The financial market is a place in which people sell financial securities and derivatives such as options and futures at low transaction costs. Securities include precious metals, bonds, and stocks. The word “market” is often used for what are more majorly exchanges, organizations that assist the trade in financial securities, e.g. a commodity exchange or stock market.
Trading of bonds and currencies is majorly on a bilateral basis, the stock exchange sometimes may help to facilitate the sale of bonds, and people are also building electronic system for these as well, to the stock exchanges.
The stock exchange may be a physical location (like the BSE, LSE, NYSE, JSE, etc.) or an electronic system. The bulk of trading stocks majorly takes place on an exchange, but corporate actions (spinoff, or merger) are not within an exchange, while any two people or companies for whatsoever reason may agree to sell stock from the one to the other party without using an exchange.
Financial market is a term adopted by the financial sector as a market that is used to raise finance; for short term finance, the “money market”; for long term finance, the “capital market”. We can also use the term financial market to generalize all the markets in the financial sector, the breakdown of examples are explained below;
- Commodity markets, which assists in the trading of commodities.
- Derivative markets, which makes instruments available for management of financial risk.
- Foreign exchange markets, which facilitates foreign exchange trading
- Spot market
- Capital markets which consist of:
- Bond markets, that facilitates financing through the release of bonds, and also enables the trading of bonds also.
- Stock market, that also facilitates financing through the issuance of shares, and also enable trading of shares also.
- Crypto currency market, which facilitates the trading of financial technologies and digital assets.
- Futures markets, that provides standard forward contracts for trading any products at some future date.
- Interbank lending market
- Money markets, which enables short term investment and debt financing.
The basic function of the financial market is to attracts funds from available investors and channel them to corporations, thus allowing corporations to finance their day to day operations to achieve desired growth. The money market gives firms the avenue to borrow funds on a short term basis, while capital markets allow corporations to access long term funding to support their expansion.
Borrowers would find it extremely difficult to lend money themselves without the financial market system. Intermediaries such investment banks, boutique investment bank, and other financial institutions can assist in this process. Banks will take deposits from customers who have money to save. Then can then lend out the money from the ocean of deposited funds to those who wish to borrow. Banks particularly lend money in form of mortgages and loans.