In our economy today, money flows in circles. While, some need to turn their savings into investments, others need the investments to run their businesses. However, somehow, through the functions of the various types of the financial market, things will fall into place for those who want to invest and those who need the investment.
That’s how interesting the financial market can be. This article contains all you need to know; it also goes further to explain the importance of the financial market. Plus, you can download our free pdfs on the financial market, which will help you to learn more at your own convenience.
What is Financial Market?
Financial market is place where people trade financial securities. Some of these securities include; bond market, stock market, forex market, bonds and derivative market. In financial market they call them commodities.
Understanding the Financial Market
The importance of the financial market in the capitalist economy can’t be overemphasized. because it helps the operation run smoothly. It not only creates liquidity for businesses and firms, it also allocates resources to them. The market makes it convenient for traders to buy and sell their financial securities. However, they can invest or take a loan when they have excess or little money.
Note: ‘’Market” as used here could be anywhere as long as trade is going on there. Most times it’s not a physical space.
Financial markets could differ, depending on how much activities are carried there. For instance, the New York Stock Exchange (NYSE) trade in trillions of dollars on a daily basis. On the other hand, there are other markets that trade in thousands daily.
Terms
Equities (stock market): This market makes buying and selling of shares easy for investors.
Primary Stock market: It is called Public Offerings (IPOs). They sell new issues of stocks.
Secondary market: This is a financial market where investors trade securities have previously owned.
Importance of Financial Market
The importance of the financial market reflects so much on the economy. This is because it helps to boosts the economy.
- One of the functions of the financial market is to provide access to capital for individuals, governments, companies and even organizations.
- The markets have so much job opportunities. It helps reduce the rate of unemployment.
- It provides a comfortable platform for traders like investors and debtors.
- They create an opportunity for people to invest their money in shares or equities, for good returns in the future.
- The various types of financial markets enable banks to borrow, in order for them to provide loans to people who need it.
- They give permissions to take out insurance, most insurance companies need to use the financial market.
- Serves as the intermediary between savers and investors. These help savers eventually become investors.
- It boosts the economy. For instance, it helps business raise money for expansions. Hereby, increasing the cash flow in the business.
Classification of Financial Market
The financial market is classified into four. However, these classifications are based on how they trade.
#1. Debt Market
In debt market, instruments of debts are traded between investors. For example, bonds and debentures. The interest rate on this instruments remains fixed for over a period of time.
#2. Equity Market
Equity means whatever the owner of the business put in. that is to say the owner’s capital. This market trade on equity instruments. The equity shareholders own whatever remains after paying fixed liabilities.
#3. Money Market
Investors in the money market don’t invest for longer than a year. This market is for short term finance. They trade on instruments like, treasury bills, commercial paper, monetary assets.
As a result of the short time (1year) the market has a lower risk and lower amount of returns which is often in form of interest.
#4. Capital Market
Instruments used for trade in this market are often medium- and short term. In this market people can get maximum interchange of money. Investors can invest in the equity share capital, which will make them equity shareholders. They will earn money as company earns profit.
Types of financial market
They are about 5 types of financial marketing;
#1. Over-the-Counter Markets
This is a decentralized market,, i.e., there is no physical location. This means trading here is done electronically between the two parties involved without a broker. Over-the-counter market deal with publicly traded stocks that are not on the American Stock Exchange. However, the over-the-counter market does not need much regulation because only small companies trade on it.
#2. Bond Markets
A bond is an agreement over a period of time between a lender and borrower that contains details of their agreement. This type of money market provides the platform for finance by providing bonds issued by corporations, states, or even sovereign governments. They also sell securities like, notes, bills still issued by the state. Another name for the bond market is a fixed-income market or credit market
#3. Money Market
This market is identified with a high degree of safety, which results in low returns on investment. This is because the trade products with high short term
(1year) liquidity. which explains why they yield low interest. In addition, they help institutions manage their liquidity positions, which makes it easy for individuals with insufficient funds and institutions that have excess funds to interact.
Individuals that buy short-term certificates like U.S. Treasury bills, may decide to invest money in the money market.
One interesting thing about the money market is “call money.” These funds are borrowed for one day, after which they will be called “notice money” and can be called at any time. For instance, if a person borrows money at 6:00 p.m. today, they expect payment back on or before 6:00 pm the next day. After which the loan becomes callable at any time.
