What is financial market?
Introduction: So What is financial market, there is not a single day when you don’t think about your future, and it’s very natural to do so. We all are living in a booming economy, and every person out there is eager to utilize its opportunities according to their needs. So, to be frank, everybody has to know the basic fundamentals of our economic system, and the financial market is the backbone of it. So, you can surely fathom the gravity of this topic, now let’s discuss “what is financial market?”, “types of financial market”, and the “Functions of financial markets”.
The financial market actually combines many things and so is very confusing. But if I say it simply the financial market refers to a marketplace where buyers and sellers trade or exchange assets. These assets include stocks, bonds, mutual funds, derivatives, commodities etc. This way the companies reduce the risks by selling their assets to the people and the people who buy those assets get the benefits from that.
Types of financial market
When someone asks me about what is financial market? the first thing which comes into my mind is the stock market. A stock market is a place where various companies go to raise money for their future growth by offering their assets. The companies’ assets are called shares which get sold to the interested buyers through the stock brokers and the people who buy the stocks become the shareholder of that corporation. The shareholders make money with the increasing earnings of the corporation. But there are also various risks involved in it like if the corporation makes any loses the shareholders also lose their money. So it is very essential to know everything about the stock market before investing in shares.
The stock market operates through the various exchanges all over the world, like New York Stock Exchange and NASDAQ in the U.S.A, Euronext in Europe, Tokyo Stock Exchange in Japan, Shanghai Stock Exchange in China etc. The buyers and sellers make trades in these exchanges by anticipating the fate of the traded companies. The stock market timings vary through the countries, so every country has its separate stock market timings or treading hours.
Like the stock market the commodity market trade in raw goods like Crude oil, Gold, Silver, Natural Gas, Copper etc., instead of shares. The commodity market greatly impacts the global economy because of its importance as a core asset. Every single industry out there needs raw materials to build their products. Now if we talk about the U.S economy then the oil and gas sector is the backbone of it. The United States consumes more than 99,000,000 barrel of oil per day which is more than any other country. Just like the stock market timings every country has its own commodity market timings where the commodities get bought and sold.
If we are discussing the types of financial market then we can’t ignore the importance of mutual funds. The mutual funds give you the opportunity to buy a bunch of stocks at once. With mutual funds, you can surely reduce the risks involved in the individual stock picking instead you just have to choose one good mutual fund, but it will still require some good skill to choose the right one. I can give you a few names of the mutual fund management firms which have a very good reputation in the market – DFA https://us.dimensional.com, American Funds https://www.americanfunds.com, and Vanguard https://investor.vanguard.com.
We can’t really understand what is financial market without understanding the bond market. The bond market is completely different than the stock market where companies raise money by issuing shares. The bond market actually provides loans to the organizations. If we talk about the United States, there are many types of bonds available in the market like the treasury bond, corporate debt bond, municipal bond, agency securities bond etc. The United States bond market is world’s largest bond market, with more than 30% market share worldwide.
In above we have discussed four types of financial markets, but now the fifth one is a bit different than the other fours. The derivatives actually derive their value from its underlying assets. The derivatives were particularly created for the hedging purpose. There are particularly two types of derivative contracts available in the market, the future contract also known as the stock market futures and the option contract also known as the stock market options. The stock market futures actually predict the future value of an underlying stock or commodity which include the cost of carrying amount. The derivatives trading has been very helpful to the U.S economy in decreasing the market validity. The stock market futures have become a very useful way of making money in the stock market by hedging. In most of the cases, the derivatives market follows the usual stock market timings.
Functions of financial markets
To know what is financial market you will also have to know the functions of it. The functions of financial markets are very enormous and impact a lot in our life. We have learned about the different types of financial markets and how they work. We have also learned about the stock market timings and how the buyers and sellers buy and sell things in an open and regulated system. The financial market helps the companies to stabilize the risks involved in treading. It helps the buyers and sellers to determine a fixed price which eliminates the market volatility. The financial market creates a single platform for the buyers and sellers so you don’t have to waste time and resource to find the potential buyers and sellers. Today the financial market has become more simple, now we can exchange and trade assets over the phone or via internet without any risks. The functions of financial markets are very vast and can’t be explained in a short note. But I think this discussion will be enough to provide you a basic knowledge about the main functions of financial market.
In this article I have given you a complete idea about what is financial market and how it works. But to be frank the financial market is very vast and takes a lot of time to understand it all. So stay updated with all the financial related articles if you want to become an expert.
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