When you hear the term “financial market”, what’s the first thing that comes into your mind? You might think of Wall Street, with its stock exchange, commodities, interest rates, and mutual funds. Well, the truth is that there are many other financial markets out there. A financial market is basically a market where individuals trade derivatives and financial securities at low transaction prices. Some of these financial instruments are bonds and stocks, financial investments like accounts receivables, retained earnings, and deposits, and precious metals and minerals, which are commonly referred to as precious metals.
The main purpose of financial markets is to provide investors with access to the capital they need for short-term purposes. For example, if you want to buy a new car, you can go to a dealer and talk to them about the kind of car you are interested in. They will give you some options, and you can choose one depending on your budget and preference. After you decide on what kind of car you would like to have, you can get it financed from a dealer. The dealer will loan you the money, and you make payments to them on your behalf according to the interest rate set by the government. This setup has been going on for decades, ever since capital goods like cars and trucks were introduced in the market.
In general, the main purpose of financial markets is to provide potential buyers and sellers of goods and services with the resources they need at the right time. This process is possible because the money supply is flexible and the interest rate is stable. However, this is not the complete story. The primary reason why capital is flowing into the market is because of the various factors that affect supply, like inflation and deflation.
To give you a better understanding of the financial market, let us take a look at some examples that illustrate the way it works. Let us start with the stock market, where shares represent ownership in a company. When a company makes profits, shareholders will be happy, and the company will be able to raise funds to buy more shares and create more new shares. However, when the economy goes bad, the share price will plummet, because investors will start selling their shares in the hope of getting a return on their investment. This scenario is repeated again, so it’s no wonder that there are worries about the financial market being an efficient source of liquidity for businesses.
Another example is the commodity market, which is where commodities like oil, gold, or other precious metals are bought and sold. Commodities are highly valuable, because their price increases with the growing demand for them. These key segments have become very important players in financial markets because of their fundamental significance. Other key segments that are equally important to include bond market, energy sector, and precious gems and stones.
The currency market, or forex market, is another important segment, since it plays a huge role in financial markets by allowing for different types of financial transactions. Currencies can be traded and exchanged either between countries or between individual users, depending on their relative value. For example, if a trader wants to buy a British pound with US dollars, he would enter the forex market and purchase the pound with US dollars. The transactions take place in real time, so they are fast, secure, and convenient.