What is the Financial Market – Basic of Finance

Before reading this post/lecture on What is the Financial Market, the first lecture on finance subject Basic of Finance and its Overview may have a look.

What is the Financial Market

A financial market is a form of the marketplace that provides a path for the trading of assets such as bonds, stocks, foreign exchange, and derivatives. Wall Street and Capital Markets are also called Financial markets, having the same meaning. It is used by businessmen and investors to mark up the money to raise their business and to make more money.

For Example

Imagine a bank where a person maintains an account and deposit some amount of money. The bank can use his money and loan to another person, or organization and charge interest over it. In this way banks earn money. 

The depositors themselves also earn and see their money grow through the interest that is paid to it. Therefore, the bank serves as a financial market that benefits both the depositors and the debtors.

 

What are the Types of Financial Markets

After knowing the above, about what is the financial market, let’s learn the type of financial market.

There are various financial markets, and every country has at least one financial market, in different sizes. Some are small while some are at the international level, such as the NYSE and Nasdaq that trades trillions of dollars on a daily basis. Following are the types of financial markets.

  • Stock Market
  • Bond Market
  • Commodities Market
  • Derivative Market

 

Stock Market

The stock market is a series of exchanges where companies go to lift large amounts of cash to expand. Shares of ownership of public companies are being traded by the stock market. Each share has a price and when the stocks perform well in the market, the investors make money from it. It is easy to purchase stocks. Choosing the right stocks is the real challenge to earn money for the investor. Investors earn a profit when companies increase their earnings. This also keeps the U.S. economy or any other country’s economy growing. To monitor the stock market there are different indices that investors may use. One of them is DJIA.

 

Bond Market

When organizations need finance. they go to the bond market because the bond market offers opportunities for corporations, companies, or firms to secure money and to finance a project and investment. Investors purchases bond from corporations, and the corporations return the amount of bond within the contracted period along-with interest. When stock prices go up, bond prices go down. There are many different types of bonds, including Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the U.S. economy functioning smoothly.

 

Commodities Market

A commodity market is where companies buy and sell natural resources such as oil, corn, gold, meat, etc to offset their futures risks. Because their prices are unpredictable. Therefore,  the price of items that are to be delivered at a given future time is already identified and locked today. Since these exchanges are public, many investors also trade in commodities for profit only. For example, most investors have no intention of taking shipments of large quantities of pork bellies.

 

For instance, the most important commodity in the U.S economy is Oil. It is used for electric generation, industrialization, transportation, and heating, etc. Whenever prices of oil rise, the gas prices fall down or weaker in just a few days. You would have also observed that when oil and gas prices stay high, you’ll see the impact on food prices in about six weeks.4 The commodities futures market determines the price of oil.

Gold is another important commodity. It’s purchased as a hedge against inflation. Gold prices rise when there is more economic uncertainty in the world. In the past, every dollar was traded for its value in gold. When the U.S. break the standard of gold, it lost this relationship to money. Still, there are many people around the world who look at gold as a safer alternative to cash.

to pay for something today which is to be delivered tomorrow, future is a medium/procedure. They increase a trader’s leverage by allowing him to borrow the money to buy the commodity.

 

Derivatives market

Derivatives are financial products whose value is based on underlying assets of market value.  To magnify their potential gain, investors and hedge funds use them. Due to higher returns for high-end investors, hedge funds became popular in 2007. It is further relevant to mention that hedge funds invest heavily in futures, some argued they decreased the uncertainty of the stock market and, hence, the U.S. economy. 

Did you know in 2008 there was a global financial crisis in the USA? What was the cause of that global financial crisis? 

The cause was the hedge fund investment in subprime mortgages and other derivatives.

What are the types of Derivatives Market

  • Forward
  • Future
  • Options
  • swap

 

 

Leave a Reply