Financial market

Financial market
Finance

v
t

e [1]

Financial markets

Public market

Exchange
Securities
Bond market

Bond valuation

Corporate bond

Fixed income

Government bond

High-yield debt

Municipal bond
Stock market

Common stock

Preferred stock

Registered share

Stock

Stock certificate

Stock exchange

Voting share
Derivatives market

Credit derivative
Futures exchange
Hybrid security
Securitization
Over-the-counter

Financial market

Forwards
Options
Spot market
Swaps
Foreign exchange

Currency
Exchange rate
Other markets

Commodity market
Money market
Reinsurance market
Real estate market
Practical trading

Clearing house
Financial market participants
Financial regulation
Finance series

Banks and banking

Corporate finance
Personal finance
Public finance

v
t

e [2]

A financial market is a market in which people and entities can trade financial securities, commodities, and other
fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include
stocks and bonds, and commodities include precious metals or agricultural goods.
There are both general markets (where many commodities are traded) and specialized markets (where only one
commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and
government agencies, in one "place", thus making it easier for them to find each other. An economy which relies
primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast
either to a command economy or to a non-market economy such as a gift economy.
In finance, financial markets facilitate:

The raising of capital (in the capital markets)

The transfer of risk (in the derivatives markets)
Price discovery
Global transactions with integration of financial markets
The transfer of liquidity (in the money markets)
International trade (in the currency markets)

and are used to match those who want capital to those who have it.
Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities
which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some
compensation in the form of interest or dividends. This return on investment is a necessary part of markets to ensure
that funds are supplied to them.

Financial market

Definition
In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or
service and the transactions between them.
The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in
financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE,
BSE, NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still,
corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever
reason, may agree to sell stock from the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and
people are building electronic systems for these as well, similar to stock exchanges.

Types of financial markets

Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise
finance: for long term finance, the Capital markets; for short term finance, the Money markets. Another common use
of the term is as a catchall for all the markets in the financial sector, as per examples in the breakdown below.
Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common stock, and enable the
subsequent trading thereof.
Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading
thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products at some future date; see also
forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets may also be divided into primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow
investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors,
while in secondary market transactions exist among investors.
Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which
a security can be sold without a loss of value. Securities with an active secondary market mean that there are many
buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets
whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount.

Financial market

Raising capital
Financial markets attract funds from investors and channel them to corporationsthey thus allow corporations to
finance their operations and achieve growth. Money markets allow firms to borrow funds on a short term basis,
while capital markets allow corporations to gain long-term funding to support expansion.
Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as
banks, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those
who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow.
Banks popularly lend money in the form of loans and mortgages.
More complex transactions than a simple bank deposit require markets where lenders and their agents can meet
borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A
good example of a financial market is a stock exchange. A company can raise money by selling shares to investors
and its existing shares can be bought or sold.
The following table illustrates where financial markets fit in the relationship between lenders and borrowers:
Relationship between lenders and borrowers
Lenders
Individuals
Companies

Financial Intermediaries Financial Markets

Banks
Insurance Companies
Pension Funds
Mutual Funds

Interbank
Stock Exchange
Money Market
Bond Market
Foreign Exchange

Borrowers
Individuals
Companies
Central
Government
Municipalities
Public Corporations

Lenders
Who have enough money to lend or to give someone money from own pocket at the condition of getting back the
principal amount or with some interest or charge, is the Lender.
Individuals & Doubles
Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A
person lends money when he or she:

puts money in a savings account at a bank;

contributes to a pension plan;
pays premiums to an insurance company;
invests in government bonds; or
invests in company shares.

Companies
Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period
of time, they may seek to make money from their cash surplus by lending it via short term markets called money
markets.
There are a few companies that have very strong cash flows. These companies tend to be lenders rather than
borrowers. Such companies may decide to return cash to surplus (e.g. via a share buyback.) Alternatively, they may
seek to make more money on their cash by lending it (e.g. investing in bonds and stocks).

