In the United States economy, we have things that are referred to as “financial markets”. Some of you may be asking, what exactly is a financial market. Well by definition, a financial market is a market in which funds are transferred from people who have an excess of available funds to people who have a shortage. In other words, it’s a market where people with money saved up can lend money to people who need it. There are really two main types of financial markets in the US.
To start off with the bond market, I must first say that a bond is a debt security that promises to make payments for a specified period of time. What a security is is basically just a guarantee on a person’s future income or assets. What makes the bond market so important in the US is that it allows the government and corporations to borrow money to finance activities, and it also allows people who are able to purchase these bonds some nice interest rates. It is the bond market, which also helps determine what interest rates are, as well as the Federal Reserve System. To get really simple and define an interest rate, an interest rate is basically the percentage, or cost of borrowing money. If you are the lender, it can also be the percentage increase that you are earning on your money. Interest rates effects everyone’s lives, as it may affect whether or not you’re able to get a loan for a car, a house, or other large purchase.
I’m sure everyone has heard of the stock market, but I’m going to go over a few details of it, and why it’s important. What stock really is, is just a representation of the fact that a person has a share of ownership in a particular corporation. In other words, when I invest in a company, I’m actually buying in as part owner of that particular company. If the company’s stock price goes down, so does the value of my investment, if the stock price goes up, the value of my investment goes up. The stock market is definitely the most widely known financial market in the world, as it’s everywhere.
Financial markets can be incredibly complex, as these are really just the basics. The financial markets get further into different financial intermediaries, which are the banks, credit unions, etc. what these companies or organizations do, is take in people’s savings, and then use that money to loan out to people who need it. Overall, there’s a lot to know about financial markets, this is just the beginning.