how markets work
a market is any place where two or more parties can meet to engage in an economic transaction even those that don t involve legal tender a market transaction may include goods services information currency or any combination that passes from one party to another in short markets are arenas in which buyers and sellers can gather and interact two parties are generally needed to make a trade however a third party is required to introduce competition and balance the market as such a market in a state of perfect competition among other things is characterized by a high number of active buyers and sellers beyond this broad definition the term market encompasses various things depending on the context for instance it may refer to the stock market which is the place where securities are traded it may also describe a collection of people who wish to buy a specific product or service in a particular place such as the brooklyn housing market it could also refer to an industry or business sector such as the global diamond market certain decisions that help shape the market are determined by an economic system known as the market economy in this system factors like investments and the production distribution and pricing of goods and services are led by supply and demand from businesses and individuals as such a market economy is unplanned and is not part of a planned or command economy where the government dictates all of these factors examples of market economies include the united states canada the united kingdom and japan the securities and exchange commission sec regulates the stock bond and currency markets in the united states it puts provisions in place to prevent fraud while ensuring traders and investors have the right information to make the most informed decisions possible whatever the context a market establishes the prices for goods and other services these rates are determined by supply and demand the idea of supply and demand is one of the very basics of economics the sellers create supply while buyers generate demand markets try to find some balance in price when supply and demand are in balance but that balance can be disrupted by factors other than price including incomes expectations technology the cost of production and the number of buyers and sellers participating simply put the number of goods and services available is determined by what people want and how eager they are to buy sellers increase production when buyers demand more goods and services producers tend to raise their prices when demand increases when buyer demand decreases they drop their prices and therefore the number of goods and services they bring to market markets may be represented by physical locations where transactions are made these include retail stores and similar businesses that sell individual items to wholesale markets selling goods to distributors or they may be virtual internet based stores and auction sites such as amazon and ebay are examples of markets where transactions can occur entirely online and the parties involved never physically connect markets may emerge organically or as a means of enabling ownership rights over goods services and information when on a national or more specific regional level markets may often be categorized as developed or developing this distinction depends on many factors including income levels and the nation or region s openness to foreign trade the size of a market is determined by the number of buyers and sellers and the amount of money that changes hands each year certain features help define a market and are necessary for it to function the following are the most basic characteristics that shape a market other features include competition pricing and the freedom to buy and sell goods and services types of marketsmarkets vary widely for several reasons including the kinds of products sold location duration and size the constituency of the customer base size legality and other factors are equally influential aside from the two most common markets physical and virtual there are other kinds of markets where parties can gather to execute their transactions an underground or black market refers to an illegal market where transactions occur without the knowledge of the government or other regulatory agencies many illegal markets exist to circumvent existing tax laws this is why many involve cash only transactions or non traceable forms of currency making them harder to track many illegal markets exist in economically developing countries with planned or command economies where the government controls the production and distribution of goods and services when there is a shortage of specific goods and services in the economy members of the illegal market step in and fill the void illegal markets can also exist in developed economies these shadow markets as they re also known become prevalent when prices control the sale of specific products or services especially when demand is high ticket scalping is one example of an illegal or shadow market when demand for concert or theater tickets is high scalpers will step in buy a bunch and sell them at inflated prices on the underground market an auction market brings many people together for the sale and purchase of specific lots of goods the buyers or bidders try to top each other for the purchase price the items for sale go to the highest bidder the most common auction markets involve livestock foreclosed homes and art and antiques many operate online now for example the u s treasury sells its bonds notes and bills via regular auctions 1the blanket term financial market refers to any place where securities currencies and bonds are traded between two parties these markets are the basis of capitalist societies providing capital formation and liquidity for businesses they can be physical or virtual the financial market includes the stock exchanges such as the new york stock exchange nyse nasdaq the london stock exchange lse and the tmx group other financial markets include the bond and foreign exchange markets where people trade currencies regulating marketsother than underground markets most markets are subject to rules and regulations set by governing body that determines the market s nature this may be the case when the regulation is as wide reaching and as widely recognized as an international trade agreement or as local and temporary as a pop up street market where vendors maintain order and rules among themselves 