WHAT ARE FINANCIAL MARKETS?

A financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals, energy, or agricultural goods), and other fungible items of value at low transaction costs and at price.

Markets work by placing many interested buyers and sellers in one “place”, thus making it easier for them to find each other to trade.

The word finance originally came from the French word ‘finer’ meaning to settle a debt, and market derives from the Latin word ‘mercari’ which means to buy.

The term ‘Financial Market’ can often seem overwhelming. It is impossible nowadays to avoid the subject because it features when you read, watch or listen to the news. However, more often than not when you read or watch media coverage the whole thing can leave you feeling rather confused, often being above the experience of most people. Yet whatever your level of experience it goes without saying that in business people strive every day to manage their assets and liabilities to seek maximum advantage.

PRIMARY AND SECONDARY MARKETS

In short, financial markets facilitate the movement of funds for many varied motives. These could be between lenders, borrowers, investors, and will range from large organisations to individuals. Markets are classified into two categories namely Primary and Secondary Markets.

Primary markets are used by businesses, governments and households to raise funds for the expenditure of goods, services, and assets.

Secondary markets on the other hand are used by investors to trade what has been bought in the primary market.

CAPITAL MARKETS AND MONEY MARKETS

Financial markets are also classified into Capital Markets and Money Markets. Capital Markets are for companies and governments that need to raise capital. This is done using the primary market and new stocks can include IPOs, company options, placements, bonds etc. Once newly issued stocks are sold in the primary market they can be traded through the secondary markets

MONEY MARKETS

Money Markets on the other hand are used by banks that lend and borrow from each other by trading financial instruments such as Certificates of Deposit (CDs) or agreements such as repos and reverses. Money markets serve to provide short to medium term liquidity in the global financial system and as such are a very important aspect of it. Some derivatives of the money market include forward rate agreements (FRAs) and futures. Examples of financial markets include the Stock Exchanges which facilitate the resale of previously issued stock or shares. Government bond markets such as the US, UK, etc also are financial markets for the resale of previously issued bonds.