Financial markets . Financial markets can function without physical contact, through telephone, fax, computer. There are also financial markets that do have physical contact, such as the stock market.
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- 1 Objective
- 2 Features
- 3 Advantages
- 4 Classification of financial markets
- 5 Source
The purpose or objective of the financial market is to bring together providers and applicants of funds, and determine the fair prices of the different financial assets. Another purpose of financial markets is to keep transaction costs as low as possible. But it must be stressed that the main purpose is to determine the fair price of the financial asset, this will depend on the characteristics of the financial market. The closer a financial market gets to the perfect financial market ideal, the price of the asset will be more adjusted to its fair price.
- Amplitude: number of financial securities that are traded in a financial market. The more securities are traded, the broader the financial market will be.
- Depth: existence of supply and demand curves above and below the equilibrium price that exists at a given moment.
- Freedom: if there are barriers to entering or leaving the financial market.
- Flexibility: ability of the prices of financial assets, which are traded in a market, to change in the face of a change that occurs in the economy.
- Transparency: possibility to obtain information easily. A financial market will be more transparent when the information is easier to obtain.
The advantages that investors have thanks to the existence of financial markets are the quick search for the financial asset that suits the will to invest, and also, that investment has a fair price which prevents them from being scammed. The price is determined from the supply and demand price. Another purpose of financial markets is to keep transaction costs as low as possible. But it must be stressed that the main purpose is to determine the fair price of the financial asset, this will depend on the characteristics of the financial market. The closer a financial market gets to the perfect financial market ideal, the price of the asset will be more adjusted to its fair price.
Financial markets classification
Direct and indirect:
- Direct: families go directly to companies and offer their resources.
- Indirect: when an intermediary appears on the market (financial agents, financial intermediaries).
Free and regulated:
- Free: there is no restriction (neither in the entry, nor in the exit from the market, nor in the variation of prices).
- Regulated: there are certain regulations or restrictions to promote the proper functioning of the financial market.
Organized and not registered:
- Organized: it has some type of regulation.
- Not registered: they do not have a regulation (OTC or over the counter).
Primary and secondary:
- Primary: companies or public bodies obtain financial resources.
- Secondary: a game that is carried out with the shares between the owners of financial assets (resell or repurchase financial assets).
Centralized and decentralized:
- Centralized: there is a single price and, basically, a single place for trading (Spanish continuous market).
- Decentralized: there are several prices for the same financial asset (the stock exchanges in Spain).
Directed by orders or by prices:
- Directed by Orders: stock market in Spain, both continuous and stock markets. (Ahem: I order you to buy those shares when they drop to 3,000 ptas per share.)
- Directed by Prices: the figure of the market maker is important, they are dedicated to giving purchase and sale prices, so one buys or sells as they see fit but at the price launched on the market. This process gives liquidity to the market. (Ahem: the creator buys at 190 and sells at 200).