About Financial Markets

Normal economic development requires mobilization of available funds of individuals and legal entities with the following distribution and redistribution on commercial base between different economic sectors.

The funds can be invested into manufacturing, commerce, real estate, and precious metals. With time, they might bring some profit if the direction and condition of the investment are chosen correctly. Prior to making an investment, you need to accumulate funds or receive them from somewhere else. The sphere of this activity is called financial market.

You need to distinguish between two market types: the ones where you can invest only – primary markets, and financial markets, where the funds are accumulated and eventually invested into primary markets.

Financial markets are the markets of brokers between the funds owners and those funds’ final users.

Fund raising can be carried out by internal and external sources. Internal sources are usually presented by depreciation deductions and income. Major external sources are bank loans and the money received from securities sells. Internal sources dominate in economics, and external sources are the result of their redistribution. Available funds can be invested in many spheres: manufacturing and economics, real estate, precious metals, foreign currency, pension and insurance funds and, securities. Also funds can be loaned or deposited with the interest into the bank.

Financial markets are mechanisms of the capital distribution between the lenders and borrowers with the help of brokers based on demand and supply for this capital. In practice it is presented by a set of credit and financial institutions (investment funds, banks, etc.), which direct the funds flow from owners to borrowers and back. The main function of the financial markets is the transformation of idle cash into loan capital. Financial markets consist of the system of the following markets:

  1. Foreign exchange market (FOREX);
  2. Stock market;
  3. Money market;
  4. Forward market;
  5. Precious metals market.

Financial markets are an organized and informal system of trade with financial tools. Money exchange, loans and capital mobilization take place at this market. Here, the major role belongs to financial institutions which direct the cash flow from owners to borrowers. The goods are presented by money itself and securities. Like any market, financial markets are designated to establish direct contacts between the buyers and sellers of financial resources.

Thus, financial markets consist of two parts – cash markets and funds markets. Stock markets, as a part of financial markets, are the segment of both of those markets. The cash movement at the financial markets goes from savers to users. By financial markets, the funds can be transferred from one economic sector into a different one. There are 4 sectors total:

The major part of household capital is formed by equity. Particularly here, the major funds surplus is formed.  This surplus is directed to finance commercial firms, state needs, and placed in financial institutions. The biggest sector- state, has the biggest need in funds. It is the main borrower at the financial market but also the main lender for households, commercial firms and financial intermediaries. The funds flow between the sectors also takes place. Nevertheless, these funds flows mutually compensate each other since ultimately amount of financial assets is equal to the amount of investments.

 Financial markets perform the following functions: