Overview
This lecture introduces financial markets, their definitions, functions, and the different types of markets crucial to an economy.
Introduction to Financial Markets
- Financial markets are platforms for buying and selling financial instruments such as stocks, bonds, and derivatives.
- They connect savers and borrowers, enabling the flow of funds in the economy.
Functions of Financial Markets
- Financial markets facilitate raising capital for businesses and governments.
- They allow investors to buy, sell, and trade securities efficiently.
- Prices in financial markets reflect the value of financial instruments based on supply and demand.
- These markets help in risk-sharing by allowing diversification of investments.
- They provide liquidity, enabling assets to be quickly converted into cash.
Types of Financial Markets
- Money markets deal with short-term debt instruments (less than one year).
- Capital markets handle long-term securities, such as stocks and bonds.
- Primary markets are where new securities are issued for the first time.
- Secondary markets allow trading of existing securities among investors.
Key Terms & Definitions
- Financial Instrument — a document representing an asset, such as stocks, bonds, or derivatives.
- Liquidity — the ease with which an asset can be quickly sold for cash without significant loss of value.
- Primary Market — the market where new issues of securities are sold to initial investors.
- Secondary Market — the market where previously issued securities are bought and sold.
- Money Market — a segment focused on short-term borrowing and lending.
- Capital Market — a segment for long-term investment and funding.
Action Items / Next Steps
- Review examples of different financial markets and instruments.
- Read textbook chapter on the roles and importance of financial markets.