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Financial Markets

What are Financial Markets? How are they useful?

Financial markets are marketplaces in which assets are bought and sold. These assets include bonds, commodities, stocks, derivatives and foreign exchange. Financial markets are where businesses come to raise capital for growth and reduce risks, and where investors come to make money. They are widely used because they create a regulated and open system for the purpose of raising capital. The stock and bond markets are used for raising capital, whereas the commodities, foreign exchange, futures contracts and derivative markets are used to offset risks. The large size of the financial markets allows liquidity, meaning that sellers can unload assets in order to raise cash. As well as this, financial markets decrease the cost of doing business because you do not have to search very far to find a buyer or somebody who would like to sell.

Types of Financial Markets:

  • -Stock Market

-> Also known as the Equity Market. This is where shares of publicly listed companies are traded.

  • -Bond Market

-> This is where participants can issue new debt, or buy and sell debt securities- usually in the form of bonds.

  • -Derivatives

-> Derivatives are priced securities that are derived from at least one underlying asset. The derivative is a contract between at least 2 parties, and its value is derived from fluctuations in the underlying asset.

  • -Commodities Market

-> This is a physical or virtual marketplace wherein hard and soft commodities are sold or traded. Soft commodities are agricultural products whereas hard commodities are mined, e.g. oil.

  • -Foreign Exchange

-> This market buys, sells, or exchanges currencies at current or set prices.

Why are Financial Markets important?

-> Buyers and sellers are brought together through a medium so that money can flow to where it is needed the most.

-> Anybody can invest in company shares through the financial markets, meaning that you can profit from returns over a period of time.

-> They allow households to take out insurance.

-> They allow banks to make money so that in turn, banks can lend to customers seeking loans.

->They provide finance for companies so that they are able to invest and grow.

You can find out more information on Financial Markets here:

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