An Introduction to the Financial Markets

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 and Stock Investing

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.

What Are the Components of the Stock Market?

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.

What Are Mutual Funds?

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.

What Is the Bond Market?

Generally, when stock prices go up, bond prices 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 keeps the U.S. economy lubricated. Their most important effect is on mortgage interest rates.

What Are Commodities?

Oil is the most important commodity in the U.S. economy. The price of oil 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.

What Are Hedge Funds?

By 2007, hedge funds increased in popularity due to their supposed higher returns for high-end investors. Since hedge funds invest heavily in futures, some argued they decreased the volatility of the stock market and therefore the U.S. economy. However, hedge fund investments in subprime mortgages and derivatives caused the 2009 recession. Iin 1997 the world’s largest hedge fund at the time, Long Term Capital Management, practically brought down the U.S. economy. (Updated January 4, 2010)