Financial market – what is it and how does it work?

Financial market

The financial market is an environment that brings together a set of institutions – among borrowers and investors – and allows the trading of financial products, such as government bonds, shares, investment funds, among others.

Its structure is comprehensive and complex, with several financial institutions, in addition to being subdivided into foreign exchange, money, credit and capital markets.

Understand in this article what the financial market is and how it works.

What is financial market?

Involving operations for the purchase and sale of financial assets, the financial market has a very complex structure that is composed of several financial institutions, such as banks, brokers, payment institutions and also some government agencies.

It is quite comprehensive and its rules affect practically all United State or people who do business with United State.

What is the role of the financial market?

The main function of the financial market is to bring investors and borrowers together, that is, buyers and sellers.

We can say that it works like a big store, where whoever has the product makes it available to those who are interested in buying that product.

In this sense, it is possible to exchange goods freely, without major external interventions.

However, it is worth noting that in the financial market some institutions provide a business environment, regulating and monitoring the correct progress of exchanges.

How does the financial market work?

In practice, it works like this: the investor looks for the bank where he is an account holder and invests part of his money in a CDB, indicated by his manager.

The borrower, in turn, goes to the same bank and requests a loan. The bank then lends the money to the borrower, charging a rate higher than the investor’s rate of return.

All operations are carried out securely and intermediaries are responsible for carrying out these operations.

What are the main financial markets?

The main types of financial market that stand out are: foreign exchange market, money market, credit market and capital market.

Exchange Market

In this type of financial market, the focus is on the exchange of currencies, and here the companies that export stand out. Who oversees this type of market is the Central Bank.

Money market

This type of financial market has all transactions that take place within 24 hours.

It is possible to find reference rates of fixed income there: Certificate of Interbank Deposit (CDI) – the interest rate on bank loans.

Credit market

This is one of the most remembered financial markets. There is an intermediation between those who want to invest and those who need the resources. The main focus is on trading assets such as stocks and bonds.

By channeling resources from saving investors to other economic agents that need to use resources, the credit market increases the efficiency of the economy as a whole.

Therefore, it serves as a “thermometer” of the financial health of an economy.

Capital market

It is through the capital market that assets are traded, that is, where purchases and sales of securities are carried out.

The capital market allows securities issued by companies to be traded, bringing people or institutions that have money closer to people or institutions that need the money to finance projects.

This strengthens the country’s economy, in addition to offering diversification of the investment portfolio and income leverage.

 

Posted by: John Labunski

 

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