Financial markets are a space that can be physical or virtual, through which financial assets are exchanged between economic agents and in which the prices of these assets are defined.
The financial markets make up a space whose objective is to channel the savings of families and companies to investment. In such a way that people who save have a good remuneration for lending that money and companies can have that money to make investments.
A financial market is governed by the law of supply and demand. That is, when someone wants something at a certain price, they can only buy it at that price if there is another person willing to sell that something at that price.
Functions of the financial market
The main function of a financial market is that of intermediation between people who save and people who need financing. In other words, put buyers and sellers in contact. Based on this, we can name these 4 main functions of financial markets:
- Put in contact with everyone who wants to intervene in it.
- Set an appropriate price for any asset.
- Provide liquidity to assets.
- Reduce intermediation terms and costs by facilitating greater circulation of assets.
Characteristics of the financial market
These are the main characteristics with which we can define a financial market:
- Amplitude: A financial market is broader the greater the volume of assets that are traded in it. If there are many investors in the market, more assets will be traded and therefore there will be more breadth.
- Transparency: The ease of obtaining information about the financial market.
- Freedom: Determined by the non-existence of barriers for both buying and selling.
- Depth: A financial market is deeper the greater the number of buy-sell orders.
- Flexibility: Facility for the rapid action of the agents before the appearance of a desire to buy or sell.
If the 5 characteristics are raised to the maximum we would be facing what is called a "perfect market".
Types of financial markets
There are several types of financial markets. A basic way to separate them is based on the time of the investment:
- Money market: Short-term financial assets are exchanged (less than 12-18 months).
- Capital market: Longer-term financial assets are exchanged. Equity, fixed income and financial derivatives markets belong to this type of market.
Due to the wide range of markets within this classification, there is a broader division:
- Money market.
- Capital market. Within the capital market are these two markets: fixed income markets and equity markets.
- Financial market for raw materials (commodities).
- Currency market (Forex market).
- Financial derivatives market:
- Organized markets: They are standardized and controlled by a clearing house. Inside we find mainly the financial futures market and the financial options market.
- Unorganized markets (OTC).
- Spot market.
- Insurance market.
- Interbank market.
- Cryptocurrency market.
Who are the financial markets?
Financial markets are made up of all the people who exchange financial assets, since when we think of a market, an empty place comes to mind. So we could also say that financial markets are made up of all investors who buy and sell those financial assets. And who are these people?
Almost everyone. When a married couple saves money and invests it in a pension plan, they are part of the financial markets. When someone buys a house and takes out a mortgage, they are also part of the markets. When someone buys stocks, treasury bills, when the government or a company issues debt, they are also part of the financial markets. Even commodity markets can be considered part of financial markets as long as the customer is not the final consumer.
There are economic agents that have more influence than others in the financial markets. A person who invests 1,000 million euros will have more power of influence than a person who invests 1,000 euros. If a person sells 1,000 euros they will have little effect on the market. On the other hand, if a person sells huge amounts of shares of a bank, the shares of this bank will probably go down. In theory, in the long term, no matter how high the amount, if the market is broad, that investor’s operation will dissolve and make the financial market reflect an efficient price again.