Types of Financial Markets
Describe the four types of financial markets and provide three to five characteristics of each. Are they all equally important? Which type of market interests you the most?
The Federal Reserve has been adjusting interest rates. What is the economic significance of this change? What will the impact be on the business environment?
Four types of financial markets and provide three to five characteristics of each
Financial markets include the derivatives market, forex market, bond market, and, stock market as well as other markets where securities are traded. In a stock market, a company’s shares may be traded and purchased, and sold by investors and traders alike (Jiang et al., 2019). A few features of the stock market are that stocks must appreciate in value before they can be sold, stock prices on the market are driven by demand and supply, and traders strive to forecast stock behavior. Investing in bonds involves loaning for a certain period of time at a specified interest rate to a third-party entity. They serve as a form of protection (Jiang et al., 2019). There are a number of distinct features. Lender-borrower agreements, known as bonds, specify the terms and conditions under which a loan will be made and how much each party will pay each other. In addition to corporations, governments issue bonds to raise funds for development and services. Treasury bonds, such as those issued by the US Treasury, are available on the bond market.
As a general rule, the money markets deal in extremely liquid, short-term maturities (less than one year) and have a high degree of safety while offering just a modest yield. There are huge exchanges among banking firms and private dealers in the wholesale money markets. Money market mutual resources are available to ordinary traders, as are money market accounts for bank customers (Jiang et al., 2019). Derivatives are supplementary stocks that are based solely on the price of the primary stock to which they are linked. Derivatives markets have several features. Only when combined with anything else can it have value (Jiang et al., 2019). Futures and options contracts and other complex financial products, which draw their value from underlying instruments like commodities, stock, currencies, bonds, market indexes, and interest rates are traded in the derivatives market rather than directly on the stock exchange. All financial markets are important but not equally important. This is because they trade in different types of securities and assets. The stock market interested me the most. This is because they play a significant role in the economy and acts as a gauge for the economy’s health.
The economic significance of Federal Reserve adjusting interest rates
People’s willingness to borrow money is strongly influenced by interest rates, making them a key economic indicator. As a result, the Federal Reserve must make interest rate adjustments. Borrowing money becomes prohibitively expensive when interest rates are very high (Swanson, 2021). If individuals can get it at a discount, that is even better. Borrowing money is typically used to finance major purchases like a home or a start-up business. These investments have a cascading effect on the rest of the economy and have the potential to raise earnings as well as employment.
The impact on the business environment
A shift in interest rates can have a direct impact on the ability of people and companies to borrow money to make a plan and purchase their financial futures. Even some life insurance plans are affected by this change. Borrowers gain when interest rates are decreased, while lenders and savers lose when they do so. Consumer behavior and the level of consumption an economy can expect are also influenced by changes in interest rates (Swanson, 2021). As a result of a rise in borrowing and financing costs, higher interest rates have an impact on the cost of credit-based purchases. Elderly Americans and others who rely on interest income to supplement their incomes would benefit from a rise in interest rates (Swanson, 2021). Low-interest rates are designed to boost growth in the economy by making it easier to loan resources to finance both financial and physical asset investments.
Jiang, Z. Q., Xie, W. J., Zhou, W. X., & Sornette, D. (2019). Multifractal analysis of financial markets: a review. Reports on Progress in Physics, 82(12), 125901. https://iopscience.iop.org/article/10.1088/1361-6633/ab42fb/meta
Swanson, E. T. (2021). Measuring the effects of federal reserve forward guidance and asset purchases on financial markets. Journal of Monetary Economics, 118, 32-53. https://www.sciencedirect.com/science/article/pii/S0304393220301082