Investments such as shares, and bonds are bought and sold on “financial markets”. So are currencies such as the Sterling (Pound), US Dollar, Euro, Japanese Yen
etc. Capital Markets is the term used where companies and Governments raise long term capital (money). It is a market in which money is lent for periods longer
than a year.
The capital market includes the stock market and the bond markets (debt, loan). The two types of securities traded are capital market and equity. Buying stock
allows investors to gain an equity interest in the company and become a part owner. Another market is the housing market, where property is bought or sold either
through an estate agent or privately
Prices of shares, bonds, property and other investments can go up as well as down, according to supply and demand. Prices will go up if buyers are in the majority
or down if people want to sell. They all follow a cycle of gains and losses (boom and bust) followed by a recovery. For Example, economic recession may cause
prices to fall because there are fewer buyers and more sellers. When the economy starts to recover, people feel more positive about the future and want to buy
more, which leads to increases in prices.
Financial markets can affect our lives in many ways. In the case of the currency market, for example, as the exchange rate between the Pound, Dollar, Euro and
other currencies raise the cost of imported goods. On the other hand, businesses that export goods may find it more difficult to sell if prices for overseas buyers
go up, or businesses may earn less when revenue from overseas sales is converted to a different currency.
The stock market is a good guide for the economy. If it slumps, an economic recession may be on its way or in progress. As share prices fall and companies may be
experiencing less demand for their goods and services, which can lead to workers being made redundant. This, in turn, affects the amount of money people have to
spend on goods and services and the taxes the government can collect.
To Summarise
Financial markets enable:
- Businesses to raise money for individuals to buy and sell investments
- Individuals to trade shares, bonds, currencies, property and other investments
- Capital markets to provide money for business investment
These markets affect our lives both directly and indirectly.