What are financial markets and why are they important?
Financial markets might seem confusing, but at their heart they exist to bring people together so money flows to where it is needed most.
While eBay matches buyers and sellers to set a price for everything from second-hand furniture to the latest mobile phone, financial markets match buyers and sellers to set a price for financial assets.
What are “financial assets?”
Equities refer to the ownership of part of a company.
Bonds are essentially just loans to governments or large corporations.
In foreign exchange markets, people exchange one currency for another.
How do financial markets help me?
Financial markets can provide big opportunities for ordinary people. Anyone can invest money in company shares (also called equities or stocks) to build up a nest egg for the future.
Over a long period of time this can often provide a better return than opening a savings account at your bank. But it’s 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. See this Money Advice Service page for more information.
Financial markets also allow households 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 allow banks to borrow money, helping them to make loans to people wishing to borrow – whether that’s attending university with a student loan, say, or buying a house with a mortgage.
Why do financial markets matter?
How do financial markets help businesses?
Financial markets also provide finance for companies so they can hire, invest and grow. Take Apple as an example…
Apple started life 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 more than 100,000 people.
Building financial markets for the good of the people
So, when they work well, financial markets can make the country much better off.
But as the 2007 financial crisis showed, when markets go wrong they can cause a lot of harm. In the crisis markets proved 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 activity and more people out of work.
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 people working in financial markets are held accountable for their actions. Only by doing this can we build financial markets that work for the good of us all.