The concept of the financial market is probably familiar to you, but perhaps you imagine something different from what the term denotes. In a simplified way, the financial market is where the supply of unrestricted funds in the form of savings of various economic subjects meets the demand for these funds by different economic issues.
However, we could understand the financial market in the broadest sense of the word as a set of transactions and institutions but also a mechanism where the demand and supply for free finance and precious metals meet.
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Financial Market And Its Division
The financial market is complicated because we can find various financial instruments, especially financial derivatives. To understand how financial markets work, it is first necessary to break them down.
Financial markets are divided into:
- money markets
- foreign exchange markets
- capital markets
- derivatives markets
Money markets are the primary financial market. It is traded on or invested in short-term securities. The immediate product of the money market is deposits of the population in banks, which include time deposits, commercial securities of companies, or money funds of financial companies. The common feature of these products is that their maturity is less than one year.
Therefore, the money market is designed to cover the short-term demand for money, i.e., to ensure liquidity.
Foreign Exchange Markets
World currencies are traded in the foreign exchange markets. The primary function of these markets is to ensure the transfer of capital from one currency to another, thereby supporting the global flow of finance.
Thus, the foreign exchange markets ensure the efficient transfer of resources to the places where their need is the highest, and there is also the potential for the highest returns.
The foreign exchange market functions also include the so-called speculative position, which refers to the situation when a large part of the participants in this market do not trade with natural capital, but only speculate about the expected movement of capital.
Capital markets Unlike money markets, capital markets provide long-term sources of financing (capital). The main interested parties for funding are governments and companies. This is also why capital markets are divided into stock and bond markets. On stock markets, companies acquire capital by issuing new shares. On bond markets, by issuing bonds, i.e., securities payable at a specified time and with a specified yield. Therefore, investors come to the capital market with an interest in long-term investing, the primary form of obtaining investment capital for companies.
Undoubtedly, the largest financial market is the derivatives market, which exceeds all other demands several thousand times in size. A derivative is a financial instrument derived from an underlying asset, such as a stock, bond, currency market, or commodity. The movement of the price of the derivative is therefore related to the direction of the cost of the underlying asset. The current financial system allows the building of products from results and thus creates large pyramids, the collapse of which is behind almost all financial crises.
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