A financial market is a market in which people and entities can trade financial securities, commodities and other assets at prices that are determined by pure
supply and demand principles.
Discuss the above statement in your own words ( 1000 word) to cover different types of Financial Markets
Financial market refer to a marketplace where trading of various financial instrutments or securities like equities , bonds, currrencies & derivativies take place.Some financial market around the globe are –
- New York Stock Exchange , US
- NASDAQ , US
- London Stock Exchange , UK & Italy
- Japan Stock Exchange, Japan
- Shanghai Stock Exchange , China
In financial market price of the securities does not indicates their intrinsic value. The price here are influenced by the demand & supply principles. There are various factors which impact the demand & supply in any financial markets like systematic risk factors & unsystematic risk factors or financial factors or non financial factors or economic factors or political factors etc .
Generally in financial market there are people with trading mindset or with investing mindset.
- Traders who wants to earn profit from daily fluctuation in the market.
- Investors who invest money in the market for long run.
Different types of financial markets :-
- Exchange market – Market where price negotiation will made pubilically among various parties. like New York Stock Exchange , US
- Over the counter market (OTC) – Market where price negotiation will be made privately between two parties like NASDAQ.
- Capital market – Market where long term financial instruments like equity, debentures, bond etc are traded.
- Money market – Market where short term debt instruments like commercial paper , treasury bill , call money or notice money etc are traded.
- Foreign Exchange market – Market where trading of foreign currencies takes place . It is worth noting that more than five trillion dollor is traded on a daily basis in such market.
- Commodity market – Market where commodities like oil , iron , rubber , gold etc or even agricultural based products like sugar , cotton , coffee , wheat etc are traded.
- Derivative market – Derivative is a contract between two parties which derived its value from underlying assets ( like stock index , currency , commodity , interest rate ). It is the most volatile form of financial market.
- Primary market :- Market where securities are issued for the first time by the entity like IPO
- Secondary market :- Market where securities privioulsy issued are traded
How Price is determine in financial market ?
In any financial market price of a security is decided on the basis of bidding made by various parties.
- Best buyers quotes higher price among all buyers.
- Best sellers quotes lowest price among all sellers.
Some Common words used in financial market
- Margin money:_
It is security money (refundable) payable by trader / investor at the time of first transcation which may be buy or sell. The amount varies from stock to stock on the basis of risk involved.
- Limit price ;
It refer to price at which trader or investor wants to buy or sell the securities ie the best price
- Squre off :-
Second transaction entered which is opposite to the first transaction to netoff the position in the market is known as square off.
- Long position ;-
It is the buying position in the market.
- Short position :_
It is sellling position in the market.