What is Financial Market? Understanding the Basics

Financial Market, a financial market is an official platform for the trading and/or exchange of securities. It simply refers to the point of contact between buyers and sellers of financial instruments.

Financial markets afford companies, individuals, and governments liquidity to help them fund their business ventures.

Basically, the financial market is composed of money and capital market.

Money Market is one component of the financial market that is concerned with short-term securities. It is the platform for trading financial instruments that have a maturity of one year or less.

The money market makes it possible for government and big companies to quickly access funds that may be needed urgently. The aim here is usually to fund operating or recurrent expenses. Instruments available include the following; deposits, bills of exchange, collateral loans, acceptances, etc.

The capital market, on the other hand, is the other component of the financial market that is concerned with the trading of long-term securities, such as stocks, bonds, etc. Here, companies and governments try to raise funds to finance capital projects; long-term activities that require larger amounts of money. The capital market is relatively riskier but at the same time, it offers higher returns.

The Capital Market is further divided into primary and secondary markets.

Primary Market: the primary market simply refers to the trading of new assets. In other words, it has to do with the issuance of shares. For instance, Initial Public Offering (IPOs); whereby a company that is yet to be listed on the stock exchange offers its shares to the public for the very first time, and, Follow-on Public Offer (FPOs); whereby an already listed company offers more shares to the public, to increase revenue. Issues in the primary market are facilitated by underwriters.

Secondary Market: the secondary market is the market where existing securities are exchanged between market participants. The secondary market has some distinctive features from the primary market, such as; having a physical location like stock exchanges; whereas a primary market does not have any physical location. Issues in the secondary market are facilitated by stockbrokers.

Types of Financial Markets

The different types of markets existent are as follows:

Stock market: the stock market is the part of the capital market where big companies can raise money for expansion by offering part ownership of the company to investors. Anyone interested can purchase the shares of a particular company, which will then use the money to bolster the operations of the company. Shareholders stand to increase their income when the company performs well. And in the case of a downturn, they share the losses.

Bonds Market: this is the market where governments and corporations go to borrow money from the public to finance capital projects. A bond is a fixed-income instrument that pays the holder a fixed amount of interest for a specific time period and then repays the principal amount at maturity. The bond certificate issued allows the borrower to use the investor’s money for the period of the loan.

Spot Market: the spot market is where financial transactions are done in real-time. That is, exchanges are made on the spot and in cash only.

Commodities Market: this is the platform where commodities are traded. In the commodities market, investors can buy or sell natural resources such as oil, gold, rice, wheat, corn, etc. Prices here, are highly unpredictable as they are affected by various factors that range from climate to economic. To protect against the risks associated with this, the commodities futures market comes into existence.

Commodities Futures Market is where the price of items to be delivered in the future is determined in real-time.

Derivatives Market: derivatives market is a bit different from the other types of markets. It is the platform whereby the value of instruments traded is based on underlying assets.

The commodities futures market, above, is an example of a derivative wherein; the prices of items yet to be sold are set in the present using the current market value of said items.

The derivatives market is engaged in the trading of options, futures, forward contracts, or swaps

Forex Market: foreign exchange market is the market where different currencies are traded. For the most part, exchange rates work based on the demand and supply of a national currency. Other factors that may directly affect the exchange rate may be the economic and financial stability of that particular country.

Functions of The Financial Market

The existence of the financial market makes it possible for corporations and even governments to access huge amounts of capital to fund their operations. This is vital to the economy.

Through commodities, futures, and derivatives, companies can offset certain risks.

They provide regulation for the trading and exchange of financial assets.

Price determination and setting are possible through the financial markets.

Helps individuals get more productive returns from their savings.

The financial market helps to create liquidity.

In essence, financial markets are important to the general economy; it keeps the economy functioning by matching buyers and sellers of financial instrument.

A proper financial system is a channel for wealth creation because financial markets help individuals boost their income portfolio by providing opportunities to invest their monies. Investors have to take care though, as promising as positive investment returns can be, there is also the risk of losing some or all of your money.

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