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Financial market

A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets as commodities.

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 (such as the New York Stock Exchange (NYSE), London Stock Exchange (LSE), JSE Limited (JSE), Bombay Stock Exchange (BSE)) or an electronic system such as 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 the 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. There are also global initiatives such as the United Nations Sustainable Development Goal 10 which has a target to improve regulation and monitoring of global financial markets.[1]

Capital markets

Stock markets

The commodity market is a market that trades in the primary economic sector rather than manufactured products, Soft commodities is a term generally referred as to commodities that are grown, rather than mined such as crops (corn, wheat, soybean, fruit and vegetable), livestock, cocoa, coffee and sugar and Hard commodities is a term generally referred as to commodities that are mined such as gold, gemstones and other metals and generally drilled such as oil and gas.

Commodity markets

which provide short term debt financing and investment.

Money markets

which provide instruments for the management of financial risk.[2]

Derivatives markets

which provide standardized forward contracts for trading products at some future date; see also forward market.

Futures markets

which facilitate the trading of foreign exchange.

Foreign exchange markets

market which facilitate the trading of digital assets and financial technologies.

Cryptocurrency

Spot market

Interbank lending market

Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finances. For long term finance, they are usually called the capital markets; for short term finance, they are usually called money markets. The money market deals in short-term loans, generally for a period of a year or less. 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.


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 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.

Puts money in a savings account at a bank

Contributes to a pension plan

Pays premiums to an insurance company

Invests in government bonds

Banks/Institutions

Speculators

Government spending (for example, military bases abroad)

Importers/Exporters

Tourists

During the 1980s and 1990s, a major growth sector in financial markets was the trade in so called derivatives.


In the financial markets, stock prices, share prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products that are used to control risk or paradoxically exploit risk.[4] 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 four types:[5]


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, 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.[6]


The picture of foreign currency transactions today shows:

, 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.

Poison pill

Bips, meaning "bps" or . A basis point is a financial unit of measurement used to describe the magnitude of percent change in a variable. One basis point is the equivalent of one hundredth of a percent. For example, if a stock price were to rise 100bit/s, it means it would increase 1%.

basis points

Quant, a with advanced training in mathematics and statistical methods.

quantitative analyst

, 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 scientist

, stands for initial public offering, which is the process a new private company goes through to "go public" or become a publicly traded company on some index.

IPO

, 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.

White Knight

Round-tripping

, a deliberate structuring of payments or transactions to conceal it from regulators or other parties, a type of money laundering that is often illegal.

Smurfing

, the difference between the highest bid and the lowest offer.

Bid–ask spread

, smallest price move that a given exchange rate makes based on market convention.[8]

Pip

Pegging, when a country wants to obtain price stability, it can use pegging to fix their exchange rate relative to another currency.

[9]

Bearish, this phrase is used to refer to the fact that the market has a downward trend.

Bullish, this term is used to refer to the fact that the market has an upward trend.

Intermediary functions

price discovery

Financial Functions

Primary market: A primary market is a market for new issues or new financial claims. Therefore, it is also called new issue market. The primary market deals with those securities which are issued to the public for the first time.

Secondary market: 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.

(Archived 2010-11-03 at the Wayback Machine)

Financial Markets with Yale Professor Robert Shiller