Financial market definition – What is it? – Explanation

The financial market – an explanation for beginners

For many people, the financial market is not only a symbol of evil, but also an impenetrable mystery. However, if you want to achieve more in life, it is important to question your own beliefs – also about money and the financial market. So if you really want to dive into the financial market, you should first know exactly what actually stands behind this term. One thing should be said at this point: It really is as complicated and abstract as it looks from the outside. But that is why you have landed on this page. With this article we would like to enlighten you and reveal how the financial market works and is structured.

In financial markets you can invest in a wide variety of assets.

Financial market definition – what is it?

The financial market is, so to speak, a superstructure that all markets, at which financial resources are traded (i.e. supply and demand are present). The traded assets can be very different – of course, you probably first think of stocks and other securities. But also Currencies and Commodities can at the “large” financial market can be traded. Basically, therefore, the financial market is a way to buy or sell assets. In order to ensure this interplay of supply and demand, the same information must be available to each party on the financial market.

But what exactly are the functions performed by the financial market? The main ones to mention here are the following:

Market balancing: The aim is to create a perfect balance between supply and demand for an asset (for example, a share).
Allocation: This refers to the function of allocating capital to an investment with the highest return, if possible.
Function: To provide all participants in the market, those who give but also take capital, with sufficient information to make a good decision.
Protection of the individual: No investor should be taken advantage of over another investor, especially in obtaining information.
Transformation: The financial market also performs various transformation tasks, such as quantity transformation, maturity transformation or lot size transformation. The explanation of these terms would lead too far at this point.

In summary, it can be said at this point that the financial market functions in its basic features like any other market. Valuables are demanded, offered and delivered. Depending on how much and how often they are demanded, the supply and the price changes. In the financial market, it is important to understand the relationship between supply and demand, because all trading is based on this basic principle. So here it is worthwhile to pick up an old textbook on economics or to find out more on the Internet.

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The subdivision of the financial market

Now we have come a little closer to the definition of this term, however, the financial market may still seem abstract to you. However, it can be subdivided in its entirety, which makes it easier to understand. The financial market is divided into the money market, the capital market, the credit market and the foreign exchange market. Mostly the subdivision is made on the basis of the maturity of the transactions, however, the experts are not unanimous here and there are deviating specifications. The financial market can also be differentiated regionally or geographically One is referred to as the national, international and foreign financial markets. At this point, it is important to note that further subdivisions can also be made within the individual segments. For example, the capital market can be further differentiated on the basis of government regulations or new issues or trading of securities. Does that sound complicated to you? Don’t worry, I will deal with this point separately later. The basic subdivision of the financial market is as follows:

The money market

On the money market, mainly short-term assets are traded, for example cash deposits with a maximum term of two years, but also overnight or time deposits. Banks, insurance companies and investment companies are the main players on the money market. The money market is also an important field of activity for the respective central bank, e.g. the European Central Bank, as its decisions exert Influence on the Money supply with its decisions can. In brief, money is traded on the money market – as the name suggests.

The capital market

Trading in medium- and long-term assets takes place primarily on the capital market. The transactions have a term of at least two years. Here, mainly stocks and bonds are traded. Large corporations can use the capital market to raise capital by issuing new shares.

The capital market can still be divided into the organized and unorganized capital market (also known as the “gray Capital market”). The latter capital market is not regulated by the state, whereas the organized capital market is subject to state regulations. The organized capital market primarily includes the stock market and the bond market At transactions on this part of the market are mainly stock exchanges and banks. The so-called “black Capital market” is an illegal “segment” of this market.

But that is not all. A further subdivision can be made on the stock market, namely into Primary market and secondary market. In the primary market, new issues of shares take place. Here, investors can thus buy shares directly at the IPO (initial public offering) of a company or acquire newly created securities (in a capital increase). On the secondary market, on the other hand, shares are “only” traded traded between investors. That is, they simply change hands. Especially in the secondary market, liquidity is important to create a good balance between supply and demand.

The credit market

You can probably already guess: the credit market is where supply and demand for credit meet. This market segment is not standardized, which means that contracts between two parties can be negotiated individually, as long as they follow legal regulations.

The foreign exchange market

The foreign exchange market involves trading in currencies of all kinds The Foreign exchange market is certainly the largest segment of the financial market. It is also where the most turnover is made.

Conclusion – focus on the basics

Understanding the financial market down to the smallest detail is a mammoth task. But maybe it’s not even necessary to become a successful investor and build wealth. Of course, you should always understand what you are doing when you put your money into an asset. However, when it comes to the knowledge you need, you should focus on the basics and not dwell on non-essential information. It is important to know how the financial market works and is structured in its basic features. Above all, the principle of supply and demand is essential for the Operating on the Financial market. Depending on the asset, you should then specifically deepen and inform yourself comprehensively. Always remember the motto of investment legend Warren Buffett: “Only invest in something you really understand.” Have fun exploring the financial market.

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