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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Introduction
Hello, I'm Molly, an expert in financial markets and their importance. I work at the Bank of England, where we closely monitor and analyze financial markets. I have a deep understanding of how financial markets function and their role in driving economic growth and prosperity. I will provide you with comprehensive information on the concepts mentioned in the article you shared.
Financial Markets and Their Purpose
Financial markets are platforms where individuals and institutions can engage in various financial activities such as buying, selling, loaning, lending, saving, insuring, and investing. These markets facilitate the exchange of financial assets between buyers and sellers, determining their prices based on supply and demand dynamics.
Financial Assets
- Shares: Shares represent ownership in a company. When you own shares, you become a shareholder and have a claim on the company's assets and earnings. Companies issue shares to raise capital for investment and growth.
- Bonds: Bonds are debt instruments issued by governments or large companies to raise funds. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Government bonds, also known as "gilts," are a form of government debt.
- Currency: Financial markets also include foreign exchange markets, where individuals and institutions can exchange one currency for another. This allows for international trade and investment by facilitating the conversion of currencies.
Benefits of Financial Markets
Financial markets offer several benefits to individuals and businesses:
- Investment Opportunities: Financial markets provide individuals with the opportunity to invest their money in shares (equities) and potentially earn higher returns over the long term compared to traditional savings accounts. However, it's important to note that investing in shares carries risks, and past performance does not guarantee future returns.
- Insurance: Insurance companies utilize financial markets to ensure that policyholders receive payouts in the event of accidents or losses. By participating in financial markets, insurance companies can manage risk and provide financial protection to individuals and businesses.
- Borrowing and Lending: Financial markets enable banks and other financial institutions to borrow money from savers and lend it to individuals and businesses. This allows people to access funds for various purposes, such as education (student loans) or purchasing a home (mortgages).
Importance of Financial Markets
Financial markets play a crucial role in the economy:
- Economic Growth: By providing finance to companies, financial markets enable them to hire employees, invest in new projects, and expand their operations. This contributes to economic growth and job creation.
- Government Funding: Financial markets allow governments to raise funds by issuing bonds. These funds are used to finance public infrastructure projects, education, healthcare, and other essential services.
- Lower Costs: Well-functioning financial markets can help lower costs for consumers. For example, efficient financial markets can reduce borrowing costs for individuals and businesses, resulting in lower mortgage rates and more affordable loans.
The Role of the Bank of England
The Bank of England plays a vital role in ensuring the stability and safety of financial markets. Some of its key responsibilities include:
- Market Monitoring: The Bank collects information about financial markets and maintains close communication with market participants to understand market dynamics, identify risks, and develop appropriate measures to address them.
- Financial Market Operations: The Bank manages important financial market operations, such as quantitative easing (buying and selling government assets to influence the money supply), managing the country's gold and money reserves, and conducting foreign currency transactions on behalf of the government.
- Setting Standards: The Bank sets standards and regulations for financial firms to ensure the provision of reliable and secure financial services to individuals and businesses.
In conclusion, financial markets are essential for economic growth, investment, borrowing, lending, and risk management. They provide individuals and businesses with opportunities to grow their wealth, access funds, and protect against unforeseen events. The Bank of England plays a crucial role in overseeing and maintaining the stability of financial markets for the benefit of the United Kingdom's economy and its people.
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