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A financial market is the aggregate, or collection, of buyers and sellers of financial securities, commodities, and other sellable items, as well as the transactions between them.
Examples of financial markets include:
EXAMPLE
When people put money in a savings account or contribute to a pension, intermediaries like banks can then lend money from this pool of deposited money in the form of loans to people who seek to borrow.More complex transactions than a simple bank deposit require markets, where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties.
EXAMPLE
One instance of this is a stock exchange.There are many different ways to define and classify financial markets. The table below identifies some markets that we will discuss today.
| Type of Financial Markets | ||||
|---|---|---|---|---|
|
Money Markets |
Capital Markets |
Derivatives Markets |
Currency Markets |
|
|
Bond Market Stock Market |
Primary Market Secondary Market |
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For long-term finance, with longer maturities, we use the capital markets. For short-term finance, anything up to one year, money markets are used.
|
Money Markets |
Capital Markets |
|
| Purpose | Facilitate short-term lending and borrowing | Long-term investments |
|---|---|---|
| Time Horizon | One year or less | Longer term |
| Risk and Return | Low risk and modest return | Greater risk and return |
| Examples | Treasury Bonds, Short-term bonds, Certificates of Deposit, Commercial Paper | Stocks, Longer-term bonds, Real Estate Investment Trusts (REITS) |
We can take these long-term capital markets and divide them even further into the bond market and the stock market. Companies get financing through the issuing of shares of stock and the issuing of bonds.
Another division between the capital markets is the primary market and the secondary market.
We’ve mentioned a lot about capital markets, money markets, and stocks and bonds, but there are other markets as well.
There are derivatives markets. In the financial market for derivatives, the financial instruments are futures contracts or options, which are derived from other assets.
There are also currency markets, like foreign exchange or FOREX. Markets enable currency conversion and determine the relative value of the world currencies.
There are several terms that we often hear in the media when we talk about the markets.
We hear the term bull market, which is a market that is trending upward. A bull market is associated with increasing investor confidence and increased investing in anticipation of future price increases. A bullish trend in the stock market often begins before an economic downturn shows clear signs of a recovery. The bull market shows up first.
In the other direction is the bear market, which is a general decline in the stock market over a period of time. It’s a transition from high investor optimism to widespread investor fear and pessimism.
There are also types of trends for the bull and the bear markets. A primary trend is one that has broad support throughout the entire market and lasts for a year or longer. An even longer trend is a secular trend, which can last from 5 years up to 25 years, and is actually a series of primary trends.
EXAMPLE
A secular bear market consists of larger bear markets and smaller bull markets. A secular bull market consists of larger bull markets and smaller bear markets. So, over the long term, secular markets follow the pattern associated with that market trend.Source: THIS TUTORIAL HAS BEEN ADAPTED FROM "BOUNDLESS FINANCE" PROVIDED BY LUMEN LEARNING BOUNDLESS COURSES. ACCESS FOR FREE AT LUMEN LEARNING BOUNDLESS COURSES. LICENSED UNDER CREATIVE COMMONS ATTRIBUTION-SHAREALIKE 4.0 INTERNATIONAL.
