Concept of Financial Markets
Financial markets are markets where securities are traded at both local and global levels. Investors or traders buy and sell these securities to earn potential profits while trying to keep their risks limited. Many traders tend to focus on one financial market, such as the stock market or contracts for difference, but it is important to have a comprehensive view of all financial markets, as they may affect each other. This article reviews the most important financial markets and explains their global role.
Global Financial Markets
Definition of Financial Markets
Financial markets do not fundamentally differ much from other markets, where products are bought and sold. However, instead of exchanging vegetables, clothing, or computers for local or national currency, financial markets focus on buying, selling, and holding securities and financial instruments in their various forms. Financial markets have expanded significantly over the past few decades and now offer many types of financial instruments.
The most important of these include:
Forex - (also known as FX or the currency market)
Securities Markets - such as stock and bond markets.
Derivatives Markets - such as Contracts for Difference (also known as CFDs)
Commodity Markets - which include gold, silver, oil, and others.
Financial Debt Markets - such as short-term debt.
Cryptocurrency Markets - which include digital currencies such as Bitcoin, Ethereum, and others.
Mortgage Markets - which offer long-term loans.
Insurance Markets - which protect against risks for certain premiums.
Some of these financial markets are inherently more inclined to be: long-term, short-term, or a mix of both. The mortgage market, for example, is where many long-term loans arise, while financial debt markets focus on the short term.
Forex, stocks, contracts for difference, and commodities can be traded in the short and long term. Professional traders may decide to engage in investments or trading, according to their individual approach and trading style.
Importance of Financial Markets
Financial markets serve an important purpose for the economy and provide six essential functions:
Price Determination
Providing Liquidity
Achieving Financial Efficiency (reducing costs such as transaction costs)
Traditional Borrowing and Lending
Providing Information on Money Flow
Risk Sharing
Financial institutions help facilitate the flow and movement of money within global financial markets and the overall financial system. These institutions include commercial banks, investment banks, central banks, insurance companies, brokers, and even non-banking financial institutions (such as credit unions).#TrendingTopic 