what are financial markets 
financial markets refer broadly to any marketplace where securities trading occurs including the stock market bond market forex market and derivatives market financial markets are vital to the smooth operation of capitalist economies investopedia theresa chiechiunderstanding the financial marketsfinancial markets play a vital role in facilitating the smooth operation of capitalist economies by allocating resources and creating liquidity for businesses and entrepreneurs the markets make it easy for buyers and sellers to trade their financial holdings financial markets create securities products that provide a return for those with excess funds investors lenders and make these funds available to those needing additional money borrowers the stock market is just one type of financial market financial markets are created when people buy and sell financial instruments including equities bonds currencies and derivatives financial markets rely heavily on informational transparency to ensure that the markets set prices that are efficient and appropriate some financial markets are small with little activity and others like the new york stock exchange nyse trade trillions of dollars in securities daily the equities stock market is a financial market that enables investors to buy and sell shares of publicly traded companies the primary stock market is where new issues of stocks are sold any subsequent trading of stocks occurs in the secondary market where investors buy and sell securities they already own prices of securities traded in the financial markets may not necessarily reflect their intrinsic value types of financial marketsthere are several different types of markets each one focuses on the types and classes of instruments available on it perhaps the most ubiquitous of financial markets are stock markets these are venues where companies list their shares which are bought and sold by traders and investors stock markets or equities markets are used by companies to raise capital and by investors to search for returns stocks may be traded on listed exchanges such as the new york stock exchange nyse nasdaq or the over the counter otc market most stock trading is done via regulated exchanges which plays an important economic role because it is another way for money to flow through the economy typical participants in a stock market include both retail and institutional investors traders market makers mms and specialists who maintain liquidity and provide two sided markets brokers are third parties that facilitate trades between buyers and sellers but who do not take an actual position in a stock an over the counter otc market is a decentralized market meaning it does not have physical locations and trading is conducted electronically in which market participants trade securities directly meaning without a broker while otc markets may handle trading in certain stocks e g smaller or riskier companies that do not meet the listing criteria of exchanges most stock trading is done via exchanges certain derivatives markets however are exclusively otc making up an essential segment of the financial markets broadly speaking otc markets and the transactions that occur in them are far less regulated less liquid and more opaque a bond is a security in which an investor loans money for a defined period at a pre established interest rate you may think of a bond as an agreement between the lender and borrower containing the loan s details and its payments bonds are issued by corporations as well as by municipalities states and sovereign governments to finance projects and operations for example the bond market sells securities such as notes and bills issued by the united states treasury the bond market is also called the debt credit or fixed income market typically the money markets trade in products with highly liquid short term maturities less than one year and are characterized by a high degree of safety and a relatively lower interest return than other markets at the wholesale level the money markets involve large volume trades between institutions and traders at the retail level they include money market mutual funds bought by individual investors and money market accounts opened by bank customers individuals may also invest in the money markets by purchasing short term certificates of deposit cds municipal notes or u s treasury bills among other examples a derivative is a contract between two or more parties whose value is based on an agreed upon underlying financial asset like a security or set of assets like an index rather than trading stocks directly a derivatives market trades in futures and options contracts and other advanced financial products that derive their value from underlying instruments like bonds commodities currencies interest rates market indexes and stocks futures markets are where futures contracts are listed and traded unlike forwards which trade otc futures markets utilize standardized contract specifications are well regulated and use clearinghouses to settle and confirm trades options markets such as the chicago board options exchange cboe similarly list and regulate options contracts both futures and options exchanges may list contracts on various asset classes such as equities fixed income securities commodities and so on the forex foreign exchange market is where participants can buy sell hedge and speculate on the exchange rates between currency pairs the forex market is the most liquid market in the world as cash is the most liquid of assets the currency market handles more than 7 5 trillion in daily transactions more than the futures and equity markets combined 1as with the otc markets the forex market is also decentralized and consists of a global network of computers and brokers worldwide the forex market is made up of banks commercial companies central banks investment management firms hedge funds and retail forex brokers and investors commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products e g corn livestock soybeans energy products oil gas carbon credits precious metals gold silver platinum or soft commodities such as cotton coffee and sugar these are known as spot commodity markets where physical goods are exchanged for money however the bulk of trading in these commodities takes place on derivatives markets that utilize spot commodities as the underlying assets forwards futures and options on commodities are exchanged both otc and on listed exchanges around the world such as the chicago mercantile exchange cme and the intercontinental exchange ice thousands of cryptocurrency tokens are available and traded globally across a patchwork of independent online crypto exchanges these exchanges host digital wallets for traders to swap one cryptocurrency for another or for fiat monies such as dollars or euros because most crypto exchanges are centralized platforms users are susceptible to hacks or fraudulent activity decentralized exchanges are also available that operate without any central authority these exchanges allow direct peer to peer p2p trading without an actual exchange authority to facilitate the transactions futures and options trading are also available on major cryptocurrencies examples of financial marketsthe above sections make clear that the financial markets are broad in scope and scale to give two more concrete examples we will consider the role of stock markets in bringing a company to ipo and the role of the otc derivatives market in the 2008 09 financial crisis as a company establishes itself over time and grows it needs access to additional capital it will often find itself in need of much larger amounts of capital than it can get from ongoing operations traditional bank loans or venture and angel funding firms can raise the amount of capital they need by selling shares of itself to the public through an initial public offering ipo this changes the company s status from a private firm whose shares are held by a few shareholders to a publicly traded company whose shares will be subsequently held by public investors the ipo also offers early investors in the company an opportunity to cash out part of their stake often reaping very handsome rewards in the process initially the underwriters usually set the ipo price through their pre marketing process once the company s shares are listed on a stock exchange and trading commences the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value and the supply and demand for those shares at any given moment while the 2008 09 financial crisis was caused and made worse by several factors one factor that has been widely identified is the market for mortgage backed securities mbs 2 these are otc derivatives where cash flows from individual mortgages are bundled sliced up and sold to investors the crisis resulted from a sequence of events each with its own trigger these events culminated in the banking system s near collapse it has been argued that the seeds of the crisis were sown as far back as the 1970s with the community development act which required banks to loosen their credit requirements for lower income consumers creating a market for subprime mortgages the amount of subprime mortgage debt guaranteed by freddie mac and fannie mae continued to expand into the early 2000s when the federal reserve board began to cut interest rates drastically to avoid a recession 3 the combination of loose credit requirements and cheap money spurred a housing boom which drove speculation pushing up housing prices and creating a real estate bubble in the meantime the investment banks looking for easy profits in the wake of the dotcom bust and the 2001 recession created a type of mbs called collateralized debt obligations cdos from the mortgages purchased on the secondary market because subprime mortgages were bundled with prime mortgages there was no way for investors to understand the risks associated with the product when the market for cdos began to heat up the housing bubble that had been building for several years finally burst as housing prices fell subprime borrowers began to default on loans that were worth more than their homes accelerating the decline in prices 