Financial market definition

What is a financial market?

A financial market is defined as a medium through which assets are traded, enabling buyers and sellers to interact and facilitate exchanges. However, the term can be used in a variety of different ways – it can refer physical places, virtual exchanges or groups of people that are interested in making transactions.

More specifically, the term ‘market’ can be used to talk about:

• A broad grouping of assets (like the technology market) or a single asset
• A place – physical or nominal – that facilitates the buying and selling of assets (like the stock market, or shopping centres)
• The trading and movement of financial assets as a whole (‘the markets’, or ‘financial markets’)
• The price at which an asset is being traded (the market price)
• Unauthorised markets (like a grey market)

Examples of financial markets

Stock market

A stock market is a marketplace which allows investors to buy and sell shares of publicly traded companies. The stock market can be defined as both a primary and secondary market, although it is more commonly described as the latter.

New issues of shares are first introduced on the primary market, where investors can buy directly from companies in an IPO. The subsequent trading of these shares happens on the secondary market, either through stock exchanges or in some cases through over-the-counter (OTC) trading. Examples of stock exchanges include the NASDAQ, the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE).

Over-the-counter

Over-the-counter (OTC) is a secondary market in which trading is done directly between two parties, without the supervision of a regulated exchange. OTC trading usually involves unlisted stocks, properties, forex pairs, bonds and everything else that is not listed on an exchange.

Money market

A money market is a financial market that offers highly liquid assets. This market is associated with the short-term borrowing and lending of securities that have a maturity of less than one year. Common examples of money market instruments are certificates of deposit, banker’s acceptances, certain bills, notes and commercial papers.

Derivatives market

The derivatives market is the financial exchange for trading derivatives, which allow market participants to speculate on the price movement of securities without physically owning the asset. The value of a derivative contract is determined by the market value of the underlying asset. The derivatives market trades securities like forward contracts, futures and contracts for difference (CFDs).