Financial markets are where people can buy, sell, loan, lend, save, insure or invest.
This page was last updated on 10 November 2022
What are financial markets?
Think of companies like eBay, which match buyers and sellers to set a price for everything from second-hand furniture to the latest iPhone.
Financial markets match buyers and sellers to set a price for financial assets.
What are the "financial assets" that are exchanged in the financial markets?
Shares
Having shares in a company means you own part of it. Companies create shares to raise money so they can invest and grow.
Bonds
Governments or large companies can raise money by issuing bonds. These are essentially a future ‘IOU’ that can be bought and sold in the financial markets. Government bonds also known as ‘gilts’ and are a form of government debt.
Currency
People can exchange one currency for another in the foreign exchange markets.
How do financial markets help me?
Financial markets can give an opportunity for you to invest money in shares (also known as equities) to build up money for the future.
Over a long period of time, this can often provide a better return than opening a savings account at your bank. Butbuying shares can be risky. It is important to remember that the value of any investment can go down as well as up, and getting good returns in the past does not always mean they’ll be good in the future.
Financial markets also allow people to take out insurance. Insurance companies need to use financial markets to make sure you will receive a pay-out if you have an accident, such as losing or damaging your mobile phone.
Financial markets enable lenders such asbanksto borrow money. They make loans to people who want to borrow – whether that’s attending university with a student loan, say, or buying a house with a mortgage.
Why do financial markets matter?
Bank of England's explainer on what are financial markets and why are they important.
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Hello, my name is Molly and I work at the Bank of England. Here at the Bank of England we always need to keep an eye on what’s happening in financial markets. Financial markets may seem confusing, but essentially they exist to bring people together, so money flows where it is needed the most. Markets provide finance for companies so they can hire, invest and grow. They provide money for the government to help it pay for new roads, schools and hospitals. And they can help lower the costs you face buying food at the supermarket, taking out a mortgage or saving for your retirement. So when they work well, financial markets can be big drivers of prosperity, but as the financial crisis has shown, markets can get it wrong. That’s why the Bank of England is working hard to ensure that markets are fair, that they’re there when we need them, and that those working in financial markets are held accountable for their actions. Only by doing this, can we build real markets for the good of the good of the people of the United Kingdom.
How do financial markets help businesses?
Financial markets provide finance for companies so they can hire, invest and grow.
For example, Apple started in a garage in California. While it had some great ideas, it needed money to make them happen.
In 1977, it persuaded a single investor to loan the company $250,000. Over time, the company grew and less than five years later it was able to borrow over $100 million from financial markets by selling shares in the company.
Apple is now worth hundreds of billions of dollars and employs over 100,000 people.
So, when they work well, financial markets can make the country much better off.
What is the Bank of England's role in the financial markets?
As the Global Financial Crisis that began in 2007showed, when markets go wrong they can cause a lot of harm.
At that time, markets proved to be fragile. This fragility spread to the wider economy. Banks were less willing and less able to provide loans to households and companies. This meant lower economic activityand more people out of work.
That’s why it’s important we make sure financial markets operate in a safe way.
We do that in more than one way.
We collect information about financial markets. It’s vital we talk to people working in financial markets so we understand what’s happening, what the risks are and consider how to address them together.
We manage some key financial market operations. This includes buying and selling things owned by the government to change the amount of money available in the economy. A few examples of this are quantitative easing, printing moneyand managing the UK’s goldand money reserves (our country’s investments) on behalf of the government. We also hold a small number of foreign currency reserves, and carry out payments to other countries for government departments and a small number of their customers.
We set standards for financial firms so they keep providing services when you need them.
Find out more
- What do banks do?
- What does insurance cover?
- What does the Bank of England do?
- Will there be another financial crisis?
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I am an enthusiast with extensive knowledge in financial markets, having delved into the intricate mechanisms that drive these complex systems. My expertise is not only theoretical but also grounded in practical experiences, allowing me to navigate the nuances of financial instruments and their implications.
Now, let's dissect the concepts discussed in the article titled "What are financial markets and why are they important?"
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Financial Markets Overview: The article defines financial markets as platforms where individuals can engage in various financial activities such as buying, selling, loaning, lending, saving, insuring, or investing.
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Financial Assets: Financial markets facilitate the exchange of financial assets. The article mentions three primary types:
- Shares: Represent ownership in a company, often created by companies to raise capital for investment and growth.
- Bonds: Issued by governments or large companies as a form of debt, bought and sold in financial markets.
- Currency: Foreign exchange markets enable the exchange of one currency for another.
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Benefits of Financial Markets: The article outlines how financial markets can benefit individuals:
- Investment Opportunities: Individuals can invest in shares (equities) over time, potentially yielding better returns than traditional savings accounts.
- Insurance: Insurance companies utilize financial markets to ensure payouts for accidents or damages.
- Lending and Borrowing: Financial markets enable lenders like banks to borrow money, facilitating loans for various purposes, such as education or home buying.
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Importance of Financial Markets: The Bank of England's representative, Molly, emphasizes the significance of financial markets. They serve as essential drivers of prosperity by providing finance for companies to hire, invest, and grow. Well-functioning markets contribute to economic development, infrastructure funding, and cost reduction for consumers.
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Role of Financial Markets in Business Growth: Financial markets play a crucial role in supporting business growth. The example of Apple illustrates how financial markets provided the initial capital needed for its expansion, eventually leading to significant economic impact and job creation.
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Bank of England's Role: The Bank of England is highlighted as a key player in ensuring the stability and safety of financial markets. Post the Global Financial Crisis in 2007, it became evident that poorly functioning markets could have severe consequences for the wider economy. The Bank of England collects information, manages financial market operations, and sets standards for financial firms to ensure the proper functioning of these markets.
In summary, financial markets serve as dynamic platforms facilitating various financial activities, and their proper functioning is crucial for economic growth and stability. The Bank of England actively oversees and intervenes to ensure the integrity of these markets for the benefit of the United Kingdom's people.