Financial market

Borrowers
Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a
house purchase.
Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or
future business expansion.
Governments often find their spending requirements exceed their tax revenues. To make up this difference, they
need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities
and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the Public sector
net cash requirement (PSNCR).
Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank
accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather
than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation.
Municipalities and local authorities may borrow in their own name as well as receiving funding from national
governments. In the UK, this would cover an authority like Hampshire County Council.
Public Corporations typically include nationalized industries. These may include the postal services, railway
companies and utility companies.
Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign
exchange markets.
Borrowers having similar needs can form into a group of borrowers. They can also take an organizational form like
Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their
borrowings.

Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products,
or derivatives for short.
In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down,
creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit
risk.[3] It is also called financial economics.
Derivative products or instruments help the issuers to gain an unusual profit from issuing the instruments. For using
the help of these products a contract has to be made. Derivative contracts are mainly 3 types: 1. Future Contracts 2.
Forward Contracts 3. Option Contracts.

Currency markets
Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods. While this may
have been true in the distant past,Wikipedia:Manual of Style/Dates and numbers#Chronological items when
international trade created the demand for currency markets, importers and exporters now represent only 1/32 of
foreign exchange dealing, according to the Bank for International Settlements.[4]
The picture of foreign currency transactions today shows:
Banks/Institutions
Speculators
Government spending (for example, military bases abroad)
Importers/Exporters
Tourists

Financial market

Analysis of financial markets

See Statistical analysis of financial markets, statistical finance
Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the
founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are
now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future
changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the
short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points
rather to the random walk hypothesis, which states that the next change is not correlated to the last change. The role
of human psychology in price variations also plays a significant factor. Large amounts of volatility often indicate the
presence of strong emotional factors playing into the price. Fear can cause excessive drops in price and greed can
create bubbles. In recent years the rise of algorithmic and high-frequency program trading has seen the adoption of
momentum, ultra-short term moving average and other similar strategies which are based on technical as opposed to
fundamental or theoretical concepts of market Behaviour.
The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot
that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lvy stable
distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2.
Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an
estimated standard deviation.

Financial market slang

Poison pill, when a company issues more shares to prevent being bought out by another company, thereby
increasing the number of outstanding shares to be bought by the hostile company making the bid to establish
majority.
Quant, a quantitative analyst with a PhD[citation needed] (and above) level of training in mathematics and statistical
methods.
Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are
able to invent derivatives of high complexity and construct sophisticated pricing models. They generally handle
the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they
are physicists and engineers by training; rocket scientists do not necessarily build rockets for a living.
White Knight, a friendly party in a takeover bid. Used to describe a party that buys the shares of one organization
to help prevent against a hostile takeover of that organization by another party.
round-tripping
smurfing, a deliberate structuring of payments or transactions to conceal it from regulators or other parties, a type
of money laundering that is often illegal.
Spread, the difference between the highest bid and the lowest offer.

Role (Financial system and the economy)

One of the important requisite for the accelerated development of an economy is the existence of a dynamic financial
market. A financial market helps the economy in the following manner.
Saving mobilization: Obtaining funds from the savers or surplus units such as household individuals, business
firms, public sector units, central government, state governments etc. is an important role played by financial
markets.
Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which
are in need of the same.

Financial market
National Growth: An important role played by financial market is that, they contributed to a nations growth by
ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made
possible.
Entrepreneurship growth: Financial market contribute to the development of the entrepreneurial claw by
making available the necessary financial resources.
Industrial development: The different components of financial markets help an accelerated growth of industrial
and economic development of a country, thus contributing to raising the standard of living and the society of
well-being.

