The Structure of The Financial Market and Its Functions
A financial market is a form of market space where you sell and purchase assets like bonds, currencies, stocks, and derivatives.
These markets go by different names, like “Wall Street” or “capital market,” but in the end, they are all the same thing – a place for trading financial assets.
The financial market is the hotspot for investors and companies to raise money and expand their businesses. The largest financial market in the world is the United States, contributing to 59.9% of the global stock market share.
There are a few financial markets, each of which serves different purposes. In this article, we’ll explain in more detail what constitutes a financial market and its core functions.
Types of Financial Markets
Before we dive into the types and functions, it is important to note that you must know what’s new (and old) in the world of finance. The best way to do so is to visit a leading financial information portal and get all the relevant info.
After that, you can start exploring. The financial market structure comprises many types, but the most widely known ones are the stock market, the commodities market, the derivatives market, and the bond market.
Each type is aimed at outstanding financial opportunities and attracts different investors and businesses.
The stock market is, without a doubt, the most known financial market. It is the place of business for sharing ownership of publicly-traded companies. Simply put, businesses enter the market intending to sell their stocks, i.e., give others the chance to own some percentage of their company.
Each share is valued at a particular cost – if it’s high, investors will likely make big profits. While buying stocks is not a complex process, what’s difficult is choosing the right ones at the right time.
The stock market can be tracked for its performance with various tools and strategies. Another option is to follow several indices like the Dow Jones Industrial Average (DIJA) or the S&P 500. These monitor the performance of the stocks on the market, and investors can use them to detect when this financial asset is doing well.
Of course, it’s an unwritten rule that you buy stocks when their price is low and sell them when it elevates.
This financial market is best suited for governments and companies to attain funds to finance a project of interest or make an investment.
Participants in the bond market buy bonds from a company, but the company is bound to return the amount assigned to the bonds within an agreed-upon timeframe with interest.
The market for commodities is where investors and traders buy and see natural resources like oil, meat, corn, and even gold, silver, or copper.
The reason why there’s a different financial market is because of its price volatility. Countries and governments are the key players in the commodity market.
However, to avoid massive flops and rises in prices, there is the commodities futures market. In that case, the cost of certain commodities is locked with no chance of altering it.
The derivatives market deals with derivatives or contracts based on the traded asset’s market value. A fine derivative example is the futures mentioned in the section above.
Key Functions of the Markets
Financial markets play a massive role in the strengthening of the economy. From functionalizing savings to determining the price of commodities, here are some key functions:
- Transform savings into functional assets: Money put away for rainy days won’t do much if they sit in the savings account. Banks are also part of the financial markets, and they often allow their clients to use their savings to enter the market, file for a loan, and so on.
- Determines the price of securities: The main goal of investors is to make money off their securities. Unlike goods and services, where the overall supply and demand determine the price, financial markets determine the price of securities.
- Liquidizes financial assets: Buyers and sellers can choose to trade their assets whenever. Financial markets are an excellent choice for making funds liquid.
- Lowering transaction costs: The beauty of financial markets is that you can attain different information on securities without spending anything.
Conclusion: The Structure and the Functional Aspect of the Financial Market
The financial market is a great opportunity to boost your passive or active income. Its first and foremost importance is that they keep funds liquid. They offer a basis for investors from various backgrounds to trade on an even field.
Regardless of the participant’s size (be it a corporation or an individual), these markets are the economy’s driving force by offering everyone an equal opportunity for profit.