1. What comprises a financial market?
The make-up of the financial market
In a broad sense, the financial market refers to a market whereby parties, no matter if it is from the demand side or supply side, distribute capital resources through various financial tools. As a crucial stabilizing element in a capitalist economy, the financial market includes stock markets, bond markets, foreign exchange markets, commodity markets, and all derivatives markets.
Demand and supply sides of capital resources can trade in the form of spot markets, futures markets, off-exchange or exchange floor, through different forms of products and derivatives—which thus constitute the makeup of the entire financial market. In other words, the financial market promotes capital raising and the development of capitalist society, creates liquidity for corporations and opportunities for investors, even speculators.
What are stock, bond, gold and forex markets?
Stock is a kind of fungible and negotiable security. Corporations raise capital in the market by issuing shares. With long-term capital inflow, a corporation can strengthen its capital position and hasten business development. In a stock market, participants can hold, transfer, and cash out any shares listed on the stock exchange. With a long history of development, the stock market is one of the most common investment means in the financial market.
There are two main markets in Bonds, primary markets and secondary markets. The primary market is a marketplace where government, corporation and financial institutions sell bonds to investors and first-time buyers to raise capital. Bondholders can freely sell their bonds to cash out fin the secondary market. As a market for each government to raise capital for its budget, the bond market is also a vital channel for a central bank to dictate its monetary policy. As the benchmark of yields of other financial assets as well as a crucial indicator of market risks, the yields and yield curve of all bonds allow investors to evaluate the value of financial assets.
Foreign exchange market
Huge amounts of income and expenses are derived from business activities and dealings between economies in the international market, including consumption, trading, investment and more. Due to the differences between each country’s currency and monetary policy, individuals and businesses, banks and government need to convert their own currency into the foreign one:
this is where the forex market comes into play in the global market. International forex markets trade 24 hours a day thanks to continued development over the previous decades. Investors are now able to deal in the forms of spot trading, swap, and forward contract, etc.
Related Article: What is the Forex Exchange Market?
Different from other markets operating with cash transactions, the commodity market trades commodities in the form of futures and the process is more complicated. Firstly, delivering the commodities to a designated warehouse within the timeframe stipulated by a centralized exchange. Secondly, the commodities will be inspected and kept in a warehouse which then issues a warehouse receipt. Thirdly, come the due date of delivery, the seller submits the warehouse receipt, and the buyer pays a sufficient sum to purchase the commodities and process the delivery at a centralized exchange.
In conclusion, thanks to market development, trading of commodities now can also be done in the forms of settling price difference, letting investors trade through contracts and hedge against the commodities.
Above all, as one of the most popular commodities, gold is conventionally viewed as an asset preserving value. Most importantly, the Gold market plays a considerable role in representing a safe haven for capital when inflation or political and economic situation worsens. Due to the limited supply of gold, it is widely accepted as a reserve asset. Gold-mining companies, businesses, individuals, financial institutions and central banks of different countries are the main participants of the gold market.
Stock market indexes all over the world
Within international financial markets, the stock market is the most popularized and one of the most important for raising capital. A Share is a type of capital ownership and owners are known as shareholders. Through shares, earning dividend and capital gain results from higher stock prices of listed companies.
However, Shareholders must bear operational and market risks faced by listed companies they are investing in.
Because of the daily volatility of stock markets in different countries, the financial markets developed “indexes”. Indexes are combinations of stock fluctuations, calculated for investors to understand the performance of a particular industry across multiple markets.
- Dow Jones Industrial Average
- S&P 500 Index
- Nasdaq Composite of the United States
- DAX Index of Germany
- Nikkei 225 index of Japan
- Hang Seng Index of Hong Kong
- SSE Composite Index of China
Stock markets are closely related to the condition of the global economy. Because the index of a stock market fluctuates, it always influences indexes of other markets.
Next Article: 2. What are commodities?
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