A financial market refers to the marketplace, where buyers and sellers can trade financial securities, bonds, commodities, currencies, and derivatives. Financial markets are basically defined as the markets with transparency in pricing, regulations on trading, cost of fees, and market forces determining the prices of securities that trade.
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The financial markets have both the general markets (where commodities are being traded) and specialized markets (where only a single commodity is being traded.) For the participants of the financial markets, the person has to meet certain, which can be based on several factors like the amount of money held, the investor’s geographical location, market knowledge, or the profession and interest of the participants. Every nation in the world has its financial markets. Some are very small, with few participants, while some are giants with vast numbers of participants, like the New York stock exchange.
Financial Markets a Sector includes Several Markets such as:-
- Capital Markets- A market in which individuals and institutions trade financial securities. In this kind of market, the organizations and institutions in both the public and private sectors often trade securities on the capital markets to increment funds. It comprises two markets.
- Stock Market– This kind of market allows investors to buy or sell shares publically traded companies. Also known as the equity market. It can split into two main sections the primary markets and the secondary markets.
- The Bond Market- This is a debt investment procedure in which an investor loans money to an entity (government or corporate), which borrows the funds for a defined period of time at a fixed rate.
- Commodity Market– A market that facilities the trading of commodities.
- Money Market– A market in which the financial instruments with high liquidity and short term maturity is being traded.
- Derivation Market– A market that provides the instruments for the management of financial risks.
- Foreign Exchange Markets– Markets that facilitate the trading of foreign exchange.
Functions of the Financial Markets
Functions of the Financial Markets are as follows:-
The part of financial markets in the success and strength of an economy cannot be underestimated. Here are four critical functions of financial markets.
- Put Savings into More Productive Use- As introduced in the case above, savings account with money/commodities should not just let that money rest in the vaults. Thus, financial markets like banks/finance providers open it up to individuals and companies that need a student loan, home loan, or business loan.
- Determines the Price of Securities– Investors’ focus on making profits from their securities. However, far from goods and services whose price is determined by the law of supply and demand, prices of securities are set by financial markets.
- Makes Financial Assets Liquid– Buyers and sellers can decide to trade their securities anytime. They can use financial markets to sell their securities or make investments as they desire.
- Lowers the Cost of Transactions– In financial markets, various types of information regarding securities can be acquired without spending.
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