What is financial market? Full Guide

What is financial market

A “market” is defined as the physical or virtual place where products and services are exchanged. Therefore, the financial market is, in essence, the same as any other market, but here the products are financial, like stocks or currencies. In this post, we are going to delve into what types there are, how they are classified, etc.

What is the financial market?

A financial market is a physical or virtual space, in which financial assets are exchanged. The price of these assets will be set by their supply and demand at each moment of time. Currently, most markets are virtual thanks to the great development of Internet platforms and technology.

Financial markets are governed by the forces of supply and demand. The purpose of these markets is to put in contact with suppliers and demanders of financial assets. The advantage of these financial markets is that investors can relatively easily find the right financial assets for their will and investment time horizon.

What functions does a financial market have?

Financial markets are important to the economy, as they have these basic functions:

• Fixing prices. The aim is to put the agents involved in them in contact, whether they are individuals or companies that participate directly in the market, whether they are specialized agents or financial intermediaries. The supply and demand for financial assets provide them with a price as well as gold and silver price depends on the economic power of a country.
• Liquidity. Provide liquidity to assets, since as the market for a financial instrument expands and develops, it will be easier to convert it into money without loss. They are usually highly liquid markets, therefore, it is easy to exchange products for money and vice versa. However, there may be certain illiquid assets.
• Efficiency. Favor the efficient allocation of resources. They seek to reduce the terms and costs of intermediation, as they are the appropriate channel for rapid contact between the participating agents. The fewer restrictions, the more efficient.
• Information and administration on the flow of funds. Channel the funds of savers to investors and vice versa. In addition, it provides relevant information, such as the trading volume of security.

What characteristics do financial markets have?

Most financial markets share a number of characteristics. This will be the more efficient the better it fulfills the set of functions that it corresponds to. These are:

• Amplitude. A number of financial products being traded. The more titles, the more comprehensive.
• Depth. The depth is the list of buy and sell orders that are pending execution for a certain financial instrument. A market is deeper the greater the number of buy and sell orders that exist for each type of asset.
• Freedom. An ideal market with perfect competition must be FREE, that is, there must be perfect mobility of factors, without entry and exit barriers and must be as little intervened as possible. There should be no limitations to exchanging assets. Anyone with some capital, through a financial intermediary, can invest in the stock market.
• Flexibility. Prices reflect supply and demand, that is, at all times there is a variety of prices depending on the events that affect the investment directly and indirectly. A market is more flexible the easier it exists for agents to react quickly to changes in prices or market conditions.
• Transparency. Buyers and sellers know all the factors that affect the price of the financial instrument. Therefore, the possibility of obtaining information on all these factors that can affect the share price must be guaranteed to the greatest extent possible. Regulatory authorities pursue the use of inside information for profit. Peoples are buying Bitcoin because of more profit that’s why the Bitcoin rate is high.

How are financial markets classified?

We can make several types of classifications, depending on the characteristic of the financial market that we want to analyze. These classifications would be:

• Financial markets according to the asset exchanged.
• Financial markets according to your organization.
• Financial markets according to the financial asset negotiation phase.

Financial markets according to the financial asset exchanged

This classification is determined by the type of financial asset exchanged. In this sense, we find:

• Money market. It is the market where financial assets with high liquidity and short term are exchanged. They are usually markets where large financial entities negotiate products such as mortgage securities, business notes, treasury bills, mortgage securities, or simply currencies. A good example of this type of market is the interbank market, which is the market where banks exchange money.
• Spanish Money Market. It can be defined as a set of wholesale markets, independent, but related, where assets of high liquidity and solvency are traded. Their characteristics are:
• Wholesale markets.
• Assets with very low risk, due to the solvency of the issuers and due to the characteristics of the asset.
• Highly liquid assets, given the term and the existence of a very active secondary market.
• Capital Market. Medium and long-term financial assets are included in this type of market. Some examples would be the stock exchanges or the stock exchanges and bonds.
• Bonds and obligations markets. It is the market where debt securities are bought and sold, whether public or private. For example, the AIAF market is the official market for Corporate and Public Debt as well as oil price affected by these characteristics.
• Stock markets. This market is used for companies to finance themselves through the capital. Therefore, the issue listed shares for investors to purchase. Worldwide, the New York Stock Exchange is the highest benchmark.
• Other financial markets. There are other types of financial markets in which other types of financial products are traded. These could be the markets for financial derivatives or commodities (wheat, oil, etc.).

Financial markets according to your organization

The same financial product may be trading in different markets with different organizational structures. We can differentiate between:

• Organized financial markets. They are those that have official authorization and are regulated by competent financial authorities. They have guarantee mechanisms, settlement of positions and a clearinghouse. There are different categories according to the discretion in operations:
• Regulated financial markets.
• Multilateral trading platforms.
• Organized trading centers.
• Financial markets Over The Counter (OTC). These markets are characterized by the fact that the operations are carried out between the same parties and there is no intervention of any financial authority. The parties reach agreements with all the characteristics of the operation.
• Systematic Internaliser. It is an internalized market operated by large global financial institutions, in which the price of assets is taken from regulated exchanges. The goal of creating these alternative markets is to save stock market fees.
• Markets Over The Counter. The only difference with internalizing systems is that there is no pre-trade transparency, thus incurring a higher counterparty or liquidity risk.

As we have already said before, the same security may be trading in several markets. For example, the Inditex security is listed on the Madrid Stock Exchange (Regulated Market), Turquoise (Multilateral Trading Platform) and Instinet BlockMatch (Systematic Internaliser), among others.