Meaning of Financial Market

Acronyms Business

The financial market is the generic term for three sub-markets on which financial products are traded. These are divided into the money market, capital market and credit market. On the money market and the capital market, investors offer money as a deposit, while money is in demand on the credit market. The money market and capital market differ in terms of the maturity of the investments. However, there are no official periods for the duration of the systems. The money market usually covers periods of up to six to twelve months, the capital market longer investment periods. The counterpart to the financial market are markets on which goods are traded. What are the tasks of the financial market as a superordinate market in the financial world?

  • The financial market is divided into the money market, capital market and credit market.
  • Participants are banks and institutional investors.
  • One of the tasks of the financial market is to harmonize maturity interests, risk and interest interests of investors and borrowers.
  • It also has an indirect effect on the goods market through the financing of production processes.

Definition and function of the financial market

In addition to defining the content of the financial market, you also have to take a look at what functions the financial market has. In addition to trading in money, the financial market also fulfills four important functions:

  • Lot size transformation
  • Maturity transformation
  • Risk transformation
  • Disclosure transformation

These four points give the financial market an important task that goes beyond its mere trading center character. Conclusions about the behavior of market participants can be drawn from the individual transformations. According to abbreviationfinder, GFM stands for Global Financial Market.

The lot size transformation

The lot size transformation provides information about the investor’s willingness to invest. Suppose there is demand for a large tranche. The deposit is made up of many small partial amounts. In this case, it is possible that investors only want to take a limited risk and only contribute partial amounts. It can also be the case that funds are scarce and no individual investor can raise the required amount.

The maturity transformation

As part of the term transformation, the terms for lending money and the terms for lending money are opposed to each other. As part of the transformation, financiers and recipients must coordinate their ideas. The maturity transformation relates not only to the duration of the investment, but also to the duration of the associated fixed interest rate. If the investment period exceeds the fixed interest period, the parties involved are exposed to interest rate risks. The borrower runs the risk of rising interest rates , the lender risks falling interest rates. Since the capital is tied up, he cannot switch to any other investment.

The risk transformation

As part of the risk transformation, the different risk perceptions of the parties involved are aligned with one another. There are two approaches to risk transformation:

  • Risk reduction: The capital demanded is divided among several investors, the risk is distributed and thus reduced.
  • Risk sharing: Subdivided and split-up contracts adapt the risk interests of the parties involved to one another more individually.

The publicity transformation

Credit institutions collect data from their customers. On the one hand, these serve to analyze your customers and their business activities. On the other hand, through publication, they enable other market participants to analyze the respective bank and its creditworthiness in reverse .

Investors and borrowers do not have to come into direct contact with each other in order to get an idea of ​​the creditworthiness of the counterpart.

The borrower only has to disclose his economic situation to the respective credit institution.

Other functions of the financial market

The direct task of the financial market is to broker funds. Since there is usually a production process or trading process on the goods market behind every need for money, the financial market intervenes directly on the economy as a whole.

For the participants in the goods market, the investment costs, i.e. the financing costs, for the production of goods should be kept as low as possible.

The financial market also enables the coordination of the individual interests of donors and borrowers, since it also acts as a forum in the figurative sense.

Last but not least, he ensures that only participants with a legitimate interest have access. Certain admission restrictions select the possible participants. A classic example is the acquisition of shares . No private investor can buy shares directly on the stock exchange . In this context, an approved stockbroker is always required.