Financial markets play a crucial role in the overall economy, affecting every aspect of our lives, from the prices of goods and services to employment opportunities. This unit aims to provide a basic understanding of financial markets, their role and function, and the major stock exchanges.
Financial markets are venues where buyers and sellers interact to trade financial assets such as stocks, bonds, commodities, currencies, and derivatives. They facilitate the flow of funds from those who have excess funds (savers) to those who need funds (borrowers). This process is crucial for the growth and development of an economy.
Financial markets serve several key functions:
Stock markets are a type of financial market where shares of publicly traded companies are bought and sold. They play a critical role in corporate fundraising and provide investors with the opportunity to own a portion of the company and share in its profits.
There are many stock exchanges around the world, but the most well-known are the New York Stock Exchange (NYSE) and the NASDAQ.
New York Stock Exchange (NYSE): Founded in 1792, the NYSE is the world's largest stock exchange by market capitalization of its listed companies. It lists companies from various sectors such as finance, healthcare, consumer goods, and technology.
NASDAQ: The NASDAQ is the second-largest stock exchange in the world. It was the world's first electronic stock market and is known for listing many tech companies, including giants like Apple, Microsoft, Amazon, and Google.
Market indices are a measure of the performance of a group of stocks. They provide a snapshot of the market's overall health and direction. The most well-known indices in the U.S. are the Dow Jones Industrial Average (DJIA), which tracks 30 large publicly-owned companies, and the S&P 500, which includes 500 of the largest companies listed on the NYSE or NASDAQ.
Understanding financial markets is fundamental to investing. They provide the platform for buying and selling securities, help determine prices, and offer a way for investors to manage risk. As you continue your investing journey, you'll gain a deeper understanding of how these markets work and how to navigate them effectively.