What is financial markets?
A financial market is a place or 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 supply and demand. Typically, the term market means the aggregate of possible buyers and sellers of a certain goods or services and the transactions between them. The term “market” is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities or commodities like stock exchange or commodity exchange. Most of the trading of stocks takes place on exchanges. But corporate actions (merger, spinoff) are done outside exchanges. Some companies or individuals, whatever reason, to sell or buy each other without using an exchange. Trading of currencies or bonds is largely on a bilateral basis, although some bonds trade on stock exchanges, using electronic systems functioning similar to stock exchanges.
Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. There were financial markets long before the existence of Exchanges and, in fact, long before there was organized trading of any sort. Financial markets take various forms and operate in diverse ways. But all of them, whether highly organized forms like the London Stock Exchange, or highly informal forms like money changers on the street corners of some underdeveloped countries , serve more or less the same basic functions or characteristics as follows;
Borrowing and Lending
One key function of the financial markets is to facilitate the financing of new borrowing. Financial markets bring savers (Who with excess funds over their desired expenditure) together with would- be borrowers (who with short of funds over their desired expenditure). The borrowers issue new liabilities against themselves in return for receiving the excess funds of savers.
Markets provide price discovery, a way to determine the relative value of different items, based upon the prices at which individuals are willing to buy or sell them.
Information aggregation and coordination
Financial markets act as collectors and aggregators of information about financial asset value and the flow of fund from lenders to borrowers reducing the cost of acquiring information and the cost of transaction.
Market prices offer the best way to determine the value of a firm or of the firm’s assets, or property.
In countries with poorly developed financial markets, commodity or currencies may trade at very different prices in different locations. As traders in financial markets attempt to profit from these divergences, prices move towards a uniform level, making th entire economy more efficient.
Firms often require funds to build new facilities, replace machinery or expand their business in other ways. Shares, bonds and other types of financial instruments make this possible. The financial markets are also an important source of capital for individuals who wish to buy homes or cars, or even to make credit-card purchases
The financial markets also provide substance that makes many commercial transactions possible. This includes such things as arranging payment for the sale of a product abroad, and providing working capital in short term needs, such as payment of customers run late.
Futures, options and other derivatives contracts can provide protection against many types of risk, such as the possibility that a foreign currency will lose value against the domestic currency before an export payment is received. They also enable the markets to attach a price to risk, allowing firms and individuals to trade risks so they can reduce their exposure to some while retaining exposure to others.
Financial markets provide the holders of the financial assets with a chance to resell or liquidate these assets at reasonable price and time.