Understanding financial markets
A financial Market is a market where people and entities trade financial securities, commodities and other fungible items of value at low transaction costs and at price that reflect supply and demand.
Securities include stocks (Shares, Treasury Bills, Certificate of Deposit, Bankers Acceptance) and bonds, and commodities include precious metals (gold, diamond etc) or agricultural goods.
There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded).
Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one “place”, thus making it easier for them to find each other.
An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.
Financial markets are typically defined by having transparent pricing, basic regulation on trading costs and fees and market forces determining the prices of securities that trade.
Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investors’ geographical location, knowledge of the markets or the profession of the participant.
Capital markets which consist of:
Stock markets, 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 bonds, and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products at some future date;
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.
The capital markets may also be divided into primary markets 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 in 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.
A capital market is a market that where government and enterprises can raise long term capital or funds. It also involves borrowing, lending buying and selling of securities with original maturity of more than a year.
Various instruments like shares on stock exchange and bonds are treaded. In other countries it will also involve derivatives and commodities both precious metal and agricultural.
Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere
The money market developed because parties had surplus funds, while others needed cash. Today it comprises cash instruments as well.
Money market is a market that trades securities with tenure of less than a year. As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less.
Trading in the money markets is done over the counter, is wholesale.
Various instruments like Treasury bills, commercial paper, bankers’ acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, government funds, and short-lived mortgage- and asset-backed securities do exist. It provides liquidity funding for the financial system. Money markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure.
Financial markets attract funds from investors and channel 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.
Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks, stock brokers, asset management and investments companies help in this process. Financial Institution takes deposits from those who have money to save. 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 while financial institutions like assets management can invest in TBs and buy papers from the banks.
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.