financial market
Information about financial market
economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis.
Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.
Both general markets, where many commodities are traded and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. 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 that is based, such as a gift economy.
In Finance, Financial markets facilitate:
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.
Financial markets could mean:
1. organisations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants.
2. the coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.
In academia, students of finance will use both meanings but students of economics will only use the second meaning.
Financial markets can be domestic or they can be international.
Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks 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:
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 lenders (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.)
Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation 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 nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the public sector borrowing requirement (PSBR).
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 nationalised 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.
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.
Seemingly, the most obvious buyers and sellers of foreign exchange are importers/exporters. While this may have been true in the distant past, whereby importers/exporters created the initial demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to BIS.[1]
The picture of foreign currency transactions today shows:
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 scale of changes in price over some unit of time is called the volatility. It was discovered by Benoît Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lévy stable distributions. The scale of change, or volatiliy, 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 that what one would calculate using a Gaussian distribution with an estimated standard deviation.
Only negative stories about financial markets tend to make the news. The general perception, for those not involved in the world of financial markets is of a place full of crooks and con artists. Big stories like the Enron scandal serve to enhance this view.
Stories that make the headlines involve the incompetent, the lucky and the downright skillful. The Barings scandal is a classic story of incompetence mixed with greed leading to dire consequences. Another story of note is that of Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had a serious impact on its course in Europe. A commonly recurring event is the stock market bubble, whereby market prices rise to dizzying heights in a so called exaggerated bull market. This is not a new phenomenon; indeed the story of Tulip mania in the Netherlands in the 17th century illustrates an early recorded example.
Financial markets are merely tools. Like all tools they have both beneficial and harmful uses. Overall, financial markets are used by honest people. Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.
For example, if you borrow money and have to pay interest once a month, you have issued a fixed-income security.
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Economic policy
Monetary policy
Central bank Money supply
Fiscal policy
Spending Deficit Debt
Trade policy
Tariff Trade agreement
Finance
Financial market
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)
Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.
Both general markets, where many commodities are traded and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. 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 that is based, 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); and
- International trade (in the currency markets).
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.
Definition
The term Financial markets can be a cause of much confusion.Financial markets could mean:
1. organisations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants.
2. the coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.
In academia, students of finance will use both meanings but students of economics will only use the second meaning.
Financial markets can be domestic or they can be international.
Types of financial markets
The financial markets can be divided into different subtypes:- 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.
Raising capital
To understand financial markets, let us look at what they are used for, i.e. what is their purpose?Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks 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 | Financial Intermediaries | Financial Markets | Borrowers |
| Individuals Companies | Banks Insurance Companies Pension Funds Mutual Funds | Interbank Stock Exchange Money Market Bond Market Foreign Exchange | Individuals Companies Central Government Municipalities Public Corporations |
Lenders
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.
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 lenders (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.)
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 modernisation 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 nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the public sector borrowing requirement (PSBR).
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 nationalised 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.
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.
Currency markets
Seemingly, the most obvious buyers and sellers of foreign exchange are importers/exporters. While this may have been true in the distant past, whereby importers/exporters created the initial demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to BIS.[1]
The picture of foreign currency transactions today shows:
- Banks and Institutions
- Speculators
- Government spending (for example, military bases abroad)
- Importers/Exporters
- Tourists
Analysis of financial markets
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 scale of changes in price over some unit of time is called the volatility. It was discovered by Benoît Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lévy stable distributions. The scale of change, or volatiliy, 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 that what one would calculate using a Gaussian distribution with an estimated standard deviation.
Financial markets in popular culture
- Gordon Gekko is a famous caricature of a rogue financial markets operator, famous for saying "greed ... is good".
Only negative stories about financial markets tend to make the news. The general perception, for those not involved in the world of financial markets is of a place full of crooks and con artists. Big stories like the Enron scandal serve to enhance this view.
Stories that make the headlines involve the incompetent, the lucky and the downright skillful. The Barings scandal is a classic story of incompetence mixed with greed leading to dire consequences. Another story of note is that of Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had a serious impact on its course in Europe. A commonly recurring event is the stock market bubble, whereby market prices rise to dizzying heights in a so called exaggerated bull market. This is not a new phenomenon; indeed the story of Tulip mania in the Netherlands in the 17th century illustrates an early recorded example.
Financial markets are merely tools. Like all tools they have both beneficial and harmful uses. Overall, financial markets are used by honest people. Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.
Financial markets slang
- Big swinging dick, a highly successful financial markets trader. The term was made popular in the book Liar's Poker, by Michael Lewis
- Geek, a Quant
- Grim, an ageless man known for his whistle and tendency to relate current events to financial market
- Nerd, a Quant
- Quant, a quantitative analyst skilled in the black arts of PhD level (and above) 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 frightening 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 an organisation to help prevent the takeover of that organisation by another party (that is making a hostile bid).
See also
Notes
References
- Steven Valdez, An Introduction To Global Financial Markets, Macmillan Press Ltd. (ISBN 0-333-76447-1)
- Hagen Kleinert, Path Integrals in Quantum Mechanics, Statistics, Polymer Physics, and Financial Markets, 4th edition, World Scientific (Singapore, 2004); Paperback ISBN 981-238-107-4 (also available online: PDF-files)
General areas of finance |
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| Financial markets • Investment management • Financial institutions • Personal finance • Public finance • Mathematical finance • Financial economics • Experimental finance • Computational finance |
| Economics topics | Finance topics | Accounting topics | Management topics | Marketing topics | List of economists |
The bond market, also known as the debt, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. The size of the international bond market is an estimated $45 trillion of which the size of outstanding U.S.
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worldwide view.
Fixed income refers to any type of investment that yields a regular (or fixed) return.For example, if you borrow money and have to pay interest once a month, you have issued a fixed-income security.
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A corporate bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.
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A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
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In the United States, a municipal bond (or muni) is a bond issued by a state, city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, school districts, publicly owned airports and seaports,
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Bond valuation is the process of determining the fair price of a bond. As with any security or capital investment, the fair value of a bond is the present value of the stream of cash flows it is expected to generate.
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In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase.
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A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately.
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In financial markets, the stock capital of a corporation or a joint-stock company is the capital raised through the issuance, sale and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
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Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than common stock, and its terms are negotiated between the corporation and the investor.
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A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities.
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The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators,
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The Retail forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the larger Foreign exchange market.
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History
Retail trading is more structured than the forex market as a whole...... Click the link for more information.
The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives.
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In finance, a credit derivative is a financial instrument or derivative whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded.
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- Returns: Predictable dividend, often franked therefore possible tax advantage to the holder
- Capital price:
- *Price moves in line with share price (fixed conversion terms e.g.
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Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or
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In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date.
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A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated.
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swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.
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Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.
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Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is the opposite of exchange trading which occurs on futures exchanges or stock exchanges.
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Property law
Part of the common law series
Acquisition of property
Gift · Adverse possession · Deed
Lost, mislaid, and abandoned property
Alienation · Bailment · License
Estates in land
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Part of the common law series
Acquisition of property
Gift · Adverse possession · Deed
Lost, mislaid, and abandoned property
Alienation · Bailment · License
Estates in land
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The Spot Market or Cash Market is a commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects.
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financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial market by Central banks is usually regarded as intervention rather than participation, although evidence exists in the Sprott '"Visible Hand of Uncle Sam"' report that
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Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value while reducing the firm's financial risks.
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Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial
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Economic policy
Monetary policy
Central bank Money supply
Fiscal policy
Spending Deficit Debt
Trade policy
Tariff Trade agreement
Finance
Financial market
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bank is a commercial or state institution that provides financial services , including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.
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