agreed upon by a co ...
s (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 A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...
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".Unite ...

Sustainable Development Goal 10
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 A capital market is a financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securitie ...
; 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 market A capital market is a financial market in which long-term debt (over a year) or Equity (finance), equity-backed security (finance), securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital m ...
s 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, as ...

Stock market
s, which provide financing through the issuance of shares or
common stock Common stock is a form of corporate equity (finance), equity ownership, a type of security (finance), security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or or ...

common stock
, and enable the subsequent trading thereof. **
Bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt security (finance), securities, known as the secondary market. This is usually in th ...
s, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. *
Commodity market A commodity market is a Market (economics), market that trades in the Primary sector of the economy, primary economic sector rather than manufactured products, such as Cocoa bean, cocoa, fruit and sugar. Hard commodities are mined, such as gol ...
s, The commodity market is a market that trades in the primary economic sector rather than manufactured products,
Soft commodities Soft commodities, or softs, are Commodity, commodities such as coffee, Cocoa bean, cocoa, sugar, Maize, corn, wheat, soybean, fruit and livestock.Patrick Maul, ''Investing in Commodities'', diplom.de, 2011, p8 table c. The term generally refers to c ...
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 market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As Security (finance)#Debt, short-term securities became a commodity, the mone ...
s, which provide short term debt financing and investment. * Derivatives markets, which provide instruments for the management of
financial Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...

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 derivative (finance), derivatives contracts to buy or sell specific quantitie ...
s, which provide standardized
forward contract In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumpt ...
s for trading products at some future date; see also forward market. *
Foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) Market (economics), market for the trading of currency, currencies. This market d ...
s, which facilitate the trading of
foreign exchange The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
. *
Cryptocurrency A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It is ...
market which facilitate the trading of digital assets and financial technologies. *
Spot market The spot market or cash market is a market (place), public financial market in which financial instrument, financial instruments or commodity, commodities are traded for spot date, immediate delivery. It contrasts with a futures exchange, futur ...
*
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 market A capital market is a financial market in which long-term debt (over a year) or Equity (finance), equity-backed security (finance), securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital m ...
s may also be divided into
primary market :''"Primary market" may also refer to Art valuation#Primary and secondary markets, 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 i ...
s and
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial markets, financial market in which previously issued financial instruments such as stock, Bond (finance), bonds, option (finance), options, and Fut ...
s. Newly formed (issued) securities are bought or sold in primary markets, such as during
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically Underwriting, underwritten by one or mo ...
s. 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 Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liqui ...
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 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 markets. Beca ...

bank
s, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those who have
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...

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
loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
s and
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners ...
s. 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 stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and sell security (finance), securities, such as share (finance), shares of stock, Bond (finance) ...
. A company can raise money by selling
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...
to
investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...
s 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 A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
'' 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 market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As Security (finance)#Debt, short-term securities became a commodity, the mone ...
s. Alternatively, such companies may decide to return the cash surplus to their shareholders (e.g. via a
share repurchase Share repurchase, also known as share buyback or stock buyback, is the re-acquisition by a company of its own shares. It represents an alternate and more flexible way (relative to dividends) of returning money to shareholders. When used in coord ...
or
dividend A dividend is a distribution of Profit (accounting), 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 ...

dividend
payment).


Banks

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'
loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
s 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 flow A cash flow is a real or virtual movement of cash, money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are exp ...
s. 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 ...

Government
s'' often find their spending requirements exceed their
tax revenue Tax revenue is the income that is collected by governments through taxation. Taxation is the primary source of government revenue. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resourc ...
s. 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 (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'' 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 reductio ...

inflation
''. ''
Municipalities A municipality is usually a single administrative division Administrative division, administrative unit,Article 3(1). country subdivision, administrative region, subnational entity, constituent state, as well as many similar terms, are ge ...
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 A public company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock exchange or in Over-the-counter (finance), over-the-counter markets. A public (publicly traded) comp ...
'' typically include
nationalized Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the State ownership, public ownership of a Government, national government or State (polity), ...
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 market The foreign exchange market (Forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) Market (economics), market for the trading of currency, currencies. This market d ...
s. 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 environme ...
''. 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 The future is the time after the past and present. Its arrival is considered inevitable due to the existence of time and the laws of physics. Due to the apparent nature of reality and the unavoidability of the future, everything that currently ...
# Forward # Option # Swap Seemingly, the most obvious buyers and sellers of
currency A currency, "in circulation", from la, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...

currency
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 Bank for International Settlements (BIS) is an international financial institution owned by central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country ...

