Financial markets are places where investors trade derivatives and securities, such as stock and bonds. Consumers borrow from financial institutions and then pay the money back over time with interest. Consumers also serve as lenders in financial markets. For example, when someone purchases a certificate of deposit (CD), they are actually loaning money to a bank for some period. Businesses use financial markets to borrow money to finance expenses. Understanding how securities are traded, sold, and priced is essential to investors and businesses raising financial capital and in financial management. Understanding supply and demand, elasticity of markets, and efficiency of markets is equally important.
At A Glance
Securities are traded globally through several large markets and "off-exchanges" through electronic networks, though investors seek to trade where they have legal protections.
Securities markets have a significant effect on a country's economy, such as triggering economic collapse or creating higher levels of consumer confidence.
- The capital asset pricing model can be used by investors to determine the amount of risk for an individual security.
- Supply changes as a result of consumer demand, where price and quantity are inversely related, in an elastic market.
- Supply does not change as a result of demand in an inelastic market.
Securities prices are governed by the elasticity of the market on which they are sold.
- Unlike inefficient markets, where a trading price does not always reflect a true value, a perfectly efficient market should fairly price all trading opportunities because investors have all the information when setting a price.
- An inefficient securities market will have greater opportunity for extreme loss or extreme gain.
- A security price may change due to changes in the national or global economy, falling gross domestic product, or a negative U.S. jobs report.