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Financial markets are platforms—like stock exchanges or over-the-counter systems—where buyers and sellers trade assets such as stocks, bonds, currencies, and derivatives, facilitating capital raising, risk transfer, and price discovery. They connect those with surplus funds (investors) to those who need capital (borrowers/companies).
Key types include capital markets (long-term, e.g., NYSE) and money markets (short-term, e.g., T-bills).
Key Components and Types Stock Markets: Trading ownership shares of public companies. Bond Markets: Issuing debt securities for companies or governments to raise funds. Foreign Exchange (Forex) Markets: Trading of different currencies. Derivatives Markets: Trading contracts based on the value of an underlying asset for risk management. Commodities Markets: Trading raw materials like gold, oil, and agricultural goods.
Primary vs. Secondary Markets Primary Market: Where new securities are created and sold for the first time (e.g., IPOs). Secondary Market: Where investors buy and sell existing securities among themselves (e.g., stock exchange).
Core Functions Capital Allocation: Directs money to productive uses. Liquidity: Enables fast buying/selling of assets. Price Determination: Establishes prices based on supply and demand. Risk Management: Allows transfer of risk.
Key Participants Investors: Individuals or institutions looking to grow their capital. Issuers: Companies or governments seeking funds. Financial Institutions: Banks, brokers, and investment firms facilitating trades.
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