Financial Markets Definition

Investing financial markets

Financial Markets

Your savings account provides you a safe place a bank to keep your money and gain interest on it while you are not using that money. But the money in your savings account does not sit in a giant vault in the bank, it is used to help other people buy homes and cars and go to college.

Analyzing the securities' greater categories can be very useful when investing. There are four types of investment markets, each of different risk and nature: the money market, the bond market, the ownership market and the derivative market. We will go over their general characteristics, ordered from lowest to highest risk.

When the bank makes a loan, it is drawing on all the money people have put into it. In this way the bank acts as a financial market place for money. A bank loan can help fuel growth but one day it will have to be paid back, with interest a fee to cover the cost of borrowing. Money is also investing financial markets by people to make investments.

Investing in the 4 Great Categories of Financial Markets

When you invest in a company you are giving them a loan when you buy bonds or buying a part of that company when you buy stock. When you invest in a company it may use the money to get bigger, purchase equipment, increase advertising, hire new people, research new products, or any number of other business activities. A business owned and operated by one person is called a sole proprietorship.

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A sole proprietorship is easy to form and all the profits go to the owner. But a sole proprietorship may not have enough money called capital to grow or the owner may be concerned that he or she carries all the risks of operating a business.

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A sole proprietor may join with other people to form a partnership, owned by two or more people. There may be more money to investing financial markets now, but the owners have to share decision making power and cash may still be limited.

A partnership can also limit risk by making the business itself a legal entity. This way the business may be sued but the partners homes and money outside the business will be safe.

How to Invest in Stocks

A company that still wants to grow has several choices. Its first option is to use its profits for capital -- called reinvestment. A company, like an individual, can also get money by borrowing from a bank.

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Like an individual though, the bank loan has to be paid back with interest, and the bank may limit how much it will lend a business according to the ability of the company to pay it back. A small company will probably only be able to borrow a small amount of money. For longer term growth a company may try a different form of borrowing, by issuing bonds.

Investing: An Introduction

A bond is an IOU from the company to the investors. After a specified amount of time, from six months to thirty years, a bond will mature. When this happens the company must pay each individual the amount they invested.

The company also pays each investor interest at specific intervals during the years the investor holds the bond. The fourth alternative for raising capital is to sell piece of ownership in the corporation to the public. Selling stock in the company can generate huge amounts of cash that can be used for a variety of purposes.

How Financial Markets Work

When a company begins to sell stock it is said to "go public". The company will usually hire an investment banker to help it go public by evaluating the company, determining a price for the stock, and serving as an intermediary between the company and the investing public.

When a company's stock is sold for the first time it is called an initial public offering or IPO and is sold in the primary market. Then when the stockholders want to resell the stock it is sold on a secondary market, like one of the exchanges.

By selling stock the company is investing financial markets from a private business owned by a few people to a public business owned collectively by a large pool of investors.

World Financial Markets

Back to Top How Investment Takes Place A financial market is a place where firms and individuals enter into contracts to sell or buy a specific product such as a stock, bond, or futures contract.

Buyers seek to buy at the lowest available price and sellers seek to sell at the highest available price. There are a number of different kinds of financial markets, depending on what you want to buy or sell, but all financial markets employ professional people and are regulated.