Those seeking to recruit financial investors or hoping to launch a company must start with finding the right team members. Many choose online advertisements as a starting point, and more than a few recruit family members and friends for this opportunity. However, what happens when they want out of the business soon after it launches? If these initial investors decide to sell their shares after less than a few years, finding buyers may be a challenge at best. In addition, a newly-launched company will not yet be financially stable enough to lose the initial investors, and this could ruin the company.

There is a helpful solution for this common problem: the financial market. These markets introduce the right buyers and sellers of financial instruments, such as stocks, bonds, commodities, and currencies. The stock market—also called the stock exchange—is an example of one such financial market, trading trillions of dollars every day.


The financial markets bring buyers and sellers together, making it easier to find the right contacts and prices

Examine a real life situation:

Most of us choose to shop at a supermarket, primarily because most of the shopping list is available at that one store. This means that the buyer does not have to travel from one store to another, finding one or two items at each place and wasting time trying to find the rest of the necessary items. The financial markets are a kind of supermarket for financial instruments, with many different things available in one place for buying and selling, including financial instruments from all over the world. A market exchange can be described as a big room in which every person who wants to buy and sell can do so safely and conveniently.

Financial markets and exchanges are used to raise finances, and can be used for long term financial gain, as opposed to capital markets, which are used for short term gain and are called money markets. Capital markets can then be divided into primary markets and secondary markets. Primary markets are used to buy and sell newly-issued securities between issuers and investors while secondary markets allow investors to buy and sell securities between themselves.

The Financial Markets are a kind of supermarket for financial instruments

Modern financial markets have made selling and buying a lot easier for everyone involved. In order to utilize an exchange such as the NYSE or New York Stock Exchange, traders no longer have to travel to New York with the advent of online trading. This has revolutionized the trading industry, introducing more buyers and sellers from all over the planet and making the market as a whole far more fluid.

There are 10 main Financial Markets:

o   Bond Markets: Allows the exchange of bonds, e.g. government bonds.

o   Commodity Market: Allows the exchange of commodities, e.g. crude oil

o   Derivatives Market: Allows the exchange of Derivatives and financial risk, e.g. swaps

o   Foreign Exchange Markets: Allows the exchange of foreign exchange, e.g. EUR/USD currency pair

o   Futures Market: Allows the exchange of future contracts, e.g. gold

o   Insurance markets: Allows the exchange of financial risk, e.g. business insurance

o   Money Markets: Allows the exchange of short term debt, e.g. Treasury bills

o   Stock Markets: Allows the exchange of shares, e.g. Apple Shares.

 

How Do Financial Markets Work?

The Financial markets easily confuse many people, and this is the reason many of those same people lose their money in the markets. Therefore, all buyers and sellers (commonly called traders) need a better and clearer understanding of the market’s inner workings before beginning to invest any money. Fortunately, it is not difficult to understand with some basic research.

Following is an example with one of the most common stock exchanges:

Dealers - NASDAQ

In the absence of stock exchanges, selling or buying stock would become very difficult. A stock exchange allows traders to sell and buy shares instantly. This enables a very unique side effect for stock exchanges: Since all the selling and buying is concentrated in a single place, and everything is managed electronically, it is possible to track fluctuating prices of every stock in real time.

For instance, investors are able to investigate a particular stock’s price reaction to media reports, special news from a company (like mergers, for example), and other vital factors. The Securities and Exchange Commission requires all publicly-traded companies to issue their earnings reports on a quarterly basis. If these earnings are not good, many shareholders sell their stock. This can significantly lower the stock price. However, if the earnings are exceptional, people start buying the company’s shares. Thus, the price of the stock would also increase.

Since stocks are bought and sold in one place, it is easy to obtain information and data

Over-the-Counter Trading

In most cases, small companies trade stock over-the-counter when they are unable to meet stock exchange listing requirements. This is also known as Unlisted Stock. Over-the-Counter stock is traded by brokers and dealers, who handle trading with each other directly over the phone or via computer networks.

Note: NASDAQ is technically a dealer network. However, its stocks are not classified as Over-the-Counter because they are a stock exchange market. OTC stocks are traded on the OTCBB or Over the Counter Bulletin Board. These are also called Pink Sheets. Usually, OTC stocks are offered by business organizations that lack a credit record. They can also be offered in the form of Penny Stocks.

Instruments like bonds cannot be traded on formal stock exchange markets. Therefore, they are also considered Over the Counter securities. Traders wanting to sell or buy a bond need to contact a bank that creates the market for that particular bond in order to ask for quotes.

Over-the-Counter stock is traded by brokers and dealers who handle trading with each other directly over the phone or via computer networks

Bottom Line

In order to understand the working of the financial markets, try to get as much available information and education possible before making the first investment. One of the best ways to introduce a trader to the financial and exchange markets is a demo account. These allow traders of all experience levels to try various strategies that can be employed later in live trading environments. A demo account permits a clearer picture of the actual market before risking actual hard-earned money, which is a great benefit for learning the financial markets without risking an entire portfolio loss.

Summary

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The financial markets bring buyers and sellers together, making it easier to find the right contacts.


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The financial markets are a kind of supermarket for financial instruments.


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Since stocks are bought and sold in one place, it is easy to obtain information and data.


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Over-the-Counter stock is traded by brokers and dealers who handle trading with each other directly over the phone or via computer networks.


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Demo accounts allow traders of all experience levels to try various strategies that can be employed later in live trading environments.

 

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