How financial market works?

In a layman’s term, a market is a place where trading activities takes place. Similarly, the financial market is the lifeboat to a sinking economic ship where financial assets are traded.

The importance of financial markets in today’s economy cannot be under estimated because they provide a common ground for investors and debtors, regardless of their size, with each receiving a fair and proper treatment to make transactions. When needed, they provide individuals, companies, and government organizations access to capital.

At certain stages in the operation processes, organizations, groups, governments etc. would be in need of extra funds to continue or expand operation and to remain stable. Financial market is the go-to place, hence financial markets can be considered as the following:

• Where people trade assets and financial holdings
• Where business go to raise cash to grow
• Where investors make money and companies reduces risks.
• Creates security products that provide return for those with excess fund(investors/lenders) and make this funds available to those who need additional money (borrowers).
• Relies heavily on information transparency to ensure that the market set prices are efficient and appropriate.
• Reduces risk by making information publicly available to investors and traders.
• Instills confidence in investors thereby stabilizing the economy.
• Create liquidity that allow businesses to grow and entrepreneur raise money for their ventures.
• Matches traders together so money can flow to where it’s needed the most.

Since investors want to make profits from securities, they set prices in such a way that would benefit them, invariably making the financial markets a great determinant in setting the prices of securities.

Basic terminology of the financial market

Asset: Asset could be referred to as anything of durable value. There are various types of asset and they are:

• Real assets; these are assets that are available in physical form, for example, land, equipment, machineries etc.,
• Financial assets: these are direct or indirect claims over real assets. Indirect in the form of money holdings or claims to future income whose source is the real asset and direct, for example stock equity share.

Lenders: These are the people with excess available funds (exceeding their budgeted expenditures) which they plan to loan out at certain interests.

Borrowers:  These are people who have shortage of funds (relative to their budgeted expenditures) who are seeking to obtain loans. This is done by selling newly issued claims to lenders. i.e by selling financial assets to lenders.

Finally, the financial market could be described as a type of market place that authorizes the sales and purchases of assets such as stocks, bonds, foreign exchange and other derivatives. At the brink of falling, businesses, and government can go to a financial market to raise funds needed to save their businesses from crumbling and investors are also around to make more money by giving out loans with interest upon return.

A financial market is such that their participants are clearly defined, they include; Stock brokers, investors, business representatives and so on. There are different types of financial markets and the common ones include the Stock market and Bond market. You can visit thetradable.com to learn more about how financial market works.

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