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'', '' statistical finance'' Much effort has gone into the study of financial markets and how prices vary with time.
Charles Dow Charles Henry Dow (; November 6, 1851 – December 4, 1902) was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also co-founded ''The Wall Street Journal ''The Wall Street Journ ...
, one of the founders of
Dow Jones & Company Dow Jones & Company, Inc. is an American publishing firm owned by News Corp and led by CEO Almar Latour. The company publishes ''The Wall Street Journal'', ''Barron's (newspaper), Barron's'', ''MarketWatch'', ''Mansion Global'', ''Financial Ne ...
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 The Wall Street Journal Asia, ...

The Wall Street Journal
, enunciated a set of ideas on the subject which are now called Dow theory. This is the basis of the so-called
technical analysis In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and Quantitative analysis (finance), quantitati ...

technical analysis
method of attempting to predict future changes. One of the tenets of "technical analysis" is that
market trend A market trend is a perceived tendency of financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. So ...
s 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, 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 Benoit B. Mandelbrot (20 November 1924 – 14 October 2010) was a Polish-born French-American mathematician and polymath with broad interests in the practical sciences, especially regarding what he labeled as "the art of #Fractals and the ...
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 number, real-valued random variable. The general form of its probability density function is : f(x) = \frac e^ The param ...

normal distribution
, 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 In statistics, the standard Deviation (statistics), deviation is a measure of the amount of variation or statistical dispersion, dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean (al ...

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 Statistics (from German language, German: ''wikt:Statistik#German, Statistik'', "description of a State (polity), state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of ...
methods. * Rocket scientist, a financial consultant at the
zenith The zenith (, ) is an imaginary point directly "above" a particular location, on the celestial sphere. "Above" means in the vertical direction (plumb line) opposite to the gravity direction at that location (nadir). The zenith is the "highest" ...
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 In business, a takeover is the purchase of one company (law), company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in ...
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 Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictions ...
that is often illegal. *
Bid–ask spread The bid–ask spread (also bid–offer or bid/ask and buy/sell in the case of a market maker) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate sale ( ask) and an immediate ...
, 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 In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the beha ...
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: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!'', by Robert Kiyosaki and Sharon Lechter. Warner Business Books, 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 Columbia University Press is a university press based in New York City, and affiliated with Columbia University. It is currently directed by Jennifer Crewe (2014–present) and publishes titles in the humanities and sciences, including the field ...
, 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 Columbia University Press is a university press based in New York City, and affiliated with Columbia University. It is currently directed by Jennifer Crewe (2014–present) and publishes titles in the humanities and sciences, including the field ...
, 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 W. Sage, Henry William Sage. It was first established in 1869, making it the first university publishing en ...
, 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 Harvard University Press (HUP) is a publishing house established on January 13, 1913, as a division of Harvard University, and focused on academic publishing. It is a member of the Association of American University Presses. After the retirem ...
, 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 Academic publishing, 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, ...
, 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 W. Sage, Henry William Sage. It was first established in 1869, making it the first university publishing en ...
, 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 Columbia University Press is a university press based in New York City, and affiliated with Columbia University. It is currently directed by Jennifer Crewe (2014–present) and publishes titles in the humanities and sciences, including the field ...
, 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 Academic publishing, 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, ...
, 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 publishing, 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 ...
, 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 The MIT Press is a university press affiliated with the Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts (United States). It was established in 1962. History The MIT Press traces its origins back to 1926 when MIT publish ...
, 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 Academic publishing, 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, ...
, 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 W. Sage, Henry William Sage. It was first established in 1869, making it the first university publishing en ...
, 2021, pp. 19–29, . * * * * * * * * *


External links


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