A financial market is simply a marketplace where people trade derivatives and various financial securities at below market prices. Some of these securities consist of bonds and stocks, precious metals and other materials, which are called derivatives in the financial markets. Derivatives are financial products that allow the holder to gain, by way of dividends or interest payments, from the changes in price values. In essence, it permits one to gamble for a possible return.
The basic function of the financial markets is to facilitate liquidity. This means that there is complete freedom of pricing of financial securities in the market. There are possible buyers and sellers in these markets. There is not a central body or authority that decides what price should be asked; it is left to the free market to decide. The central institutions involved in stabilizing the value of the currencies do nothing to influence the fundamental factors that determine the value of a currency.
In the Financial Market, there are mainly three types of markets: General Ledger, Primary Portfolio and Systematic Futures. The first type of markets allows for the transfer of assets from one part of the world to another. This is known as “interbank” credit. It is facilitated by clearinghouses that act as intermediaries between the possible buyers and sellers of financial securities. Most of these clearinghouses deal with assets that are available for trade such as treasury bills, corporate bonds and mortgage backed securities.
On the other hand, the second type of financial markets are those that focus on the sale of financial instruments such as equities, derivatives, government debt and corporate bonds. On the other hand, “systemic” financial instruments are those that are traded directly by dealers. Examples of such financial instruments are financial futures and options on commodities.
In addition to facilitating trade among financial assets, many financial markets also facilitate inter-bank competition. As a result, interest rates are usually determined by the interbank market. Most economic policies are also influenced by the financial market since it influences the exchange rates and inflation. In fact, the goal of central banks is to stabilize the exchange rate so that economic activities can be more stable.
With all the many financial markets, it is not easy for ordinary depositors to follow its movements. However, if you want to make money on the market, you need to understand how to identify the right entry points. Some common areas to watch include the savings account, the money market and the bond market. Although there are other less well known areas of influence such as the foreign exchange market and interest rate transparency. Regardless of your experience level with various financial markets, it will always be helpful to consult a financial advisor before investing in any particular area.