Financial Markets

What’s the Role of Financial Markets? 

Companies, real estate, and commodities are traded in financial markets, including the stock market, bond market, foreign exchange (currency) market, and others. These financial markets play a crucial role in the economy. They serve as intermediaries between businesses and investors and help businesses raise money to expand. Values are set by the markets and those who trade in them.

What Can You Learn from Monitoring the Market?

By monitoring financial markets and looking at the stocks included in them, you can get a sense of what’s important to producers and consumers. This can also give you some indication of the state of health of the macroeconomy.

The use of computers and technology has reduced the costs of and removed the barriers once associated with buying or selling stock on the actual floor of the New York Stock Exchange and other exchanges. Today, most trading is online.

Numerous brokerage firms and app companies have even made investing a possibility for minors. With the help of a trusted guardian, online brokerage firms, such as Stockpile, let adults buy gift cards that allow you, as a minor, to buy fractions of shares of stock with as little as $5, $25, $50, or $100. Owning even a fraction of a share of Disney, McDonald’s, Microsoft, Apple, or another stock could inspire you to learn more about the goods produced and the services offered by the company.

Bull and Bear Markets

As stock prices change, the financial markets rise and fall. These movements are called changes in “the market.” At the beginning of the 1950s, the Dow stood at 200. It reached 1,000 in 1982, 5,000 in 1995, over 11,000 in 2006, and more than 26,000 in 2018. Historically, investments tied to the Dow earn about 7 percent over long periods.

When “the market” rises for months and stock prices are rising, on average, people are motivated to buy. This trend is called a “bull market.” In contrast, the “bear market” indicates a continuous drop in financial markets. “Bears” sell their stock shares and go into hibernation because they expect stock prices to continue to fall.

You need to know that there are risks associated with stock investments. Knowledge and research, possibly provided by financial experts, will help you in making strategic stock decisions.

Government and Financial Markets

Having explored how businesses can raise money to invest in themselves and how creditors lend with the hopes of receiving a return, you may be asking, what does this have to do with the role government plays in the financial markets?

With respect to financial markets, the federal government has taken numerous steps to ensure the banking system remains competitive and efficient. This is important if businesses are going to be able to identify productive capital projects and successfully secure financing for them. The federal government is also responsible for addressing system-wide failures in markets. 

FDIC

In 1933, the United States Congress created an independent agency called the Federal Deposit Insurance Corporation (FDIC). In response to a historic number of depositors with checking and savings accounts withdrawing their bank deposits during the panics of the early 20th century, the FDIC began to insure customers’ checking and savings deposits. In doing so, the federal government minimized concern that the banking system would fail. The reduced risk motivated depositors to return to banking, increasing the amount of loanable funds for businesses and expanding opportunities for savers and investors to benefit from the power of compound interest.

SEC

In 1933, the United States Congress also created the Securities and Exchange Commission (SEC). The SEC protects the buyers of stocks, bonds, and other securities from fraud, deceit, and misrepresentation. It does so by requiring corporations to provide the public with the same financial information that is available to corporate insiders, including risk factors.

The next year, Congress passed the Securities Exchange Act of 1934. It prohibits insider trading, which occurs when confidential information about securities—hidden from the general public, especially stockholders—is misused by people who work at a company. 

Summary: The Role of Financial Markets

In order to have a healthy economy, we need our businesses to grow and our consumers’ money to grow. This happens when individuals save and then use those savings to invest in businesses through loans, stocks, and bonds. These transactions happen in financial markets. Businesses take this money and invest it in their businesses, meaning that they make long-term choices to grow the businesses. They then pay their investors back, plus interest.

This helps answer an important question: how can government in a mixed market economy help consumers and businesses prosper, even in times of crisis? Even in a limited government, it is necessary for the government to play referee to keep these financial markets fair and efficient, and to step in when there in a market failure.