What are the financial markets? If you are confused, there is a good reason. That’s because financial markets go by many terms, including capital markets, Wall Street, even the markets. Some experts even simply refer to it as the stock market, even though they are referring to stocks, bonds and commodities.
Quite simply, that is what the financial markets are - any type of financial transaction that you can think of that helps businesses grow and investors make money. Here is an overview of the financial markets, from the simple to the complex.
Stocks are shares of ownership of a public corporation which are sold to investors to allow the companies to raise a lot of cash at once. The investors profit when the companies increase their earnings which keeps the U.S. economy growing. It is easy to buy stocks, but takes a lot of knowledge to buy stocks in the right company.
To a lot of people, the Dow is the stock market. However, the Dow, which is the nickname for the Dow Jones
Industrial Average, is just one component among many. There is also the Dow Jones
Transportation Average and the Dow Jones
Utilities Average. The stocks that make up these averages are traded on the world’s exchanges, two of which include the New York Stock Exchange and the NASDAQ.
Mutual funds give you the ability to buy a lot of stocks at once. In a way this makes them an easier tool to invest in than individual stocks. By reducing stock market
volatility, they have also had a calming effect on the U.S. economy. Despite their benefits, you still need to learn how to select a good mutual fund.
Generally, when stocks go up, bonds go down. However, there are many different types of bonds, including Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the
liquidity that helps keep the U.S. economy lubricated. Their most important effect is on mortgage interest rates.
The most important commodity to the U.S. economy is oil, and its price is determined in the commodities futures market. What are futures? They are a way to pay for something today that is delivered tomorrow, which helps to remove some of the volatility in the U.S. economy. However, futures also increase the trader’s leverage by allowing him to borrow the money to purchase the commodity. This can have a huge impact on the stock market, and the U.S. economy, if the trader guesses wrong.
Recently, hedge funds have increased in popularity due to their supposed higher returns for high-end investors. Since hedge funds invest heavily in futures, some have argued they have decreased the volatility of the stock market and therefore the U.S. economy. However, in 1997 the world’s largest hedge fund at the time, Long Term Capital Management, practically brought down the U.S. economy.
