The make-up of the financial market
In a broad sense, a financial market refers to a market whereby parties, no matter from the demand-side or supply-side, distribute capital resources through various financial tools. As a crucial stabilizing element in a capitalist economy, the financial market includes stock markets, bond markets, foreign exchange markets, commodity markets, and all derivatives markets.
Demand and supply sides of capital resources can trade in the form of spot markets, futures markets, off-exchange or exchange floor, through different forms of products and derivatives—which thus constitute the big environment of the entire financial market. In other words, the financial market promotes capital raising and the development of capitalist society, creates liquidity for corporations, and opportunities for investors, even speculators.
What are the stock, bond, gold, and forex markets?
Stock is a kind of fungible and negotiable security. Corporations raise capital in the market by issuing shares. With long-term capital inflow, a corporation can strengthen capital position and hasten business development. In a stock market, participants can hold, transfer, and cash out any shares listed on stock exchange. With a long history of development, stock market is one of the most common investment means in the financial market.
There are primary markets and secondary markets. The primary market is a marketplace where governments, corporations, and financial institutions sell bonds to investors and first-time buyers to raise capital. Bondholders can sell their bonds to cash out freely in a secondary market. As a market for each government to raise capital for its budget, the bond market is also a vital channel for a central bank to dictate its monetary policy. As the benchmark of yields of other financial assets as well as a crucial indicator of market risks, the yields and yield curve of all bonds allow investors to evaluate the value of financial assets.
Foreign exchange market
A huge amount of income and expenses are derived from business activities and dealings between economies in the international market, including consumption, trading, investment and more. Due to the differences between each country’s currency and monetary policy, individuals and businesses, banks and governments need to convert their own currency into the foreign one: this is where the forex market comes into play in the global market. The international forex market trades 24 hours a day. Thanks to the development over the decades, investors are now able to deal in the forms of spot trading, swap, and forward contracts, etc.
Different from other markets operating with cash transactions, the commodity market trades the commodities in the form of futures and the process is more complicated. Seller usually delivers the commodities to a designated warehouse within the timeframe stipulated by a centralized exchange. The commodities will be inspected and kept in a warehouse which then issues a warehouse receipt. Come to the due date of delivery, the seller submits the warehouse receipt, and the buyer pays a sufficient sum to purchase the commodities and process the delivery at a centralized exchange. Thanks to market development, trading of commodities now can also be done in the forms of settling price difference, letting investors trade through contracts, hedge against the commodities.
As one of the most popular commodities, gold is conventionally seen as an asset to preserve value. The gold market plays a considerably important role as it represents a safe haven for capital when inflation or political and economic situation worsens. Due to the limited supply of gold, it is widely accepted as a reserve asset. Gold-mining companies, businesses, individuals, financial institutions, central banks of different countries are the main participants of the gold market.
Stock market indexes all over the world
Among the huge scale of the international financial market, the stock market is the most popularized and one of the most important markets to raise capital. Share is a type of capital ownership and the owners are known as shareholders, who earn share dividends and capital gain resulting from the higher stock price of listed companies. Shareholders, however, must bear operational and market risks faced by listed companies they invested in.
Considering the daily volatility of stock markets in different countries, financial markets developed a combination of selected stocks in which the stock price fluctuations are calculated to be an “index” for investors to quickly understand the ecology of the entire stock market or gauge the performance of a particular industry. Among different stock markets in the international financial market, investors pay more attention to these indexes: Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite of the United States; DAX Index of Germany; Nikkei 225 index of Japan; Hang Seng Index of Hong Kong; and SSE Composite Index of China.
Stock markets are closely related to the global economic condition. When the index of a stock market fluctuates, it always influences indexes of other stock markets and the other markets.
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