finance market definition
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Finance market definition

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The sentence contains offensive content. Cancel Submit. At the wholesale level, the money markets involve large-volume trades between institutions and traders. At the retail level, they include money market mutual funds bought by individual investors and money market accounts opened by bank customers. Individuals may also invest in the money markets by buying short-term certificates of deposit CDs , municipal notes , or U. Treasury bills, among other examples. A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset like a security or set of assets like an index.

Derivatives are secondary securities whose value is solely derived from the value of the primary security that they are linked to. In and of itself a derivative is worthless. Rather than trading stocks directly, a derivatives market trades in futures and options contracts, and other advanced financial products, that derive their value from underlying instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks. Futures markets are where futures contracts are listed and traded.

Unlike forwards, which trade OTC, futures markets utilize standardized contract specifications, are well-regulated, and utilize clearinghouses to settle and confirm trades. Both futures and options exchanges may list contracts on various asset classes, such as equities, fixed-income securities, commodities, and so on. The forex foreign exchange market is the market in which participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs.

The forex market is the most liquid market in the world, as cash is the most liquid of assets. As with the OTC markets, the forex market is also decentralized and consists of a global network of computers and brokers from around the world. The forex market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. Commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products e.

These are known as spot commodity markets, where physical goods are exchanged for money. The bulk of trading in these commodities, however, takes place on derivatives markets that utilize spot commodities as the underlying assets. The past several years have seen the introduction and rise of cryptocurrencies such as Bitcoin and Ethereum , decentralized digital assets that are based on blockchain technology.

Today, thousands of cryptocurrency tokens are available and trade globally across a patchwork of independent online crypto exchanges. These exchanges host digital wallets for traders to swap one cryptocurrency for another, or for fiat monies such as dollars or euros. Because the majority of crypto exchanges are centralized platforms, users are susceptible to hacks or fraud.

Decentralized exchanges are also available that operate without any central authority. These exchanges allow direct peer-to-peer P2P trading of digital currencies without the need for an actual exchange authority to facilitate the transactions. Futures and options trading are also available on major cryptocurrencies. The above sections make clear that the "financial markets" are broad in scope and scale. To give two more concrete examples, we will consider the role of stock markets in bringing a company to IPO, and the role of the OTC derivatives market in the financial crisis.

When a company establishes itself, it will need access to capital from investors. As the company grows it often finds itself in need of access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. Firms can raise this size of capital by selling shares to the public through an initial public offering IPO. This changes the status of the company from a "private" firm whose shares are held by a few shareholders to a publicly-traded company whose shares will be subsequently held by numerous members of the general public.

The IPO also offers early investors in the company an opportunity to cash out part of their stake, often reaping very handsome rewards in the process. Initially, the price of the IPO is usually set by the underwriters through their pre-marketing process.

Once the company's shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value and the supply and demand for those shares at any moment in time. While the financial crisis was caused and made worse by several factors, one factor that has been widely identified is the market for mortgage-backed securities MBS.

These are a type of OTC derivatives where cash flows from individual mortgages are bundled, sliced up, and sold to investors. The crisis was the result of a sequence of events, each with its own trigger and culminating in the near-collapse of the banking system. It has been argued that the seeds of the crisis were sown as far back as the s with the Community Development Act, which required banks to loosen their credit requirements for lower-income consumers, creating a market for subprime mortgages.

The amount of subprime mortgage debt, which was guaranteed by Freddie Mac and Fannie Mae , continued to expand into the early s, when the Federal Reserve Board began to cut interest rates drastically to avoid a recession. The combination of loose credit requirements and cheap money spurred a housing boom, which drove speculation, pushing up housing prices and creating a real estate bubble. In the meantime, the investment banks, looking for easy profits in the wake of the dotcom bust and the recession, created a type of MBS called collateralized debt obligations CDOs from the mortgages purchased on the secondary market.

Because subprime mortgages were bundled with prime mortgages, there was no way for investors to understand the risks associated with the product. When the market for CDOs began to heat up, the housing bubble that had been building for several years had finally burst. As housing prices fell, subprime borrowers began to default on loans that were worth more than their homes, accelerating the decline in prices.

