What is financial market? Roles and functions

The financial market has a variety of components and unique characteristics. Understanding the financial markets helps investors develop appropriate strategies. So, what is financial market and how is the financial market structure? The article below Learn Forex Trading will provide detailed information for you to understand.

Overview of what is financial market?

The development of a market economy is the basic condition for the financial market to form and develop. When the market economy develops, there will be financial needs from different entities. And there needs to be a corresponding financial supply. So overall what is financial market? what is monetary policy? Find out below!

Conditions that form what is financial market?

The financial market is a place to trade financial assets such as stocks, bonds, bills, and other financial products. In the financial market, households, businesses, intermediary financial institutions, and governments are participants in transactions. These entities participate in buying and selling financial assets. They create activities of buying and selling financial goods in financial markets.

As the market economy develops, securities issuance and trading activities also develop. This led to the formation of an independent financial market. It facilitates the meeting and transactions between financial supply and demand. That is the concept of financial markets in the easiest way to understand.

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Factors that create a financial market structure

The financial market includes the following basic components:

• Market participants: The financial market has the participation of sources of supply and demand for capital. The sources of supply include those with outstanding financial debt such as businesses. Examples include households and financial institutions. Demand sources are people who need to use capital.
• Transactional instruments: Valuable documents issued by entities. Also seen as the structure of financial markets. For example, stocks, bonds, certificates of deposit, treasury bills, and derivative contracts.
• Market participants: Many entities are participating such as financial companies, insurance companies, banks, investment funds, etc. These entities play the role of providing financial services and participating in the market. Participate in buying and selling activities in the market.
• Commodities in financial markets: Commodities in financial markets vary depending on the type of market. For example, financial derivatives and commodity markets include forward contracts, futures contracts, swap contracts, and options contracts.

How many types of financial markets are there?

The structure of what is financial market and is it complicated? The following Self-study Forex will help you classify the financial market to have a clearer view of this economic environment.

Based on the time of using financial resources

Based on the duration of use of mobilized financial resources, the financial market can be classified as follows:

• Money market: Involves the issuance and trading of financial instruments with maturities shorter than 1 year. The market includes short-term borrowing and lending activities between banks. As well as trading financial instruments.
• Capital market: Related to the issuance and trading of financial instruments with terms of 1 year or more. This market is where the relationship between supply and demand for long-term capital is resolved. It is divided into three main segments: the equity market, the mortgage market, and the bond market.
• Derivatives market: Involves trading in derivative financial contracts. Including forward contracts, futures contracts, swap contracts, and options contracts.

Based on how to raise capital

Based on the method of mobilizing financial resources, the financial market structure can be divided into two types as follows:

Debt market: The debt market is where transactions in debt instruments take place. This market includes the following types of debt instruments:

• Short-term debt instruments: These are debt instruments with a maturity of less than 1 year.
• Medium-term debt instruments: These are debt instruments with maturities ranging from 1 to 10 years.
• Long-term debt instruments: These are debt instruments with a maturity of over 10 years.

Equity market: The equity market is where people who need capital raise capital by issuing shares. Stocks represent ownership of a portion of the assets and net profits of the issuing company. 

Based on currency circulation

Based on the circulation of financial assets. Financial markets can be classified into two types as follows:

• Primary market (also known as level 1 market): Where transactions of buying and selling securities that are being issued or new securities take place. Securities transactions in this market are often through the intermediation of banks.
• Secondary market (also known as level 2 market): Where the transfer and resale of securities that have been issued at the primary level takes place. There are two types of secondary market: decentralized market and exchange market

Based on the legal nature of what is financial market

What is financial market? Based on its legal nature, it can be divided into two types as follows:

• Formal financial market: Where all activities are carried out according to principles and institutions. Stipulated in legal documents established by the state. Entities participating in this market are recognized and protected according to the provisions of the law.
• Informal financial market: This is a market where all activities do not need to follow the principles and institutions prescribed by the state.

  

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Functions and roles of what is financial market?

Understand clearly the nature and concept of what is financial market. But do you understand the functions and roles of the financial market? Learn exactly through the Forex financial market.

Functions of the Forex financial market

The Forex financial market has specific functions. To ensure financial resources and promote related factors. Here are three specific functions of financial markets:

• Financial referral: Acts as a channel to source financial resources. This includes capital transfers from savers to entrepreneurs. Accumulate and concentrate capital, effectively use capital, and support economic policies.
• Increasing liquidity: Has the function of increasing liquidity for securities. This means that financial markets provide flexibility and ease to buy and sell securities. It helps ensure liquidity and the ability to convert financial assets into cash.
• Providing economic information and evaluating business value: Plays the role of providing information and evaluating the value of businesses operating in the market. 

The main role of the Forex financial market

Foreign exchange financial market, also known as Forex financial market (Foreign Exchange). It plays an extremely important role in the global financial system. Here are some of the main roles of the Forex market:

• Currency trading: The Forex financial market is where the buying and selling of national currencies takes place. Market participants can buy and sell to create a currency pair. 
• Facilitates international trade: Allows businesses and organizations to engage in currency transactions. They can pay for goods and services bought and sold across national borders. This supports and facilitates international trade activities.
• Currency pricing: Through the interaction between supply and demand. The Forex market plays an important role in determining currency values ​​and influencing exchange rates.
• Investment and financial transactions: Provides the opportunity to participate in currency trading and investment activities. 
• Facilitate international investment activities: Provide an environment for international investors to access different currency markets. Expanding the scope of investment helps shape and strengthen economic relations between countries.

  

Epilogue

Understanding the structure of what is financial market is an important aspect. It helps you have an overview of how the economic market works. Hope the above information will help you answer your questions. This will help you accumulate more knowledge for your investment process. Let’s follow more articles of Learn Forex Trading to find out and learn more related issues such as what is fomc, what is forex… okay.

Frequently asked questions?

What is the financial market like?

The financial market is a place where buyers and sellers meet to trade financial assets. It is not only a means of connection but also a place to concentrate capital. It is also an important indicator for the global economy.

What types of financial markets are there today?

There are 4 main types: based on capital use time, financial mobilization method, financial source transfer, and market legal nature.

What is the impact of market volatility?

Market volatility can help us increase our chances of profit. But that means it also carries many risks. It can change prices and affect investment decisions.