FINANCIAL MARKETS
CONCEPTS:
The financial market is a mechanism that allows people to buy and sell (trade)
financial securities (such as stocks and bonds), commodities (such as precious
metals or agricultural goods), and other fungible items of value at low transaction
costs and at prices that reflect the efficient-market hypothesis.
Financial markets have evolved significantly over several hundred years and are
undergoing constant innovation to improve liquidity.
Markets work by placing many interested buyers and sellers in one "place", thus
making it easier for them to find each other. An economy which relies primarily on
interactions between buyers and sellers to allocate resources is known as a market
economy in contrast either to a command economy or to a non-market such as a
gift economy.
In finance, financial markets facilitate:
-The raising of capital (in the capital markets)
-The transfer of risk (in the derivates markets)
-International trade (in the currency markets)
-they are used to match those who want capital to those who have it.
Usually, a borrower issues a receipt to the lender promising to pay back the capital.
These receipts are securities which may be freely bought or sold. In return for
lending money to the borrower, the lender will expect some compensation in the
form of interest or dividends.
Definitions:
In economics, typically, the term market means the aggregate of possible buyers
and sellers of a thing and the transactions between them.
The term "market" is sometimes used for what are more strict exchanges,
organizations that facilitate trade in financial securities, e.g., a stock exchange or
commodity exchange. This may be a physical location (like the NYSE) or an
electronic system (like NASDAQ). Much trading of stocks takes place on an
exchange; still, corporate actions (merger, spinoff) are outside an exchange, while
both companies and people, for whatever reason, may agree to sell stock from one
to the other without using an exchange.
Trading in currencies and bonds is largely on a bilateral basis, although some
bonds trade on a stock exchange, and people are building electronic systems for
these as well, like stock exchanges.
Financial markets can be domestic, or they can be international.
Types of Financial Markets:
