Question

Q#02: How would you demonstrate the role of each different type of financial markets?   

Answer 1

Answer :

Financial Markets

Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. Often, they are called by different names, including “Wall Street” and “capital market,” but all of them still mean one and the same thing. Simply put, businesses and investors can go to financial markets to raise money to grow their business and to make more money, respectively.

The depositors themselves also earn and see their money grow through the interest that is paid to it. Therefore, the bank serves as a financial market that benefits both the depositors and the debtors.

Types of Financial Markets

There are so many financial markets, and every country is home to at least one, although they vary in size. Some are small while some others are internationally known, such as the New York Stock Exchange (NYSE)  that trades trillions of dollars on a daily basis. Here are some types of financial markets.

1. Stock market

2. Bond market

3. Commodities market

4. Derivatives market

Stock market

The stock market trades shares of ownership of public companies. Each share comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to buy stocks. The real challenge is in choosing the right stocks that will earn money for the investor.

Bond market

The bond market offers opportunities for companies and the government to secure money to finance a project or investment. In a bond market, investors buy bonds from a company, and the company returns the amount of the bonds within an agreed period, plus interest.

Commodities market

The commodities market is where traders and investors buy and sell natural resources or commodities such as corn, oil, meat, and gold. A specific market is created for such resources because their price is unpredictable. There is a commodities futures market wherein the price of items that are to be delivered at a given future time is already identified and sealed today.

Derivatives market

Such a market involves derivatives or contracts whose value is based on the market value of the asset being traded. The futures mentioned above in the commodities market is an example of a derivative.

Six key roles of financial markets

1. To facilitate saving by businesses and households: Offering a secure place to store money and earn interest

2. To lend to businesses and individuals: Financial markets provide an intermediary between savers and borrowers

3. To allocate funds to productive uses: Financial markets allocate capital to where the risk-adjusted rate of return is highest

4. To facilitate the final exchange of goods and services such as contactless payments systems, foreign exchange etc.

5. To provide forward markets in currencies and commodities: Forward markets allow agents to insure against price volatility

6. To provide a market for equities: Allowing businesses to raise fresh equity to fund their capital investment and expansion

Importance of Financial Markets

There are many things that financial markets make possible, including the following:

• Financial markets provide a place where participants like investors and debtors, regardless of their size, will receive fair and proper treatment.
• They provide individuals, companies, and government organizations with access to capital.
• Financial markets help lower the unemployment rate because of the many job opportunities it offers