| Financial market | |
| In economics, a financial market is a mechanism that allows people to 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. | |
| Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers 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) | |
| 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. | |
| In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process. | |
| 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) 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. | |
| 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. | |
| The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities. | |
| 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 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. | |
| A new area of concern is the proper analysis of international market effects. As connected as today’s global financial markets are, it is important to realize that there are both benefits and consequences to a global financial network. As new opportunities appear due to integration, so do the possibilities of contagion. This presents unique issues when attempting to analyze markets, as a problem can ripple through the entire connected global network very quickly. For example, a bank failure in one country can spread quickly to others, which makes proper analysis more difficult. | |
| Other useful links | |
| Financial Markets with Yale Professor Robert Shiller | |
| Financial Markets – Financial Markets Introduction – Financial … | |
| INDIAN FINANCIAL MARKET File Format: PDF/Adobe Acrobat – Quick View | |
| Indian Stock Market >> Sensex >> Nifty >> Stock Prices >> Stock … | |
Financial Market
