FINANCIAL MARKETS

 

Financial markets

Financial markets are a type of marketplace where there is selling and buying of securities, which include the stock market, bond market, commodities market, foreign exchange, and cryptocurrency. They are an important part of any economy and in event of failure then there are economic disruptions. Understanding the financial market is crucial, and thus the proper allocation of funds and resources which in turn creates liquidity for business operators. By having a stable financial market there is a return on investments and money is available for borrowers.

The stock market is the trading of equities, bonds, currencies, and derivatives. Listed companies can buy and sell shares. Normally the companies are listed on the stock exchanges in their respective countries. Stock markets are used to raise capital via a public offering. The largest stock exchange in the world is the New York Stock Exchange and the Nasdaq.

The bond market is where investors buy and sell debt securities. Bond trading is whereby both governments and companies issue bonds to reduce debt, funding of projects, or for maintenance of daily operations. There are two categories in the bond market namely primary and secondary markets. In the primary market, the objective is to raise capital directly from bond buyers, and the secondary market is where investors trade on previously issued debt.

The commodities market is a marketplace where traders buy and sell raw products such as oil, gas, corn, and gold. Commodity markets include both physical trading and financial derivative. A financial derivative is whereby the said stock derives its value from another asset, which dictates the price and the options in acquiring it. Buying and selling stocks, commodities, currency, or assets have contracts that have a specific price and date. An investor normally uses these derivatives to hedge on risks involved and maximize returns and minimize losses. These investments can be risky and one is needed to understand the risks involved.

The forex market is whereby participants buy and sell currencies. Participants are banks, companies, investment firms, and foreign exchange traders. This market determines the foreign exchange rate determined by the supply and demand of the currency which influences the exchange rate. It is one of the largest financial markets in the world, and its structure operates in both interbank and over-the-counter markets.

Cryptocurrency markets facilitate the trading of digital assets, such as Bitcoin and Ethereum that are based on blockchain technology. Currently, there are many cryptocurrency tokens available globally, which enable traders to swap from one cryptocurrency to another. Some digital currencies operate in a centralized exchange and others operate without the control of the government thus making it easy for hacking and fraud. Trading is peer-to-peer on decentralized digital currencies, which is cheaper to transfer money and fast.

Importance of financial markets;

·         Provide a space for fair trade of investors and debtors.

·         Offer job opportunities thus lowering the unemployment rate.

·         Provide access to capital for governments, companies, and individuals.