Financial Markets & Why They are Important
Many people have most likely heard the term “financial markets” thrown around before, but without much context, understanding what they are and why they are important can be difficult.
However, they are fairly easy to understand and see their societal role. Here is everything you need to know about the financial markets and why they are significant.
How Financial Markets Help Individuals
The first question many people will have is how financial markets help me as an individual. Financial markets help create revenue by promoting financial and economic activity, which then allows individuals to invest their money into the associated assets that are created.
Banks can also use these markets to take loans, which they then loan out to individuals. These loans can then be used to start a business, buy a house, or whatever else an individual would need the extra money for.
Another benefit that many may not be aware of is insurance payouts. Insurance companies use the revenue that is created to pay-out insurance claims made by individuals.
Types of Financial Markets
In simple thermal financial markets are systems that facilitate the transfer of capital between those who have it and those who need it. There are multiple financial market sectors, including stocks, forex, and cryptocurrencies.
Stock Markets
The stock market is arguably the most well-known financial market. It is where companies list their stocks to raise capital and where individuals or other businesses can buy or sell stocks.
Over-the-Counter Markets
An over-the-counter market is a decentralized stock market where assets are traded without using a middleman. OTC markets are much smaller; therefore, they have far less liquidity, making them less popular too.
Bond Markets
A bond is a security that is given to a borrower with a pre-agreed interest rate. In essence, the bond market sells securities that the treasury issues. This is why it is also commonly known as the debt, credit, and fixed-income market.
Money Markets
The money market is described as trading in very short-term investments that are low-risk. At the wholesale level, it involves high-volume trading between wholesalers and traders. At the retail level, it involves mutual funds bought by individual investors and money market accounts.
Forex Markets
The forex market is another essential part of the financial market sphere. Forex is the process of buying and selling foreign currencies on a small or large scale. The forex market is also decentralized, comprising banks and financial institutions worldwide.
Commodities Markets
The commodities markets are where sellers and consumers meet to buy and sell physical commodities such as corn, cotton, oil, and gas. The bulk of this type of trading takes place on the derivatives market and uses spot commodities as the underlying asset.
Cryptocurrency Markets
The crypto markets are some of the newest, as cryptocurrency, in general, is still relatively new. The buying and selling of cryptocurrency is done on decentralized trading platforms, with banks and financial institutions being completely excluded from the process.
Why Financial Markets are Important
Financial markets are important to a functioning economy for six main reasons; to facilitate savings, provide loans, allocate capital for productive use, facilitate transactions, provide forward markets, and provide a market for equities.
The first aspect of the financial markets is fairly self-explanatory, but providing a way to save money allows people to take their money into the future. Without the means to save, you won’t have a way to look after yourself and your expenses when you can’t work anymore.
Being able to provide loans and bonds is necessary for both corporations and individuals. They allow businesses to flourish or individuals to own homes. Loans and bonds are necessary for growth at both the corporate and individual levels.
Making your money work for you is another part of the financial market. Instead of letting your money sit idly in a bank account, you can invest it in businesses or stocks that allow you to use your money to make money.
Being able to exchange cash for goods or services is a need every business, government, individual, and economy needs. Being able to exchange funds easily is necessary for the expansion and growth of an economy.
Providing individuals and businesses with the opportunity to buy a product in the future at a current price that isn’t affected by inflation or price volatility is another benefit of the financial markets.
A market for equities allows companies to sell shares and use the money generated from these sales to grow and expand. Individuals who buy these shares can then enjoy a profit as the business becomes bigger and more successful.