Nowadays, there are many tools and applications that are offered, they allow you to invest, offer and buy different securities, even for people who do not have a greater mastery in the subject. However, it is still important to know about financial markets. Next, we will learn the what and also the why of this knowledge.
What are the financial markets?
The name of the financial market is where the exchange processes (purchase-sale) of assets take place (securities or financial instruments) for money, and vice versa. Traditionally, this term referred to the place or physical space. But now, it can also be a virtual space, which can be accessed practically from anywhere.
It is thought that the origin of financial markets is quite old, going back to the times of the first civilizations established in Mesopotamia, where even “futures” of crops could be bought, leaving the commercial operations settled in cuneiform characters on clay tablets. And thanks to this, other great creations of humanity were also consolidated: writing and commercial legislation.
On the other hand, it is considered that, in order to fully fulfill all their functions, financial markets have or should have some characteristics, such as the following:
- Transparency: the assets that are traded must be transparent, which is why information about them should be provided to investors, and they in turn should demand it.
- Amplitude: this has to do with the volume of assets being traded and the number of investors; the larger the volume, the greater the market breadth.
- Transaction costs: taxes, interest rate variations or inflation should not affect the operations that are carried out.
- Flexibility and speed: to respond quickly to buy and sell orders.
- Freedom: there should be no barriers to the purchase and sale of assets; although each market can set its own rules.
With respect to the last point, given their importance, financial markets are regulated and supervised by central banks as well as by different institutions in each country. For example, the famous New York Stock Exchange (Wall Street), is regulated by the Securities and Exchange Commission from the USA.
The importance of financial markets
Financial markets constitute one of the most important areas of a country’s economic system, to the extent that they are a meeting point between bidders and claimants. They also help to channel savings into investment or financing.
Thus, exchange operations between companies, individuals, and even with governments, take place efficiently and transparently, as the supply and demand of assets are regulated; for all this, they allow to guarantee, to some extent, that the parties feel satisfied.
On the other hand, they help in pricing, contributing to the circulation of assets and the maintenance of liquidity that the financial system needs, and allowing economic agents to obtain resources to finance their respective activities.
In addition to these main functions, financial markets also help to reduce intermediation times and costs, favoring the efficient allocation of resources. And today, with the new technologies, market operations are even smoother.
Types of financial markets
In general, it is pointed out that there are two types of financial markets. The primary or issuing market, as the name implies, is where the securities to be traded are issued; such as public debt securities, bonds and others.
While the secondary market is the trading market itself, where assets are exchanged: stocks, fixed-income instruments, derivatives, and futures, among others. The most well-known is the one we call the stock exchange.
In a particular way, there are subtypes of financial markets, according to their structure and the assets transferred, among other aspects. In this regard, the following should be mentioned:
- Capital market: within this are those of fixed income and those of equity income.
- Foreign exchange market (FOREX): in this, the products that are traded are currencies, which are exchanged in pairs at a price called the exchange rate.
- Cryptocurrency market: similar to the previous one, except that in this case, the exchange involves some cryptocurrency, even tokens.
- Derivatives market: a derivative is an asset whose value depends on another; among these are mentioned: swaps, futures contracts, indices, currencies, stocks…
- Raw materials market (also called commodities): the object of exchange is raw materials; it is a market of physical elements. It can be gold, oil, copper, coltan, coffee, wheat, and more.
Why you need to know about financial markets
As you can see, financial markets are a key element in the economy. Knowing and analyzing their behavior provides first-hand knowledge about the health of finance of a company, a region or a country.
Likewise, knowing about financial markets implies having an understanding of different notions about the current situation of the different markets, the values and new processes and products that are emerging, the new rules, as well as their impact on the economic situation, not to mention the possible financial crises.
As already mentioned, the activity in the financial markets has an important relationship with the fixing of prices, which are established based on the supply and demand of securities. In turn, other assets, even those not traded on such markets, may fluctuate based on investors’ expectations.
All these aspects will allow us to better understand the circumstances that occur in the economy, of which we are part as actors and whose consequences also affect us.In conclusion, whether we decide to invest, buy or sell any good or security, it is always good to take a look at the financial market indicators, which are the thermometer of a country’s economy.