Financial markets are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. They are also called by different names such as “Wall Street” and “Capital Market,” but all of them still mean one and the same thing. Or simply, businesses and investors can go to financial markets to raise money to grow their business and to make more money, respectively.
Types of Financial Markets
- Stock Market – shares of ownership of public companies are being traded. Investors make money with the stocks when they perform well in the market, and each share comes with a price. It’s easy to buy stocks. The challenge is choosing the right stocks that will earn money for the investor.
- Bond Market – offers opportunities for the government and companies to secure money to finance a project or investment. In this market, investors buy bonds from a company, and the company returns the amount of the bonds with interest, within an agreed period.
- Commodities Market – this is where traders and investors buy and sell natural resources or commodities such as hold, meat, corn, and oil. Because of their unpredictable price, a specific market is created for such resources. The price of items that are to be delivered at a given time is already to identify and sealed today in commodities futures market.
- Derivatives Market – involves derivatives or contracts whose value is based on the market value of the asset being traded. Examples of derivatives are the futures mentioned above in the commodities.
Functions of the Markets
- Puts savings into more productive use – a savings account that has money in it should not just let that money sit in the vault. Hence, financial markets such as banks, open it up to individuals and companies that need a home loan, student loan or business loan.
- Determines the price of securities – prices of securities are determined by financial markets, unlike goods and services whose price is determined by the law of supply and demand.
- Makes financial assets liquid – anytime, buyers and sellers can decide to trade their securities. Financial markets can be used to sell securities or make investments as they desire.
- Lowers the cost of transactions – various types of information regarding securities can be acquired without the need to spend.
Financial markets give a place where investors and debtors, regardless of their size, will receive fair and proper treatment. They also give access to capital to individuals, companies, and government organizations. Lastly, because of the many job opportunities financial markets offers, it helps lower the unemployment rate.