Market

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DEFINITION of 'Market'

1. A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. This type of market may either be a physical marketplace where people come together to exchange goods and services in person, as in a bazaar or shopping center, or a virtual market wherein buyers and sellers do not interact, as in an online market.

2. The general market where securities are traded. This form of the term may also refer to specific securities markets and may take place in person or online.

3. People with the desire and ability to buy a specific product or service.

BREAKING DOWN 'Market'

Markets may come in the form of physical locations where transactions are made, which may exist as anything from thrift or boutique stores selling individual items to wholesale markets selling goods to other distributors. Yet, markets do not necessarily need to be a physical meeting place. Internet-based stores and auction sites are all markets in which transactions can take place entirely online and where the two parties do not ever need to physically meet. Technically speaking, a market is any medium through which two or more parties can engage in an economic transaction, even those that do not necessarily need to involve money. A market transaction may involve goods, services, information, currency or any combination of these things passing from one party to another in exchange for one of these or another combination.

Markets in Context

Markets establish the going rates for goods and other services, which sellers determine by creating supply and which buyers determine by creating demand. A market is a focal center for the distribution of goods and resources within a society, though they are not always deliberately created. Markets may emerge organically or as a means of enabling ownership rights over goods, services and information. When on a national or other more specific regional level, markets may often be categorized as “developed” markets or “developing” markets, depending on many factors including income levels and the nation or region’s openness to foreign trade.

Markets vary widely for a number of reasons, including the kinds of products sold, location, duration, size and constituency of the customer base, size, legality and many other factors. For example, the term black market refers to an illegal market. Yet, like markets in general, a black market can be a physical market where illegal goods are traded in person or a virtual market where illegal goods are traded with relative anonymity. A variation on this is a grey market, which is an unauthorized or unofficial locus of trade through channels that are otherwise legal.

Because a market may often be bound to a geographic region, nation or state, even when the market in question is not physical, it is subject to rules and regulations set by a regional or other governing body that determines the market’s nature. This may be the case when the regulation is as wide-reaching and as widely recognized as an international trade agreement (such as the North American Free Trade Agreement or the European Union) or as local and temporary as a pop-up street market where vendors self-regulate through market forces.

A market economy is an economy that is primarily controlled by market forces. Because governments may still impose regulations on an economy without it being deprived of its “market” status, market economies may exist with variable degrees of freedom. A market economy running under laissez-faire policies is commonly referred to as a free market in reference to the economy’s freedom from government restrictions.

Because of the reduced position of government in a free market economy, forces within the market often gain power over the economy instead. Without certain regulations, this can lead to monopolies, monopsonies​, oligopolies or oligopsonies, which may distort the forces of supply and demand – and thus price as well – within the economy in question. In certain conditions, such situations may result in certain negative externalities, such as pollution and other forms of environmental degradation. Such situations may also have the additional effect of reducing the efficiency and productivity of processes within the market.

The theoretical optimally functioning market is one experiencing perfect competition, a condition in which no individual party or other entity within the market is powerful enough to determine the price of a particular good or service. In addition, though only two parties are needed to make a trade, at minimum a third party is needed in order to introduce an element of competition and bring balance to the market. As such, a market in a state of perfect competition, among other things, is necessarily characterized by a high number of active buyers and sellers.

Securities Markets

The most common types of securities markets are stock markets, bond markets, currency markets (called foreign exchange markets or forex), money markets and futures markets. Many of these markets manifest themselves in the form of exchanges. In the case of the stock market, there are a variety of exchanges around the world, the most popular of which are the New York Stock Exchange, NASDAQ, the United Kingdom's London Stock Exchange, Japan’s Tokyo Stock Exchange, China’s Shanghai Stock Exchange, the Hong Kong Stock Exchange, Euronext, China’s Shenzen Stock Exchange, Canada’s TMX Group and Germany’s Deutsche Börse.

Generally speaking, the existence and prevalence of these various forms of securities markets are characteristics of a free market economy.

Markets and Market Makers

Popular market indexes are also often used to refer more broadly to the market in which the index exists. For example, if a broad market index like the S&P 500 fell, people might say, "the market is down," using the S&P 500 as a proxy to represent the overall market's performance. Additionally, “the market” is also commonly used to refer even more broadly to the economy in which a specific market or market index operates. For example, someone might say that a new piece of federal legislation is “good for the market,” using “the market” to refer to the aggregate of all markets that function under the rule or oversight of the particular federal government in question.

This form of “market” often functions as a stand-in for the greater body of people and entities with interest in a product or service, determining the demand for the product or service in question. For example, “the widget market” is referring to all of the people who will buy widgets. Broadly speaking, it can serve as a proxy for all of the market’s constituents for a particular good who buy and sell that good, thereby determining its price. This is why the commonly accepted price of a good or service is called its “market price” or “market value”—the market dictates its value.

This use of “market” can refer to a constituency with interest in a product or service that is of any size and exists on any social level. For example, it can be used in reference to something as local as “the Brooklyn housing market” or as broad as “the global diamond market.”

For more on the ins and outs of markets, check out the following articles: An Introduction To Stock Market Indexes, The NYSE And Nasdaq: How They Work, Financial Markets: Capital Vs. Money Markets, What Is Market Efficiency?, A Look At Primary And Secondary Markets and What Is An Emerging Market Economy?.

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