Understanding Market Basics

Introduction

Financial markets are platforms where buyers and sellers trade financial instruments such as stocks, bonds, and derivatives. Understanding how these markets work is fundamental to becoming a confident investor.

Types of Financial Markets

The main types of financial markets include:

• Equity Markets: Where shares of companies are bought and sold (e.g. London Stock Exchange).
• Bond Markets: Where debt securities issued by governments and corporations are traded.
• Money Markets: Short-term debt instruments like Treasury bills with maturities under one year.
• Derivatives Markets: Contracts whose value is derived from underlying assets (futures, options).

Market Participants

Markets are made up of diverse participants including retail investors, institutional investors (pension funds, insurance companies), market makers, brokers, and regulators. Each plays a different role in ensuring markets function efficiently and fairly.

Supply and Demand

Asset prices are fundamentally driven by supply and demand. When more people want to buy a security than sell it, the price rises. When more want to sell than buy, it falls. This mechanism is how markets discover fair value.