Financial markets is a space that can be physical or virtual, through which financial assets are exchanged between economic agents and in which the prices of said assets are defined.
Financial markets make up a space whose objective is to channel the savings of families and companies to investment. In such a way that people who save have a good remuneration for lending that money and companies can use that money to make investments.
A financial market is governed by the law of supply and demand. That is, when someone wants something at a certain price, they can only buy it at that price if there is another person willing to sell that something at that price.
Functions of the financial market
The main function of a financial market is that of intermediation between people who save and people who need financing. In other words, putting buyers and sellers in contact. Based on this we can name these 4 main functions of the financial markets:
- Put in contact everyone who wants to intervene in it.
- Set an appropriate price for any asset.
- Provide liquidity to assets.
- Reduce intermediation terms and costs by facilitating greater circulation of assets.
Financial market characteristics
These are the main characteristics with which we can define a financial market:
- Amplitude: A financial market is broader the greater the volume of assets that are traded in it. If there are many investors in the market, more assets will be traded and therefore there will be more scope.
- Transparency: The ease of obtaining information on the financial market.
- Freedom: Determined by the non-existence of barriers for both buying and selling.
- Depth: A financial market is deeper the greater the number of buy-sell orders.
- Flexibility: Ease for the rapid action of agents when a desire to buy or sell appears.
If the 5 characteristics are maximized we would be facing what is called a “perfect market”.
Who are the financial markets?
Financial markets are made up of all the people who exchange financial assets, because when we think of a market, no one comes to mind an empty place. So we could also say that the financial markets are made up of all the investors who buy and sell those financial assets. And who are those people?
Almost everyone. When a couple saves money and invests it in a pension plan, it is part of the financial markets. When someone buys a house and asks for a mortgage, they are also part of the markets. When someone buys shares, treasury bills, when the government or a company issues debt, they are also part of the financial markets. Even commodity markets can be considered part of financial markets as long as the customer is not the end consumer.
There are economic agents that have more influence than others in the financial markets. A person who invests 1,000 million euros will have more influence than a person who invests 1,000 euros. If a person sells 1,000 euros, they will have little effect on the market. On the other hand, if a person sells huge amounts of shares of a bank, the shares of this bank will probably drop. In theory, in the long term, no matter how high the amount, if there is a broad market, the operation of that investor will dissolve and make the financial market reflect an efficient price again.