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Financial Markets

Financial Market Overview



A financial market is an inter-bank market where individuals trade derivatives and financial securities at low transaction fees. Some of these securities normally include bonds and stocks, currencies, and financial instruments such as precious metals, materials, and stocks, which are called in the financial market as assets. Financial instruments in a market include company stock, mutual funds, insurance, and commodity futures. They are traded in the inter-bank market, the over-the-counter market, and the futures market.

The stock market in particular is the largest financial market, accounting for almost 70% of total market volume. The Dow Jones Industrial Average is one of the measures of the stock market. Other major financial markets are the bond market (which includes government debt, corporate bonds, and individual bonds), credit market, commodities, foreign exchange, and the money market. Among other financial instruments, bonds issue from a pool of debt obligation, which is then paid back in periodic payments; equity and derivatives are derivatives that protect in certain situations against fluctuations in prices; securities are financial instruments that create financial claims on another firm or organization.

In the bond market, different types of bonds are available such as corporate, municipal, government, commercial, mortgage-backed securities, government-sponsored securities, corporate bonds, debt-to-income, interest rate swap agreements. There are also various strategies used by bond investors. One strategy is to make short sales, meaning selling a bond that is not currently valued at its fair market value and buying a bond at a lower price; another strategy is to purchase bonds that are rated lower than their fair market value, and some investors use strategies such as margin loans to increase the value of the bond.

A key function of the financial market includes the measurement, interpretation, and reporting of the values of financial instruments traded in the market. It is very important that all investors, whether long term or short term, understand the methods that these values are calculated. These include calculating the discount rates and making adjustments for the inflation rates, the method of valuation of floating bonds, and measuring maturity dates. There are also other important functions of the financial market. One is to ensure liquidity; another is to ensure transparency in pricing and another is to provide information to both managers and counterparties.

The Securities and Exchange Commission (SEC) monitors the trading activities in all publicly traded securities. Some many rules and regulations that govern these transactions. One of the most important functions of the SEC is to set and implement rules for the conduct of the investment securities market. Apart from this, the SEC maintains records of all securities held by companies and reports these to the shareholders. All of these records are essential for the investors to assess the risk associated with any security.

All of these activities make it possible for the investors to determine the worthiness of the companies they are dealing with. However, it is not all smooth sailing as there will be instances where companies will fail or become unpopular. To avoid such instances, the securitization markets help by providing a bridge or insurance to the investors. This ensures that their portfolios are protected and their risk is minimized.

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