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FINANCIAL MARKETS AND INTEREST RATES
OVERVIEW OF FINANCIAL MARKETS
Market Players
Investors /
lenders and
issuers /
borrowers
As you know, a market is where buyers and sellers meet to exchange
goods, services, money, or anything of value. In a financial market,
the buyers are investors, or lenders: the sellers are issuers, or
borrowers. An investor / lender is an individual, company, government,
or any entity that owns more funds than it can use.
An issuer / borrower is an entity that has a need for capital. Each
investor and issuer is active in a market that meets its needs. Needs
are based on many factors, including a time horizon (short- or long-
term), a cost / return preference, and type of capital (debt or equity).
Brokers and
dealers
The third group of participants in the marketplace includes financial
intermediaries called brokers and dealers. Brokers facilitate the
buying and selling process by matching investors and issuers
according to their needs. Dealers purchase securities from issuers and
sell them to investors. Brokers and dealers may be referred to as
investment bankers. Investment banking firms specialize in the
financial markets.
Security is debt
or equity IOU
Security
is a generic term that refers to a debt or equity IOU issued by
a borrower or issuer.
·
Debt security or bond an IOU promising periodic payments
of interest and/or principal from a claim on the issuer's
earnings
·
Equity or stock an IOU promising a share in the ownership
and profits of the issuer
Types of Financial Markets
There are two general classifications of financial markets:
·
Money markets
·
Capital markets