Financial markets: the key to business success

Financial markets types: primary and secondary

Financial markets are categorised into two main types: primary and secondary. The primary market is where new assets are issued and sold directly by their originators, such as companies or governments. Its primary function is to enable these entities to raise capital by selling shares or bonds.

In contrast, the secondary market plays a crucial role in the financial system by allowing investors to trade previously issued securities, such as shares and bonds, thereby providing liquidity—the ability to convert assets into cash. However, the returns investors achieve in the secondary market can fluctuate based on asset prices.

The economic power of financial markets: importance and influence

Financial markets play a crucial role in shaping economies, serving as a cornerstone of national economic stability and growth. Despite differences in size, operation, and transaction types, all financial markets share essential functions.

Primarily, financial markets mobilise savings, channelling them into productive investments. They gather capital for investment in various opportunities and projects.

Furthermore, financial markets provide individuals and companies with diverse investment options, such as purchasing government shares or bonds or investing in new ventures, rather than merely holding onto funds or spending them on personal needs. These activities support companies’ objectives, stimulate economic growth, and generate employment opportunities.

Financial markets channel resources into the most effective investments and objectives, efficiently allocating funds between savers and borrowers. This process supports vital economic sectors and projects.

Moreover, financial markets allow investors to generate returns through various investment methods. They play a pivotal role in asset pricing and provide considerable data on economic status, which helps maintain market stability and equips investors and borrowers with the necessary information to make informed decisions.

Risk management is critical in financial market trading, especially for companies involved in derivatives markets like commodity futures—contracts to buy a specific commodity at a set price on a future date—and in currency trading (forex).

By diversifying portfolios across shares, bonds, and other assets, financial markets help mitigate the risks associated with asset price fluctuations.

Familiarity with these markets offers new or small businesses the chance to learn from others’ experiences, assess risks, and avoid pitfalls. Notably, many global financial markets allow investors to trade assets through online platforms regardless of location, enhancing opportunities for diversified investments.

Financial institutions are crucial players in these markets. They gather savers' funds, channel them into various investments, manage financial risks, and provide clients with financial security. Additionally, they ensure liquidity—enabling the quick and cost-effective buying and selling of assets—allowing traders to execute transactions with ease, thus fostering a thriving economic environment.

Regulation of financial markets typically falls under government authorities or financial entities. For instance, the UAE established the Securities and Commodities Authority (SCA) in 2000, which oversees the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). The SCA's mission is to ensure financial and economic stability by offering investment opportunities that adhere to precise, fair, and efficient principles while also conducting studies and making recommendations to boost investment awareness.

In conclusion,

Financial markets, through their primary and secondary functions, are essential in converting idle savings into active investments that drive economic growth, benefiting both individuals and the public. They facilitate efficient resource allocation, risk management, and liquidity, offering diverse investment options like stocks, bonds, financial derivatives, and investment funds.

References

[1] corporatefinanceinstitute.com, Financial Markets
[2] investopedia.com, Financial Markets: Role in the Economy, Importance, Types, and Examples
[3] imarticus.org, The Role Of Financial Markets In The Growth Of Economy
[4] bankofengland.co.uk, What are financial markets and why are they important?
[5] studysmarter.co.uk, Financial Markets
[6] u.ae, الأسواق المالية