You will learn about What is a financial market? What role do they play in the economy? What role do financial intermediaries play in the market? and examples of financial markets.
What is a financial market?
A financial market is a marketplace where financial instruments such as stocks, bonds, currencies, commodities, and derivatives are traded. These markets allow buyers and sellers to trade financial assets and securities, providing a platform for companies, governments, and individuals to raise funds or invest their money.
Financial markets can be categorized into two broad categories: primary markets and secondary markets. The primary market is where newly issued securities are sold for the first time, and the funds are raised for the issuer. The secondary market is where already issued securities are traded among investors, without any involvement from the issuer.
Financial markets also vary in terms of their structure and nature. Some markets, such as stock markets and commodity markets, are centralized and operate through an exchange. Other markets, such as the foreign exchange market and over-the-counter (OTC) markets, are decentralized and operate through a network of dealers or intermediaries.
Financial markets are the channels through which investors provide money to companies. Another way of saying it is that the market is where buyers and sellers of companies can make deals. Financial markets can be banks, retirement funds, and in my example Robinhood and the New York Stock Exchange. Robinhood is an online trading application that helps younger people to start investing because of how easy it is to use and that buying and selling stocks has no fees. Robinhood also brings investors to provide money to companies by offering an initial public offering also called “IPO.” I have been using Robinhood’s application since 2015. Another financial market is New York Stock Exchange also called (NYSE) which allows investors and traders to make money by providing them with a marketplace for trading securities.
What role do they play in the economy?
New York Stock Exchange and Robinhood help people to invest for their retirement and create new demand for new companies. Financial markets play a critical role in the economy by facilitating the allocation of capital, managing risk, and providing liquidity. Here are some of the key roles that financial markets play:
- Capital allocation: Financial markets allow companies, governments, and individuals to raise capital by selling securities such as stocks and bonds. This capital can then be used to fund new projects, expand operations, or invest in research and development.
- Risk management: Financial markets provide a platform for investors to manage their risk by diversifying their portfolios across different assets and asset classes. For example, an investor can spread their risk by investing in a mix of stocks, bonds, and other securities.
- Liquidity: Financial markets provide a mechanism for investors to buy and sell securities quickly and easily. This liquidity allows investors to convert their investments into cash when needed, which helps to ensure that markets function smoothly.
- Price discovery: Financial markets provide a mechanism for determining the fair value of securities by allowing buyers and sellers to exchange information and negotiate prices. This price discovery process helps to ensure that securities are priced accurately and efficiently.
What role do financial intermediaries play in the market?
The role of financial intermediaries play in the market is a financial transaction that is between banks and funds. This helps the market and lowers the cost when doing business. It can also provide leasing or factoring services. An example of this would be commercial banks, investment banks, mutual funds, or pension funds. Financial intermediaries function basically by connecting an entity with a surplus fund to a deficit fund. They ease the money flow in the economy and support economic growth. Give a specific example of an intermediary and what function it plays. Mutual funds or hedge funds are intermediaries because they charge a fee for investing for other people and people could just buy stocks for themselves and save in mutual funds or hedge fund fees. In the review, you learned about what is a financial market. what role do they play in the economy? what role do financial intermediaries play in the market? and examples of financial markets.
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References
Higgins, R. C, Koski, J. L. & Mitton, T. (2018). Analysis for Financial Management (12th ed.). Mcgraw-Hill Education.
Johnston, M. (2022). How Robinhood Makes Money.
Wallstreetmojo Editorial Team. (n.a). Financial Intermediary.
Seth, S. (2022). How the NYSE Makes Money.