#4. Derivative Market
This type of financial market is a secondary market because it derives its value or source finance from underlying assets, which are primary securities. For example, bonds, commodities, currencies, stocks, mortgages, etc. A derivative market is more like a contract between various parties who place their values on securities or indexes. However, this market will rather trade in advanced monetary products like interest rates, market indexes (primary securities) than trade stock directly.
#5. Forex Market
This type of market trades foreign exchange, i.e., they buy, sell, and predict currencies. It might interest you to know, that the forex market is the most liquid market in the world. This market has a traded value of $5 trillion in daily transactions. This is no surprise, as cash is the most liquid asset. In addition, they also trade in all the currencies in the world. However, any company, bank, individual, and even country can participate in it.
You can say that the forex market is decentralized because it consists of various brokers from around the world.
Importantly, financial literacy skills are needed for efficient trading in the forex market.
Functions of Financial market
Financial market has various functions that they perform which benefits individuals, countries, companies etc.
#1. Mobilizing Funds
One of the major functions of the financial market is to make sure no money sits idle. And one great way they do it is by connecting people who have enough savings with people who need the money. This way, the economy can possibly be successful.
Note: Investors invest at their own risk and however they are able to access the risk involved.
#2. Liquidity of financial assets
Another importance of the financial market is liquidity. This means that all financial commodities sold in the financial market can easily be converted to cash within a short period of time. This is an advantage for those who want to make short-term investments.
#3. Determines prices of commodities
Nobody fixes the prices in this market. The interaction between two or more markets determines the prices of financial commodities. This simply means that the forces of demand and supply fix the prices in these markets.
#4. Easy transactions
Traders are not stressed in the financial market. This is because investors and industries already have a platform that the market provides to perform their transaction of buying and selling easily, without having to look for each other. However, these markets perform a large number of transactions daily, which will reduce transaction costs. That is to say that investors pay fewer fees.
It is also important to read: Corporate Finance
What is the Main Function of Financial Market?
Liquidity provided by financial markets helps firms expand and provides startup founders with a means to fund their endeavours. Having data readily available to traders and investors helps lower risk. Financial markets contribute to economic stability by reassuring traders and investors.
What are the Factors Affecting Financial Market?
There are some factors that can affect the financial market and they include:
- Natural calamities
- Political factors
- Supply and demand
- Inflation
- Interest rates
What is the Most Popular Financial Market?
The stock market. The most popular and well-known financial market to trade and invest in is the stock market.
What are the Disadvantages of Financial Market?
The market price of a stock may not reflect the stock’s true value if it is affected by macroeconomic factors such as taxation. The market value of securities can be drastically altered by a number of circumstances. This means that trading on the financial market is not without its dangers.
How are Financial Markets Measured?
A few examples of these metrics are the bid-ask spread, the turnover ratio, and the price impact measurements. The liquidity indicators measure the cost-effectiveness, speed, breadth, depth, and stability of the market.
How do Financial Markets help Economy?
If the financial system is well-established, it will facilitate more prudent financial decisions, which will in turn promote more effective resource allocation and higher economic growth. The market-based and the bank-based financial systems each have their merits.
Financial Market Pdfs
This financial market pdfs will help you understand everything about the market without being in a classroom. It will also help you understand the importance of the financial market in our economy.
- Financial Market and its Definitions: Transformation of Scientific Concepts by Ainagul Amangeldinovna Adambekova and Regina Ernstovna Andekina.
- Part I: Fundamentals of Financial Market by Connie Lo Manager External Relations.
- Financial Markets by VALDONĖ DARŠKUVIENĖ Vytautas Magnus University.
- Financial Market Structure and Economic Growth; Evidence from Nigeria Data. By;
- Anne C Maduka Department of Economics, Anambra State University- Uli.
- Kevin O. Onwuka Department of Economics, Nnamdi Azikiwe University, Awka.
Conclusion
In conclusion, it is safe to say that the financial market is one of the essentials of growth in a country’s economy. Above all, these markets help businesses and companies grow their cash without many risks. Investors also have more cash to take home.
You can also read: Financial Management
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Financial Market FAQ
What are the 5 financial markets?
They are about 5 types of financial marketing;
- Over-the-Counter Markets
- Bond Markets
- Money Market
- Derivative Market
- Forex Market
What is the main function of financial market?
The financial market has various functions that they perform that benefit individuals, countries, companies, etc.
- Mobilizing Funds
- Liquidity of financial assets
- Determines prices of commodities
- Easy transactions