Functions of Financial Markets

Intermediary Functions: The intermediary functions of a financial markets include the following:
Transfer of Resources: Financial markets facilitate the transfer of real economic resources from lenders to
ultimate borrowers.
Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible
funds, thus contributing to the enhancement of the individual and the national income.
Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the
income and the gross national production.
Capital Formation: Financial markets provide a channel through which new savings flow to aid capital
formation of a country.
Price determination: Financial markets allow for the determination of price of the traded financial assets
through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy
based on the demand and supply through the mechanism called price discovery process.
Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as
to offer the benefit of marketability and liquidity of such assets.
Information: The activities of the participants in the financial market result in the generation and the
consequent dissemination of information to the various segments of the market. So as to reduce the cost of
transaction of financial assets.
Financial Functions
Providing the borrower with funds so as to enable them to carry out their investment plans.
Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in
production debentures.
Providing liquidity in the market so as to facilitate trading of funds.
it provides liquidity to commercial bank
it facilitate credit creation
it promotes savings
it promotes investment
it facilitates balance economic growth
it improves trading floors

Financial market

Constituents of Financial Market

Based on market levels
Primary market: Primary market is a market for new issues or new financial claims. Hence its also called new
issue market. The primary market deals with those securities which are issued to the public for the first time.
Secondary market: Its a market for secondary sale of securities. In other words, securities which have already
passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock
exchange and it provides a continuous and regular market for buying and selling of securities.

Based on security types

Money market: Money market is a market for dealing with financial assets and securities which have a maturity
period of up to one year. In other words, its a market for purely short term funds.
Capital market: A capital market is a market for financial assets which have a long or indefinite maturity.
Generally it deals with long term securities which have a maturity period of above one year. Capital market may
be further divided into: (a) industrial securities market (b) Govt. securities market and (c) long term loans market.
Equity markets: A market where ownership of securities are issued and subscribed is known as equity market.
An example of a secondary equity market for shares is the Bombay stock exchange.
Debt market: The market where funds are borrowed and lent is known as debt market. Arrangements are
made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some
specified amount of interest.
Derivative markets:
Financial service market: A market that comprises participants such as commercial banks that provide various
financial services like ATM. Credit cards. Credit rating, stock broking etc. is known as financial service market.
Individuals and firms use financial services markets, to purchase services that enhance the working of debt and
equity markets.
Depository markets: A depository market consist of depository institutions that accept deposit from individuals
and firms and uses these funds to participate in the debt market, by giving loans or purchasing other debt
instruments such as treasure bills.
Non-Depository market: Non-depository market carry out various functions in financial markets ranging from
financial intermediary to selling, insurance etc. The various constituency in non-depositary markets are mutual
funds, insurance companies, pension funds, brokerage firms etc.

Notes
[1] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Finance_sidebar& action=edit
[2] http:/ / en. wikipedia. org/ w/ index. php?title=Template:Financial_markets& action=edit
[3] Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2, Section 4: Financial Markets. pp. 3 (http:/ / www. saylor. org/
site/ wp-content/ uploads/ 2012/ 06/ ECON302-1. 1-1st. pdf) Accessed June 20, 2012
[4] Steven Valdez, An Introduction To Global Financial Markets

<References
T.E. Copeland, J.F. Weston (1988): Financial Theory and Corporate Policy, Addison-Wesley, West Sussex (ISBN
978-0321223531)
E.J. Elton, M.J. Gruber, S.J. Brown, W.N. Goetzmann (2003): Modern Portfolio Theory and Investment Analysis,
John Wiley & Sons, New York (ISBN 978-0470050828)
E.F. Fama (1976): Foundations of Finance, Basic Books Inc., New York (ISBN 978-0465024995)
Marc M. Groz (2009): Forbes Guide to the Markets, John Wiley & Sons, Inc., New York (ISBN
978-0470463383)

Financial market

R.C. Merton (1992): Continuous-Time Finance, Blackwell Publishers Inc. (ISBN 978-0631185086)
Keith Pilbeam (2010) Finance and Financial Markets, Palgrave (ISBN 978-0230233218)
Steven Valdez, An Introduction To Global Financial Markets, Macmillan Press Ltd. (ISBN 0-333-76447-1)
The Business Finance Market: A Survey, Industrial Systems Research Publications, Manchester (UK), new
edition 2002 (ISBN 978-0-906321-19-5)

External links
Financial Markets with Yale Professor Robert Shiller (http://oyc.yale.edu/economics/financial-markets/)

