Introduction into Financial Markets

“Financial markets” refers, collectively, to the places and systems that bring the buyers and sellers of financial products together. Some of the most important financial products that are bought and sold in the world financial markets include stocks, bonds, currencies, and derivatives.

Stocks, or shares of stock, are portions of company ownership. A company that wants to raise money sells stock to investors, and investors can buy or sell their shares in the stock market. A share of stock typically gains value when a company prospers and loses value when a company struggles. Investors try to predict a company’s future performance and buy stocks that will rise in value.

Bonds are portions of government or corporate debt. When a government or company needs to borrow more money than a bank can provide, it may turn to investors. Investors lend money to the government or to a company by purchasing bonds on the bond market, and in exchange they are paid a fixed rate of interest (a fee paid to those who lend money).

Currencies are different forms of money used in different countries. Because the values of all currencies in the world are constantly changing, an investor can use one currency, such as the U.S. dollar, to purchase another currency, such as the Japanese yen. These trades are made on what is called the foreign exchange market. If the Japanese yen then rises in value relative to the dollar, the currency trader makes a profit.

Derivatives are contracts based on or derived from other financial products. For example, an investor can purchase, on the derivatives market, the right to buy a specific stock at a specific price up to a specific date. Such a derivative is commonly called a future or option. If the stock price rises before that date arrives, the derivative rises in value (since the holder of the derivative has the right to purchase that valuable stock at a lower price than that at which it is currently being offered). If the stock price falls, the derivative also loses value. There are many different types of derivatives, but all of them share the common feature of having their value tied to the performance of the financial product from which they are derived.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.