Financial Markets

Overview

A financial market is a marketplace where buyers and sellers trade assets such as equities, bonds, currencies, derivatives, and commodities. These markets are defined by transparent pricing, strict regulations, costs of transaction, and market forces determining the prices of securities that are traded. Financial markets can be found in nearly every nation in the world.

Classification of Financial Markets

Financial markets can be classified in several ways, including by the type of asset traded, the structure of the market, and the timeframe in which transactions are made.

By Type of Asset

Financial markets can be divided into markets for equity securities (also known as stock markets), debt securities markets (also known as bond markets), derivatives markets (which include options, futures, and swaps), commodity markets, and currency markets (also known as foreign exchange markets).

By Market Structure

Financial markets can also be categorized by their market structure. The two main types of market structures are over-the-counter markets (OTC) and exchange markets.

By Timeframe

Financial markets can also be classified by the timeframe in which transactions are made. These can be divided into spot markets (where trades are made for immediate delivery) and futures markets (where trades are made for delivery at a future date).

Role of Financial Markets

Financial markets play a crucial role in the overall economy of a nation. They serve multiple functions which are traditionally measured by a well-established set of financial market indicators.

Price Determination

Financial markets play a crucial role in determining the prices of securities that are traded. Prices are set by market supply and demand.

Raising Capital

Financial markets provide a venue for companies and governments to raise capital. This is done through the issuance of bonds and stocks.

Transfer of Risk

In financial markets, risk can be transferred from those who have it but may not want it, to those who are willing to take it on, often for a price. This transfer of risk is facilitated by derivative products.

Financial Market Participants

Participants in financial markets can be individuals, companies, or governments, and they can be participating as either buyers or sellers.

Individual Investors

Individual investors, also known as retail investors, participate in financial markets for a variety of reasons, including for long-term investments like retirement, short-term income, or speculative gains.

Institutional Investors

Institutional investors are organizations that invest on behalf of their members. These can include pension funds, mutual funds, insurance companies, and hedge funds.

Companies

Companies participate in financial markets in order to raise capital, manage risk, and potentially to invest excess capital.

Governments

Governments participate in financial markets in order to raise capital, manage national economic policy, and in some cases, to invest sovereign wealth.

Criticisms of Financial Markets

While financial markets play a crucial role in the global economy, they are not without their criticisms. These criticisms often revolve around issues of fairness, transparency, and risk.