What are financial markets and how do they affect the economy? Financial markets are known by many terms like markets, capital markets, and even stock markets, although this is one of many financial markets. These loose terms tend to confuse people.
However, the best definition of a financial market is that it is a financial transaction that allows a business to grow and an investor to make money. Of course, if the company does not prosper, the investor has also assumed a risk of loss.
The most common financial markets are the stock market, mutual funds, bond market, and commodities. In considering what are financial markets, it's important to recognize the role of the stock market. And shares in a public corporation that are sold so investors can raise a large sum of money immediately. When the company makes money, the investors make a profit. The stock market, as a whole, also keeps the US economy growing. While it is easy enough to buy stocks, profitable investments come from buying stocks in a successful company.
Most people think of the stock market as the Dow, but the stock market is more than the Dow. The Dow is a moniker for the Dow Jones Industrial Average, but there are also other types of Dow markets, like the Dow Jones Transportation Average and the Dow Jones Utility Average. The stocks that compose these averages can be found on the NASDAQ, the New York Stock Exchange, and others.
Mutual funds are a way to buy numerous stocks simultaneously. This is easier than buying stocks individually. Mutual funds benefit the US economy because they reduce the volatility of the stock market. Like stocks, an investor has to learn how to pick the right mutual funds to earn a profit.
A bond is security for a debt, much like an IOU An investor who purchases a bond is lending money to a federal agency, municipality, corporation, or government. Bonds often work in contrast to stocks. When stocks go down, then bonds go up, and the other way around. There are many types of bonds: municipal bonds, corporate bonds, and Treasury bonds, for example. Bonds provide liquidity for the US economy. They also affect mortgage interest rates.
Also, in defining what are financial markets, it's important to consider the significance of commodities. Commodities are essential raw materials necessary for an economy. They are natural products like oil, gold, cattle, wheat, and orange juice. Investors buy and sell on speculation, and they are often called speculators. Some commodities can affect the entire US economy, including the stock market. When oil goes up or down, the price is a result of what happens in the commodities future market. A future is payment for something now that will be delivered later. Futures can be leveraged, meaning money can be borrowed to buy the commodity.