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Examples Of Financial Markets And Their Roles
The total GDP of every country put together (or global GDP) was measured at $105 trillion in 2023! That means that in 2023 alone, the international community created $105 trillion worth of new goods and services.
This massive production volume is only possible thanks to many countries specializing in specific industries in which they excel. None of this would be possible if it weren’t for financial markets.
The various types of financial markets allow individuals and groups to raise money to fund their projects. Read about a few examples of financial markets in this informative post to learn more about the beating heart of the world’s economy.
Financial Markets Overview
When you save money at the bank, your cash is not simply sitting in a vault gathering dust until the day you need it again. Banks make money by lending the money you give to other people.
Those people use that money for homes, cars, and businesses and then pay the bank back with interest. Your bank keeps some of the interest and gives some of it back to you. The bank makes a way for people who want to save money to save and also makes it possible for people who need funds to access those funds.
In this example, we see a snapshot of how global financial markets work. However, banks facilitate the flow of funds directly within the banking system.
In the financial market, traders, brokers, buyers, and sellers interact with one another in the financial marketplace. Doing it this way allows market forces to accurately determine the value of financial instruments based on various factors. It also stops a single powerful institution from taking control and directing the flow of funds in ways that investors wouldn’t want.
Examples Of Financial Markets
Every country has at least one of its own (America has the New York Stock Exchange, amongst others). Some smaller financial markets only deal in a specific type of security or a particular industry.
Stock Market
The stock market is also referred to as the capital market because it is where companies go to raise capital to fund their projects. What these companies do on the stock market is carve out pieces of themselves and put them up for sale. Investors can then buy and become the owners of that piece of the company.
These tiny shards of companies are called stock, shares, or equity. If the companies do well, their stock becomes more valuable, and their shareholders may even get paid a little bit of extra money! Investors buy shares of companies either directly from the companies or trade stocks with other shareholders.
Bond Market
Bonds are debt instruments; by purchasing a bond, you lend money to the bond issuer in return for interest repayments. Many governments issue treasury bonds to get money.
Four pieces of information let you know if a bond is worth buying. The face value and the bond value (near enough to the purchasing price of the bond) are the same as long as the interest rates don’t change. Coupon payments are the small interest repayments you get back every period.
When the bond expires, the company or government pays the face value of the bond back to you. What makes these incredible, however, is that their value increases when interest rates drop (as long as you bought when the interest rates were high).
You buy bonds directly from issuers on the primary bond market. You can also buy bonds from other bondholders on the secondary bond market.
Commodities Market
Commodities and futures contracts (futures) help stabilize trade between buyers and sellers of goods that take a long time to create and deliver. Oil, corn, meat, platinum, steel, and many other commodities are traded on the commodity market, and the brokers of these deals profit by helping these transactions.
They’re called futures because the broker sets the deal up, with a price and delivery point fixed, months before the delivery occurs. These valuable contracts protect sellers from sudden price drops. They also protect buyers from a sudden spike in prices.
Derivatives Market
Financial derivatives are special investment bundles people can buy to help them profit from any of these other investment types. When you buy a derivative asset, the company you work through may take ownership of it. They reward you by paying you dividends and increasing the value of your derivative asset.
The derivatives market is wonderous because it allows ordinary people access to things like bonds and commodities. Usually, these assets would be far too expensive for the average person to afford. A derivative breaks that price down into affordable pieces.
Forex Market
Foreign exchange is where you can buy and sell fiat currencies from all over the world. This is also sometimes shortened to the forex market.
The principle is simple: You buy a currency when you think it will strengthen and then sell it when you think it will weaken. You can also trade between currencies depending on their relative prices.
Cryptocurrencies And The Internet
Though the Internet isn’t technically a financial market, it revolutionized trading by allowing millions more people access to financial markets. Through services like My Investing Club and Robinhood, ordinary folk have been able to learn about day trading and have been able to buy assets on various financial markets.
The Internet has even been the breeding ground for some unique securities: Cryptocurrencies and NFTs. Like other financial instruments, Crypto and NFth have their values controlled by supply and demand market forces.
They can also be used to fund companies and projects indirectly, but seasoned investors are quite weary of them because they are incredibly unreliable stores of value.
Broaden Your Investing Skills
These are some basic examples of financial markets that exist in the world. Most institutions, like the NYSE, are a combination of several of these types of financial markets. All of them make it possible for people to make money by investing in the hope that someone else’s enterprise or country will become more valuable.
Trading and investing both require a high level of technical analysis. You have to look at interest rates, corporate structures, companies’ performances, and so much more.
Learn about sharpening these skills and more by visiting our blog and improving your investing knowledge today.
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