What Are Financial Markets?

Financial markets refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, forex market, and derivatives market,
among others. Financial markets are vital to the smooth operation of capitalist
economies.

Financial markets are a type of marketplace that provides an avenue for the sale and
purchase of assets such as bonds, stocks, foreign exchange, and derivatives. Often, they
are called by different names, including “Wall Street” and “capital market,” but all of
them still mean one and the same thing. Simply put, businesses and investors can go to
financial markets to raise money to grow their business and to make more money,
respectively.

For example, let us imagine a bank where an individual maintains a savings account. The
bank can use their money and the money of other depositors to loan to other individuals
and organizations and charge an interest fee.

The depositors themselves also earn and see their money grow through the interest that is
paid to it. Therefore, the bank serves as a financial market that benefits both the
depositors and the debtors.

How financial securities are traded in financial market?

A security is simply a financial term that refers to any financial asset that you can trade
on a market. The term “security” applies to types of investments that are fungible and
negotiable, such as mutual funds, bonds, stocks, stock options, and exchange-traded
funds (ETFs). Instead of taking out a bank loan, corporations and municipalities can
generate new capital by selling securities. The seller of a security is called the issuer,
while the buyer is called an investor.

How Are Securities Traded?

a. Publicly traded securities are listed on stock exchanges, where issuers can seek
security listings and attract investors by ensuring a liquid and regulated market
in which to trade. Investors can purchase publicly traded securities on stock
exchanges, such as the NASDAQ and New York Stock Exchange.

b. Informal electronic trading systems have become more common in recent years,
and securities are now often traded "over-the-counter," or directly among
investors either online or over the phone. If a stock isn't listed on one of the
main stock exchanges, investors can also purchase securities directly from the
 issuer, which is called over-the-counter trading. 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 between two parties without a broker. 

c. An initial public offering (IPO) represents a company's first major sale of equity
securities to the public. After a company's initial public offering (IPO),
investors can buy and sell the securities on the secondary market. The
secondary market means that new investors can only purchase securities from
current shareholders. When current shareholders sell their securities, they're
selling to other investors, ideally for capital gain, meaning they sell their
securities for more than they initially bought them for.

References:

1. Financial Markets - Overview, Types, and Functions. (2022, January 22).

Corporate Finance Institute; corporatefinanceinstitute.com.
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/
financial-markets/
2. Security Definition: How Securities Trading Works. (2022, June 11).
Investopedia; www.investopedia.com.
https://www.investopedia.com/terms/s/security.asp#toc-how-securities-trade
3. Financial Markets Definition. (2022, May 31). Investopedia;
www.investopedia.com. https://www.investopedia.com/terms/f/financial-
market.asp#toc-types-of-financial-markets