Article Sources and Contributors

Article Sources and Contributors

Financial market Source: http://en.wikipedia.org/w/index.php?oldid=598622114 Contributors: -oo0(GoldTrader)0oo-, 7, AbsolutDan, Adrian.benko, Adriantame, Aelffin, Ahd2007, Alexius08,
Ancheta Wis, Andre's Possee, Andrei Stroe, AniRaptor2001, Anna Lincoln, Aourangzaib, Arbitrarily0, AshFR, AspectusPR, Barek, BeachComber1972, Beccare, Beetstra, Bhludzin, BillFlis,
Bomac, CSWarren, Caltas, Camw, Cemo33@yahoo.com, Cent-Hero, Cguttormson, Charles Matthews, Charybdisz, Chokoboii, Christian Lassure, Cjfsyntropy, Ckatz, Closedmouth, CloudNine,
Courcelles, Crash D 0T0, Creschenko, Ctschro, Cyrus Grisham, Danno uk, Deor, Dewritech, Dijxtra, DocendoDiscimus, Dreispt, Drewwiki, Duoduoduo, E2eamon, EconoPhysicist, Edgar181,
Edward, Emmisa, Eric Kvaalen, Esoth, Ewlyahoocom, Examtester, Feco, Fender0107401, Fenice, FeydHuxtable, Finance C, Finnancier, Flowanda, Flyer22, Funandtrvl, Fylbecatulous, Gail,
Gatewaycat, Giganut, Glinos, Gpvos, Gracie chan, GraemeL, Gregalton, Hu12, IbankingMM, Imnotminkus, IngsocV, ItayGolan, Ixfd64, Jackbaird, Jackollie, Jfeckstein, Jnewton37, Johnleemk,
Jose77, Joseph Solis in Australia, Jroovers, Kbrose, Ken'ichi, Kevinsleem, Khaderv, Kiore, Konob21, Kozuch, Kuru, LARS, La goutte de pluie, Lamro, LeeCoursey, Leifern, Luna Santin, Lupo,
Maelor, ManuP, MartinDK, MastCell, McSly, Mean as custard, Mellery, Mic, Michael Hardy, Michellemaree, Misterx2000, Mk*, Mmortal03, MrOllie, Mukitul Anam, Mydogategodshat, Naive
rm, Nancy, Nasnema, Nicholaslepan, Nirvana2013, Notinasnaid, Nurg, Ohnoitsjamie, Phils, Pisibe, Pnm, Prp0001, Pumeleon, Quarl, Raystic, Renamed user 4, Rhobite, Rich Farmbrough,
Rinconsoleao, Rjwilmsi, Ryuch, Sachindole, Sae Harshberger, Sargdub, Sean.hoyland, Shell Kinney, Signalhead, Sloman, Smallbones, Soniah2010, Sowndaryab, Srahmadi, Statarb1,
Statoman71, SteinbDJ, Stepheng3, Sun Creator, Swethashan latha, Swpb, Taxman, Template namespace initialisation script, Tgeairn, The wub, TheSoundAndTheFury, ThowardLP, Tiger888,
Touretzky, Typelighter, Vanka5, Vilool1, Viveksharma020, Vrenator, Wavelength, WellmanP, Wieldthespade, Yahel Guhan, Yongxinge, Zeimusu, Zidonuke, , 233 anonymous edits

Image Sources, Licenses and Contributors

File:BilleteiNTER II.jpg Source: http://en.wikipedia.org/w/index.php?title=File:BilleteiNTER_II.jpg License: Creative Commons Attribution-Sharealike 3.0 Contributors: User:Veronidae
File:Philippine-stock-market-board.jpg Source: http://en.wikipedia.org/w/index.php?title=File:Philippine-stock-market-board.jpg License: Creative Commons Attribution 2.0 Contributors:
Katrina.Tuliao

License
Creative Commons Attribution-Share Alike 3.0
//creativecommons.org/licenses/by-sa/3.0/

10