What is the 'Financial Market'
The financial market is a broad term describing any marketplace where trading of securities including equities, bonds, currencies and derivatives occurs. Although some financial markets are very small with little activity, some financial markets including the New York Stock Exchange (NYSE) and the forex markets trade trillions of dollars of securities daily.
BREAKING DOWN 'Financial Market'Financial market prices may not indicate the true intrinsic value of a stock due to macroeconomic forces like taxes. In addition, the prices of securities are heavily reliant on informational transparency by the issuing company to ensure efficient and appropriate prices are set by the market.
The stock market is a financial market that enables investors to buy and sell shares of publicly traded companies. The primary stock market is where new issues of stocks are first offered. Any subsequent trading of stock securities occurs in the secondary market.
The over-the-counter (OTC) market is an example of a secondary market. An OTC market handles the exchanging of public stocks not listed on the NASDAQ, New York Stock Exchange, or American Stock Exchange. Companies with stocks trading on the OTC market are usually smaller organizations as this financial market require less regulation is less expensive to be traded on.
A bond is a security in which an investor loans money for a defined period of time at a pre-established rate of interest. Bonds are not only issued by corporations but may also be issued by municipalities, states and federal governments from around the world. Also referred to as the debt, credit or fixed-income market, the bond market also sells securities such as notes and bills issued from the United States Treasury.
A money market is a portion of the financial market that trades highly liquid and short-term maturities. The intention of the money market is for short-term borrowing and lending of securities with a maturity typically less than one year. This financial market trades certificates of deposit, banker’s acceptances, certain bills, notes and commercial paper.
The derivatives market is a financial market that trades securities that derive its value from its underlying asset. The value of a derivative contract is determined by the market price of the underlying item. This financial market trades derivatives including forward contracts, futures, options, swaps and contracts-for-difference.
The forex market is a financial market where currencies are traded. This financial market is the most liquid market in the world as cash is the most liquid of assets. The inter-bank market is the financial system that trades currency between banks.