What is Financial Market Analysis? - Definition & Explanation

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, you will learn about financial markets. We'll explain what a financial market looks like, real-world examples, and the two broad types of financial market analysis: fundamental and technical.

Bidding Wars

Imagine you are in the mood for a banana. So, you decide to visit the market.

There must be hundreds of vendors, but you come to the fruit section and notice one particular vendor selling the largest bananas you have ever seen. ''How much?'' you ask him. ''1 dollar for 6 bananas,'' he says.

But another banana vendor right next to him says, ''I'll give you 7 for a dollar!'Yet another banana vendor peeps her head up and says, ''Forget them. I'll give you 7 bananas for $1 and I'll throw in a free apple.''

To your surprise (and delight), there is a little bidding war going on. You explain you really just need 1 banana. As you explain this, another customer comes by and tells the vendor that she works for a restaurant and is going to buy 100 bananas.

If the vendors weren't clawing over one another before, they certainly are now. They quickly forget about you and start bidding for the larger customer.

This is a simple example of a market. Financial markets are no different than banana markets, they just sell a different product. In this lesson, we'll define financial markets and financial market analysis, and learn about two main types of financial market analysis: technical and fundamental.

Financial Market Analysis

Financial markets are marketplaces where entities buy or sell financial securities like stocks, bonds, currencies, derivatives, etc.

Financial market analysis then, like any type of analysis, is concerned with trying to understand what has happened, what is currently happening, and what will happen in that marketplace to better understand what positions that entity should take.

The formal definition of 'analysis' is the separation of something into its constituent parts. We see this with financial market analysis. Analysts typically break apart financial markets by the type of security they are trading - like stocks, bonds, commodities, etc.

Some of the most common types of securities are:

  • Equities - Marketplaces include the New York Stock Exchange, NASDAQ, London Stock Exchange, Tokyo Stock Exchange
  • Bonds - traded over-the-counter (OTC, i.e. dealer to dealer). Marketplaces include some OTC exchanges like OTC Markets Group
  • Derivatives - Marketplaces include the Chicago Mercantile Exchange, Chicago Board Options Exchange
  • Currencies - Traded over-the-counter.

Within each group, the analysis can be put in one of two camps.

Two Types of Financial Market Analysis

There are two broad types of financial market analysis. It is worth noting however, these two types are not all-encompassing.

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