In economics, a financial market is a mechanism that allows people to easily buy and sell financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis.
Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.
Both general markets and specialized markets exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy that is based, such as a gift economy.
Financial markets facilitate:
* The raising of capital
* The transfer of risk
* International trade
They are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.
Financial markets could mean:
1. organizations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants.
2. the coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.
In academia, students of finance will use both meanings but students of economics will only use the second meaning. Financial markets can be domestic or they can be international.
Types of financial markets
The financial markets can be divided into different subtypes:
1.Capital markets which...