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Financial markets

Table of Contents

What are financial markets?

A financial market is a marketplace where financial securities are sell and purchase. In other words, the marketplace where buyers and sellers trade securities such as bonds, derivatives, foreign stock, exchange of currencies, cryptocurrencies, and more.

Importance of financial markets

The vital importance of the financial market are :

  • The financial market plays a vital role in the economic growth of the country 
  • Financial market allocates capital efficiently.
  • It increases the employment rate by offering massive job opportunities.
  • Investors and businesses access the financial market to raise and make money.
  • Financial market provides a platform where the seller and buyers can trade in financial securities.

Types of financial markets

The type of financial markets are mentioned below:

Types of financial markets

Bonds markets

The bond market is also known as the debt,  credit, or fixed-income market. It is a marketplace that allows investors to buy company bonds to finance their projects. Bonds are like debenture, but they are used in banks and large companies such as in municipalities, states, and sovereign governments finance projects and operations. Bonds are issued for a pre-defined time period with a pre-defined interest rate.

Stock markets

Stock market/stock exchange is the marketplace where companies are looking forward to raising their capital. Various companies register their share and register them to the interested investors via an initial public offering(IPO).

Derivatives markets

A derivative is a financial marketplace where derivatives market trade in future and option contracts that drives their value from underlying instruments. This market involves contracts whose value totally depends on the market price of the asset being traded.

Forex markets

The foreign exchange, also known as Forex, FX, and currencies market, determines the global rate of foreign currencies. The forex market is the most liquid market, consisting of banks, commercial companies, central banks, investment management firms, forex dealers, and investors. Candidates in this market can buy, sell, and exchange various currency pairs.

Cryptocurrencies

Cryptocurrency is a digital currency that operates free of any central oversight of banks or government control. Instead, it relies on blockchain to record person-to-person transactions and centralized ledgers. In addition, cryptocurrency relies on cryptography to secure transactions where buyers and sellers can transact directly using encrypted digital wallets or exchanges. The ledger is maintained through a revolutionary technology blockchain that maintains all the transactions and public ledgers.

Commodities markets

A commodity market is a physical and virtual marketplace where buyers and sellers sell/ buy commodity products like oil, gold, silver, wheat, barley, and copper.

Functions of financial markets

The financial markets perform different functions:

Functions of financial markets

Price Determination

The financial markets determines the price of various financial instruments trade between buyers and sellers. The price depends upon the market forces factor that assists in deciding the price of trade.

Liquidity

Liquidity allows investors to sell their financial instruments and face value in the market anytime.

Risk Sharing

Financial markets perform the function of risk sharing as the risk transfer from the person who is investing and selling funds/assets.

Easy access

Financial markets provide a place/venue where buyers and sellers meet, interact, agree, and deal. Moreover, It helps in making trade much more accessible.

Reduction in transaction cost

The financial market provides various types of information for doing the transaction of buying and selling securities.

Capital information

The financial market provides a channel for new savings and cash flow by adding country capital formation.

How do they work?

The financial market brings buyers and sellers together and allows them to trade. It is a marketplace where investors and businesses raise funds to grow their businesses for long-term growth. In this marketplace, sellers and buyers get an appropriate candidate for their specific products, such as bonds, stock, and futures contracts.

In addition, the financial markets, buyers seek to buy products at the lowest price, and sellers seek to sell at the highest price. This process is done through an auction or price discovery mechanism.

Conclusion

Summing up the above article, financial markets help companies to raise funds to finance their growth. Moreover, It also brings buyers and sellers together to trade and broadens the scope of inclusivity in terms of economic integration.

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