What Is a Market?

A market is a place where two parties can gather to facilitate the exchange of goods and services. The parties involved are usually buyers and sellers. The market may be physical like a retail outlet, where people meet face-to-face, or virtual like an online market, where there is no direct physical contact between buyers and sellers.

The term market also takes on other forms. For instance, it may refer to the place where securities are traded—the securities market. Alternatively, the term may also be used to describe a collection of people who wish to buy a specific product or service such as the Brooklyn housing market or as broad as the global diamond market.

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Understanding Markets

Technically speaking, a market is any place where two or more parties can meet to engage in an economic transaction—even those that don't involve legal tender. A market transaction may involve goods, services, information, currency, or any combination of these that pass from one party to another.

Markets may be represented by physical locations where transactions are made. These include retail stores and other similar businesses that sell individual items to wholesale markets selling goods to other distributors. Or, they may be virtual. Internet-based stores and auction sites such as Amazon and eBay are examples of markets where transactions can take place entirely online and the parties involved never connect physically.

[Important: The size of a market is determined by the number of buyers and sellers, as well as the amount of money that changes hands each year.]

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Types of Markets

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. Aside from the two most common markets—physical and virtual—there are other kinds of markets where parties can gather to execute their transactions.

Black Market

A black market refers to an illegal market where transactions occur without the knowledge of the government or other regulatory agencies. Many black markets exist in order to circumvent existing tax laws. This is why many involve cash-only transactions or other forms of currency, making them harder to track.

Many black markets exist in countries with planned or command economies—where the government controls the production and distribution of goods and services—and in countries that are developing. When there is a shortage of certain goods and services in the economy, members of the black market step in and fill the void.

Black markets can also exist in developed economies as well. This is prevalent when prices control the sale of certain products or services, especially when demand is high. Ticket scalping is one example. When demand for concert tickets are high, scalpers will step in and sell them at inflated prices on the black market.

Auction Market

An auction market brings many people together for the sale and purchase of specific lots of goods. The buyers or bidders try to top each other for the purchase price. The items up for sale end up going to the highest bidder.

The most common auction markets involve livestock and homes, or websites like eBay where bidders may bid anonymously to win auctions.

Financial Market

Financial market is the blanket term that refers to any place where securities, currencies, bonds, and other securities are traded between two parties. These markets are the basis of capitalist societies, and they provide capital formation and liquidity for businesses. They can be physical or virtual.

The financial market includes the stock market or exchanges such as the New York Stock Exchange, Nasdaq, the LSE, and the TMX Group. Other kinds of financial markets include the bond market and the foreign exchange market, where people trade currencies.

Key Takeaways

  • A market is a place where buyers and sellers can meet to facilitate the exchange or transaction of goods and services.
  • Markets can be physical like a retail outlet, or virtual such as an e-retailer. Other examples include the black market, auction markets, and financial markets.
  • Markets establish the prices of goods and services which are determined by supply and demand.

How Markets Work

Markets are arenas in which buyers and sellers can gather and interact. In general, only two parties are needed to make a trade, at minimum a third party is needed to introduce 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.

The market establishes the prices for goods and other services. These rates are determined by supply and demand. Supply is created by the sellers, while demand is generated by buyers. Markets try to find some balance in price when supply and demand are themselves in balance. But that balance can, itself, be disrupted by factors other than price including incomes, expectations, technology, the cost of production, and the number of buyers and sellers in the market.

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.

Regulating Markets

Other than black markets, most markets are subject to rules and regulations set by a regional or 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, or as local and temporary as a pop-up street market where vendors self-regulate through market forces.

In the United States, the Securities and Exchange Commission (SEC) regulates the stock, bond, and currency markets. Although it may not have full control of the nation's exchanges, it does have provisions in place to prevent fraud while ensuring traders and investors have the right information to make the most informed decisions possible.