Financial Markets - An Introduction

Participants in markets
People - Investors, borrowers and agents who bring these 2 together
Products - We will see it
Places - Not a physical place but connected through sophisticated markets.

The Size of Financial Markets
The importance of modern financial markets is evidenced by their enormous scale. The value of total global financial assets outstanding in 2007 was estimated as USD 196 trillion, which was itself USD 29 trillion larger than the same estimate a year earlier.

It is estimated that the value of global financial assets represents three times the current level of global GDP, but even this huge number does not encompass all of the activity. Most importantly, it does not include the substantial market in foreign exchange (FX). At the time of its 2007 market survey, the BIS estimated that daily trading volumes in the FX market were of the order of USD 3.2 trillion – and they have probably increased since then.





Financial Market Turnover

Naturally, a rapidly growing market requires a constant supply of new instruments and assets. (The BIS estimated that in 2008 USD 2.35 trillion worth of international bonds were issued.) Markets must be sufficiently developed in order to sell instruments to potential investors.

However, activity in financial markets is not simply restricted to transactions in new instruments; such trades are called primary market transactions. There is often a significant (and in many cases larger) secondary market that encompasses trades in outstanding instruments. For instance, a share of common stock in a company can change hands many times after its initial issuance. Secondary markets, particularly those covering equities, are substantial. According to the World Federation of Exchanges (WFE), the total number of transactions in equity shares on its member exchanges reached almost 14 trillion in 2008.

Geography
It is perhaps no surprise that the bulk of the world's financial assets are concentrated in few major areas:
Area                     Per cent (rough idea)
US                          30
Western Europe      25
Japan                      10
UK                         5
But you don't have to be present at particular place to enter into transaction. Instead you can enter into deal from any part of the world through sophisticated internet etc.

Functions of Markets
1. Price discovery and asset valuation.
2. Capital opportunities
3. Short term financing
4. Investment opportunities
5. Financial risk management