Friday, August 04, 2006

What is a financial market?

A financial market is a place where individuals or institutions can exchange standardized, well known financial instruments/contracts under standardized exchange rules.

There are financial markets for:

  • Stocks
  • Bonds
  • Commodities (raw material)
  • Derivatives (Options, Futures, ...)

The role of these markets is to ensure liquidity of the financial instruments, i.e. guaranty the possibility to always be able to buy or sell a financial contract at some price even if not at the expected price.

There are two kinds of markets:

  • Primary markets : theses are markets of professionals where huge amounts of money are collected to make initial investments in some market segments and produce the initial financial contracts.
  • Secondary markets : these are markets of professionals and individuals where the financial contracts are further exchanged on.

Both kinds of market are complementary. Without a secondary market no-one would take the risk to bring the money on the primary market. Without a primary market, the companies wouldn't be able to collect the amount of money needed by initial investments.

Finally the economic goal of markets is to make investments of any size possible by putting together people having complementary financial needs.

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