When investors realized the MBS and CDOs were worthless due to the toxic debt they represented, they attempted to unload the obligations. However, there was no market for the CDOs. The subsequent cascade of subprime lender failures created liquidity contagion that reached the upper tiers of the banking system. Two major investment banks, Lehman Brothers and Bear Stearns, collapsed under the weight of their exposure to subprime debt, and more than banks failed over the next five years.

Several of the major banks were on the brink of failure and were rescued by a taxpayer-funded bailout. Some examples of financial markets and their roles include the stock market, the bond market, forex, commodities, and the real estate market, among several others. Financial markets can also be broken down into capital markets, money markets, primary vs.

OTC markets. Despite covering many different asset classes and having various structures and regulations, all financial markets work essentially by bringing together buyers and sellers in some asset or contract and allowing them to trade with one another. This is often done through an auction or price-discovery mechanism. Financial markets exist for several reasons, but the most fundamental function is to allow for the efficient allocation of capital and assets in a financial economy.

By allowing a free market for the flow of capital, financial obligations, and money the financial markets make the global economy run more smoothly while also allowing investors to participate in capital gains over time. Firms use stock and bond markets to raise capital from investors; speculators look to various asset classes to make directional bets on future prices; hedgers use derivatives markets to mitigate various risks, and arbitrageurs seek to take advantage of mispricings or anomalies observed across various markets.

Brokers often act as mediators that bring buyers and sellers together, earning a commission or fee for their services. Compare Forex Brokers. Federal Deposit Insurance Corporation. Federal Reserve Bank of St. Options and Derivatives. Your Money. Personal Finance. Your Practice. Popular Courses.

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Whereas, the premium from fire, theft, accident, medical and other such insurances are invested in short-term opportunities. Brokerage Firms : The firms which deal in the equity or debt market to make commission or brokerage by facilitating transactions between the buyers and the sellers is known as a brokerage firm. Any market which deals in financial assets is a financial market. The following are the different types of financial market:. Cash or Spot Market : It is a spot or real-time market where all the trading and transactions are executed or take place immediately.

Forward or Futures Market : Unlike cash market, in future and forward markets, the execution of the transaction takes place on a future date. Here, the price of securities or transaction value is decided at present to minimize the loss to either party. Money Market : The financial market which provides very short-term loans or advances having a maturity period within a year of issue is termed as a money market. Capital Market : This market exists for the trading of medium and long-term financial instruments between the individuals and financial institutions.

Primary Market : In a financial market, when the listed companies issue new securities, or new companies take entry with new stocks, it is called as a primary market. Secondary Market : It is commonly known as the stock market. It is a financial market where the individuals, brokers, companies, banks and various other parties are involved in trading of existing already issued previously securities.

Debt Market : The financial market which facilitates the trading of debt instruments or instrument with fixed interest such as bonds, fixed deposits, debentures are called debt market. Equity Market : This market deals in financial instruments or securities whose value keeps on fluctuating and the claimant receives the amount which persists on the date of redemption.

Exchange-Traded Market : The market where trading of call, put, and futures options take place on an organized futures exchange in a systematic manner is called an exchange-traded market. Over-The-Counter Market : Unlike an exchange, in this unregulated market, trading of various securities such as exotic options and derivatives, swaps, credit derivatives, forward contracts take place directly between the two parties without any involvement of the intermediaries.

The financial markets play a significant role in the economy and perform some of the essential functions. Let us now discuss each of these functions one by one:. These markets involve a massive amount of risk. But when done wisely and strategically, they are highly beneficial for the individuals, business firms, financial institutions, brokers and various other parties involved in it.

Your email address will not be published. Comments Great article with precise content indeed. Thank you for sharing. Nan Maynatt. Oh that's great. And yes you are right, people ARE afraid, these financial things are more often volatile. The recent global financial crisis increased that possibility even further.

Excellent analysis of the markets and investments. I was licensed by the SEC to sell mutual funds for 12 years and resigned when the market was down. Personal Finance. Top 10 Teen Titans Episodes. Why Hubpages is Great for International Writers. Related Articles.

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Market definition finance natural gas price outlook

What is Financial Market? definition, features, functions and classification

Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market. A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets as. A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks.