What Is a Financial Market?

A financial market is a broad term describing any marketplace where trading of securities including equities, bonds, currencies, and derivatives occur. Some financial markets are small with little activity, while some financial markets like the New York Stock Exchange (NYSE) trade trillions of dollars of securities daily.

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Financial Market

Understanding the 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 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.

[Important: There are many types of financial markets.]

Types of Financial Markets

Over-the-Counter Markets

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 requires less regulation and is less expensive to be traded on.

Financial Markets for Bonds

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 sells securities such as notes and bills issued from the United States Treasury.

Money Markets

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.

Derivatives Market

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.

Forex Market

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 interbank market is the financial system that trades currency between banks.

Key Takeaways

  • "Financial market" is a broad term, and there are many kinds of financial markets, including (but not limited to) forex, money, stock, and bond markets.
  • Some financial markets are small with little activity, while some financial markets like the New York Stock Exchange (NYSE) trade trillions of dollars of securities daily.
  • Financial market prices may not indicate the true intrinsic value of a stock due to macroeconomic forces like taxes.