A financial market is a marketplace where people trade financial securities and derivatives at low transaction costs. Financial markets provide buyers and sellers with the means to trade financial instruments such as bonds, equities, commodities, and derivatives. They are vital to the smooth operation of capitalist economies by allocating resources and creating liquidity for businesses and entrepreneurs. Financial markets can be categorized into two main types: capital markets and money markets. Capital markets are used for long-term finance, while money markets are used for short-term finance.

Some key functions of financial markets include:

• Price determination: Financial markets allow for the determination of the price of traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the prices of financial assets.

• Allocation of resources: Financial markets allocate resources by providing a mechanism for investors to invest their excess funds and for borrowers to obtain the funds they need.

• Liquidity creation: Financial markets create liquidity by providing a platform for buyers and sellers to trade their financial holdings.

• Risk management: Financial markets provide a mechanism for investors to manage their risks by allowing them to diversify their portfolios.

Examples of financial markets include the stock market, bond market, forex market, and derivatives market. Financial markets can be organized in two ways: exchange and over the counter (OTC) . Trading on an exchange involves buying and selling securities on a centralized platform, while OTC markets involve trading securities directly between two parties.

In summary, financial markets are essential to the functioning of modern economies. They provide a platform for investors and borrowers to trade financial instruments, allocate resources, create liquidity, and manage risks.