Financial markets play a pivotal role in ensuring the smooth running of capitalist economies by allocating resources and creating liquidity for entrepreneurs and businesses. The markets provide an enabling environment for buyers and sellers for easy trading of their financial holdings. Financial markets create securities products that give a return for lenders/investors who have excess capital by making these funds available to borrowers who need additional funds.
You should be in a position to know the difference between the stock market and the financial market: the stock market is amongst the types of financial markets. The whole idea of financial markets involves buying and selling different financial instruments such as bonds, equity, derivatives, and currencies. The markets depend largely on the transparency of the information to ensure the prices set are appropriate and efficient.
How are financial markets traded?
You can trade markets in two ways, which are:
1. On-exchange
In the past years, trading took place in an actual building where brokers converged to buy and sell shares in different assets like companies, livestock, or even corn. Nowadays, exchange trading mostly takes place online, which is an easy way to place orders worldwide. In this trading method, contracts are standardized with clear specifications and guidance on the quantity, quality, and when goods are received.
2. Over-the-counter
This method involves two parties agreeing to buy or sell directly without a medium: on exchange.
Types of Financial Markets
Below are the major types of financial markets:
1. Stock Markets
Stock markets are the most prevalent financial markets. They are avenues where companies list their securities that traders or investors trade through buying and selling. Companies use stock markets to raise capital through an Initial Public Offering (IPO), with securities traded afterward among numerous buyers and sellers: secondary market.
Investing in stock markets is a risky process, and you will need to carefully analyze different stocks and determine a specific stock that will make a great investment. One method of beating the market is taking risks. With greater risk, you can get greater returns or greater losses. With superior information, stock picks can outperform the market. However, getting this superior information can be hard unless you are an insider of a company, so it might be worth searching for the best stock advisor worth listening to.
2. Over-the-Counter Markets
This type of financial market is decentralized, meaning it has no physical location. The entire trade is carried out electronically, where most traders buy and sell their securities directly without the involvement of a broker. An over-the-counter market (OTC) handles trading in specific stocks, especially riskier or smaller companies that do not qualify to be listed on exchanges. OTC Markets and different transactions that take place on them are less liquid, less regulated, and tend to be more opaque.,
3. Bond Markets
A bond is a form of security that involves an investor lending money for a well-defined period at a specified interest rate. It is an agreement between the borrower and lender that contains loan specifications and payment details. Bonds are mostly issued by corporations, states, municipalities, and sovereign governments to finance particular operations and projects. For example, the bond market can trade securities such as bills and notes. Other terms used to refer to the bond market include the credit, debit, or fixed-income market.
4. Money Markets
This type of financial market trades highly liquid products with short-term maturities, usually less than a year. Money markets are characterized by high levels of safety and low-interest returns. Money markets involve a large volume of trade between traders and institutions at the wholesale level. On the other hand, at the retail level, the money markets involve mutual funds bought by investors and accounts opened by bank customers. As an individual, you can trade in the money market by buying Treasury bills, notes, or short-term certificates of deposit.
5. Forex Market
The Foreign exchange or forex is a financial market where involved parties can buy, hedge, speculate, and sell on exchange rates between two currencies. Foreign exchange is the most liquid financial market in the world. It involves buying and selling of currencies which is the most liquid asset on the market. This market handles more than $5 trillion transactions daily. The forex market consists of banks, central banks, hedge funds, investors, investment management firms, commercial companies, and retail forex.
6. Commodities Markets
These are the venues where producers and consumers meet to trade commodities physically. These commodities include agricultural products, energy products, precious metals, and soft commodities. All these physical commodities are exchanged for money.
What affects the markets?
Market prices are determined by demand and supply for goods. There is a range of factors that affect the demand and supply of goods on the market. Below are the common factors that affect financial markets:
1. News
Many investors are up to date with real-time news. News like political violence or embezzlement of funds in a company drives prices down.
2. Central bank policies
The financial decisions of any country, such as interest rates, lie with Central banks. If monetary decisions and interest are favorable, more investors are likely to invest, and if the decisions are unfavorable many investors will shy away.
3. Company results
Companies listed on forex release results regularly: perhaps twice a year or four times a year, which encourage buying and selling their shares.
4. Government data
Government releases data that moves markets. The data may include unemployment rates, inflation rates, or annual GDP growth.
Importance of Financial Markets
Financial markets make the following possible:
- They provide a place where investors and debtors meet. Regardless of their investment, everyone is treated fairly.
- Financial markets help individuals, government organizations, and companies to access capital.
- Financial markets create many job opportunities, hence help in reducing unemployment rates and improve the living standards of many people across the world.
Takeaway
Financial markets create a good place for all types of investors interested in watching their money grow. They form venues where any trader with any product type such as agricultural products, energy, currency, loans, and many other products can favorably conduct business. Before you invest, you should first analyze the market and be well conversant with factors that affect the markets.
