Why are financial markets importantPosted on: 07 January 2019 by Laura Mills
Financial markets can seem complex and confusing, but they are essential to the smooth running of global economies.
Financial markets can seem complex and confusing, but they are essential to the smooth running of global economies. Put simply, a financial market is a central hub for buying and selling - a bit like Ebay or Amazon.
Financial markets provide various platforms that bring people together to either borrow funds or invest in businesses and commodities, therefore providing a means of sharing financial assets that everyone can potentially benefit from. Some financial markets, such as the London Stock Exchange, are huge, while others are small and run more like exclusive clubs, with strict criteria to fulfil before you can trade. They are heavily regulated by the FCA (Financial Conduct Authority) to ensure they are transparent and treat investors fairly.
At the centre of financial markets are the banks, building societies and other financial institutions, which make money from borrowers and investors, charging interest for facilitating transactions. Investors pay in and expect to earn a significant interest on their investment, while borrowers want the banks to lend to them at a reasonable rate. The banks make a profit by charging more interest for borrowing than they pay out in interest. This helpful video from Market Business News explains this in simple terms.
There are several means of trading on the financial markets, from stocks, shares and bonds to exchanging foreign currencies and even trading commodities such as coffee, cocoa and gold.
Importance of financial markets for… the economy
When the UK’s financial markets are performing well, everybody in the country benefits, because it means we have a strong, stable economy. This means banks are able to lend to individuals for mortgages and personal loans, businesses can secure funding essential for their growth, the Government can invest in essential public services, and unemployment remains low.
During periods of change and uncertainty, such as now as we prepare to leave the EU, the financial markets see more fluctuation, as it is more difficult for experts to predict what the impact to trade and industry will be, and investors can lose confidence, causing the market to dip.
Individual investors can often find that they can make more money from investing in the financial markets through a managed portfolio of stocks, shares and bonds that they can through saving in a high street savings account, but higher returns tend to reflect higher risks, so investors need to enter the market with their eyes open, be prepared to potentially lose money, and be fully aware of the risk. It’s a good idea to seek help from an independent financial adviser before investing.
For businesses, financial markets present a great opportunity to gain an injection of capital to grow the business further, raising money to invest in new product development, marketing and recruitment by selling shares and bonds. This way the companies raise essential growth capital to develop their businesses and ultimately become more profitable, while the individual investors can reap the rewards through the increase in share value if the company performs well. This creates more demand for products and services, so leads to job creation.
Financial markets are like the engine that keeps the nation’s money machine running, as when they function effectively they keep cash flowing for individuals, governments and businesses, and everybody can benefit.
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