Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.
Learn about two of the biggest markets in most economies; the financial and goods markets. Find out what financial markets are and the purpose they serve. Explore the stock market and bond market and see how they are different than the goods market.
Intro to Markets
Whether you know it or not, you most likely participate in the financial and goods markets every day! If you buy groceries or new clothes, or purchase gasoline for your car, you are participating in these markets. If you own a mutual fund, a company stock, or even have a small CD at the bank, you are a part of these markets. So, what are these markets exactly and how do they affect you? Let's find out.
Financial markets can mean a lot of different things to a lot of different people. They are found in almost every nation in the world. Some are very small and some are extremely large, like the New York Stock Exchange, which can trade trillions of dollars daily or weekly. In the broad sense of the term, financial markets are any marketplace where buyers and sellers participate in the trade of assets, such as equities (or stocks), bonds, and currencies. Financial markets usually have transparent pricing, basic regulations and governing bodies, costs and fees, and market forces determining the prices of securities that trade.
Wow, that sounds pretty complex! Although some aspects can be, this lesson will make it simple. Let's break down a few of the most common financial markets.
A capital market is a market where individuals and institutions trade financial securities. When companies and firms in the public and private sectors want to sell ownership or raise capital in their institutions, they can do it through the capital markets. The shoes you wear, the coffee you drink, the car you drive, and the electricity in your house all most likely come from companies such as Nike, Starbucks, General Motors, and utility companies that participate in the capital markets. A few of the most common capital markets are the following:
1. Stock markets
If you have an individual retirement account, a 401(k), or another type of investment account, you almost certainly are invested in some fashion in the stock market. Exchanges, such as the New York Stock Exchange, NASDAQ, and London Stock Exchange, are a few of the biggest. These markets and exchanges allow investors to buy and sell shares of publicly traded companies and mutual funds. They are one of the most vital areas of the market economy because they provide companies with access to raise funds and investors with a piece of ownership in the company.
2. Bond markets
Have you ever loaned money to a friend or family member? How about taken a loan and paid someone back the amount you borrowed, plus a little interest? When large companies or government institutions need to do this, they participate in bond offerings. A bond is a debt instrument in which an investor loans money to a corporate or government entity, which borrows the funds for a specific period of time at a pre-determined interest rate. This money being borrowed is used to build parks, repair roads, build schools, or simply expand operations. These markets where bonds are bought and sold are often referred to as the debt or fixed-income market. The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds.
Although there are certainly exceptions, when people invest in the stock and bond markets, they are usually planning on leaving their money invested for longer periods of time than just a few days. When someone needs instant access to their money or a company doesn't need a long-term loan, they are better served in the money markets. The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities (less than a year) are traded. Money market securities consist of items such as negotiable certificates of deposit (CDs), bankers' acceptances, commercial paper, and municipal notes. Much like the cash in your purse or billfold, these money market investments are also called cash investments because of their short maturities and ability to convert funds to cash quickly.
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If you aren't participating in the financial markets, you most certainly are in the goods market! Every time you hand over that debit or credit card to pay for food, a new pair of jeans, jewelry, or new tires on your car, you are actively engaging in these markets. In general, a goods market is any place where buyers and sellers of goods meet for potential transactions. All the grocery, birthday, and holiday shopping you participate in every month takes place in the goods market.
The heart of entry-level economics is primarily focused on these markets. Economic terms, like supply and demand, consumption, labor, and GDP, are just a few of the areas that are heavily discussed and analyzed in relation to the goods markets. These markets are the life force of the economy and are responsible for the majority of jobs and income, as well as the ability for people to live everyday normal lives.
The goods markets offer many different types of goods to households and consumers. Here are a few of the more common economic terms associated with this market:
Consumer goods - Goods such as decorations and typical household items that satisfy personal needs, rather than those required for the production of other goods or services.
Disposable goods - Consumer goods that are used up a short time after purchase, including deodorant, food, perishables, newspapers, and clothes.
Durable goods - Goods that require infrequent replacement, such as appliances, furniture, and the car you drive.
Two of the largest markets in an economy are the financial and goods markets. You most likely participate in both of these every day! Financial markets are any marketplace where buyers and sellers participate in the trade of assets, such as equities (or stocks), bonds, and currencies. The financial market is made up of several different sub-markets, with two of the largest markets being the capital and money markets.
The capital market is a place where individuals and institutions trade financial securities. Two of the biggest capital markets are the stock markets and bond markets. If money isn't changing hands in the capital markets, it is most likely in the money market, which is a segment of the financial market in which financial instruments with high liquidity and very short maturities (less than a year) are traded.
Goods markets are often the most studied markets in economics and are in any place where buyers and sellers of goods meet for potential transactions. All the grocery, birthday, and holiday shopping you participate in every month takes place in the goods markets. Supply and demand analysis, the job you have, and the GDP numbers the government release quarterly are all heavily driven by the goods markets. Consumer, disposable, and durable goods are just a few of the common categories in the goods market.
Once you are done with this lesson you should be able to:
Define and name a few financial markets
List two of the common capital markets
Discuss the benefits of money markets
Explain how you interact with goods markets every day
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