Financial markets - buyers and sellers can buy and trade a range of services
or assets that are fundamentally monetary in nature.
Financial markets exist:
1) To meet the demand for services (such as saving/borrowing, from individuals, businesses and the government)
2) To allow speculation and financial gains
Roles of the financial market include:
1) To facilitate savings - providing somewhere for consumers/firms to store their funds. Savings are rewarded with interest payments from the bank.
2) To lend to businesses and individuals - allows for consumption and investment. The transfer of funds between agents is aided by financial markets. The funds can be used for investment or consumption.
3) To facilitate the exchange of goods and services - the transfer of real economic resources is facilitated in a financial market. Financial markets can make it easier to exchange goods and services from the physical market, by providing a way that buyers and sellers can interact and transfer funds.
4) To provide forward markets in currencies and commodities - in currency markets, speculative attacks can occur which can affect the value of the exchange rate. In commodity markets, investors trade primary products (such as wheat, gold and oil). Future contracts are a method for investing in commodities and involves buying/selling an asset with an agreed price in the present, but a delivery and payment in the future. A forward market is an informal financial market where these contracts for future delivery are made.
5) To provide a market for equities - Equity markets (also known as stock markets) involve the trade of shares. Issuing shares allows companies to finance expansion but people would be unlikely to buy shares if they were unable to sell them on in the future. Returns on the investment, usually in the form of dividends, are based on future performance. A dividend is a share of the firm’s profits. Financial markets provide the ability for shares to be sold on in the future, making the asset more appealing.
Financial markets exist:
1) To meet the demand for services (such as saving/borrowing, from individuals, businesses and the government)
2) To allow speculation and financial gains
Roles of the financial market include:
1) To facilitate savings - providing somewhere for consumers/firms to store their funds. Savings are rewarded with interest payments from the bank.
2) To lend to businesses and individuals - allows for consumption and investment. The transfer of funds between agents is aided by financial markets. The funds can be used for investment or consumption.
3) To facilitate the exchange of goods and services - the transfer of real economic resources is facilitated in a financial market. Financial markets can make it easier to exchange goods and services from the physical market, by providing a way that buyers and sellers can interact and transfer funds.
4) To provide forward markets in currencies and commodities - in currency markets, speculative attacks can occur which can affect the value of the exchange rate. In commodity markets, investors trade primary products (such as wheat, gold and oil). Future contracts are a method for investing in commodities and involves buying/selling an asset with an agreed price in the present, but a delivery and payment in the future. A forward market is an informal financial market where these contracts for future delivery are made.
5) To provide a market for equities - Equity markets (also known as stock markets) involve the trade of shares. Issuing shares allows companies to finance expansion but people would be unlikely to buy shares if they were unable to sell them on in the future. Returns on the investment, usually in the form of dividends, are based on future performance. A dividend is a share of the firm’s profits. Financial markets provide the ability for shares to be sold on in the future, making the asset more appealing.
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