Financial markets enable the trading of financial instruments. They connect buyers & sellers to financial infrastructure and players to enable transactions between them.
Financial markets enable the buying and selling of different financial instruments. By connecting buyers and sellers to different financial infrastructure and processes, they facilitate the trading of different types of assets.
This article at a glance:
- Financial markets are marketplaces for buyers and sellers to transact.
- Traders can access different types of financial markets, including stocks, forex, commodities and more.
- Different players in financial markets include regulators, exchanges, brokers and clearing houses, along with buyers and sellers.
What are financial markets?
The basic definition of a financial market is a marketplace where a security or asset is exchanged. Traders buy and sell company shares, for instance, using stock markets. Or they may trade different currency pairs via forex markets.
This may sound simple enough, but in reality, requires deeply complex and intricate systems. Spot forex alone sees 2 trillion USD worth of daily transactions in forex markets. Financial markets make this, and the trillions worth of other transacted instruments, possible every day.
They also play other roles in the world of trading.
- Financial markets help create liquidity, by allowing buyers to find sellers for their assets, and vice versa.
- Entities can raise capital from retail investors or other institutions for their funding needs.
- Retail investors and traders can put a portion of their excess savings to possibly earn a return.
- Regulatory structures within financial markets mean that traders and lenders are protected, fraudulent activities are kept in check and risks are exposed.
Key parts of financial markets
Buyers and sellers
These individuals or institutions that are interested to invest in or trade different assets and derivatives. Transactions occur mainly between these buyers and sellers, with all other players in the financial market existing to facilitate these deals.
Exchanges are platforms for the trading of specific assets. For instance, stocks are traded on stock exchanges such as the London Stock Exchange, and commodities can be traded on exchanges such as the New York Mercantile Exchange. They help execute market orders and match order books. Read more about exchanges.
Regulators are regional licensing bodies that establish the rules of how assets can be offered to trade, what terms are to be followed by all financial market participants, how vulnerable buyers and sellers are protected etc.
Brokers act as financial intermediaries that facilitate the exchange of financial instruments between buyers and sellers. They help to open trading positions by passing orders through to relevant exchanges. Read more about how brokers work.
A clearing house is also a financial intermediary whose role is to finalise and settle trades. It is responsible for handling the movement of asset ownership and funds into the clients’ respective accounts.
Examples of financial markets
Traders can choose between different instruments to buy and sell:
- Stock markets: Trade the shares of public companies across the world. Stocks are traded on stock exchanges such as the New York Stock Exchange, Tokyo Stock Exchange or Bombay Stock Exchange.
- Forex markets: Trade different currency pairs. Traders can buy and sell different currency pairs, such as the GBP/USD or USD/CHF, on forex exchanges.
- Commodity markets: Trade primary products and raw materials. These commodities, such as gold, oil, wheat or coffee, can be traded on commodity exchanges such as the London Metal Exchange or the Intercontinental Exchange.
- Crypto markets: Trade digital decentralised currencies such as Bitcoin or Ethereum. They can be traded on exchanges (also decentralised) such as Binance or Coinbase.
- Futures market: Enter a contract to take a position in an asset at a pre-agreed price, at a future date and time. Examples of futures exchanges include the Shanghai Futures Exchange and the Eurex.
- Indices market: trade the entire value of a stock index. These are also traded on stock exchanges. Popular indices include the FTSE 100, the S&P 500 and the DAX.
Traders can also access these markets by trading derivatives, where they don’t own an asset outrightly. For example, INFINOX clients don’t actually buy or sell specific assets, but simply trade their prices. Learn more about the assets you can trade with INFINOX, and get started with your trading journey.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
All trading carries risk.