Financial market is the place where financial instrument like share, bond, currency, future, option is traded at low transaction cost. Financial market facilitates the interaction between who need capital with those who have capital to invest.

We should understand major 4 components that how financial market works. Those components are Market structure, Market Participant, Liquidity and Pricing, and the Spread.

Financial Market

1 Financial Market Structure:

Financial market are divided in different categories based on the kind of instrument that is being trade. Stock market, Commodity market, Currency market, Future market are the part of financial market. Investor can trade bond and equity in stock market, different types of commodity like oil, gas, commodities, gold, silver are traded in commodity market, global currencies are traded on currency market, future and option are traded on future market

2 Market Participant:

Financial market participant are the people and organization who involve in buying and selling the financial securities. Banks, finance companies, Pension funds, insurance companies, Merchant banks, individuals, government and regulator are involving in financial market.

I Supply Side Vs Demand Side

the market participant can come either supply side hence supplying access money in the form of investment) or demand side hence demanding access money (in the form of borrow equity). The demand side who need cash to operate business, interim financing and long term financing can get fund from supplying side. The demand side can use that fund to generate income. Supply side can get their capital with interest (cost of using that fund)

II Investor Vs Speculator

Investor are those who make investment. They invest particular product for regular basis with particular time period. They invest in real estate, commodities, currency, personal properties etc. Speculator is those who are doing financial speculation in buying and selling of different financial product. They can get profit base on volatility of market.  They have no intention to hold long term assets.

III Institution Vs Retail

Institutional investor are those investors who invest large portion of their portfolio. Bank, insurance companies, pension funds are institutional investor. Retail investors are individual investors.

3 Liquidity and Price

Market liquidity is directly correlated with the volume of trade taking place in particular time. High liquidity means investor can place their trade easily at desire price and indicate that there is easily matching trade to be paired with.  Low liquidity means trading volume is low and it will difficult to match transaction with another

4 Spread

Spread is different between buy price and sell price, it is also call difference between bid price and ask price. When investor want to buy securities he need to pay ask price but when he sell, he need to pay bid price. Therefore, in the process of making investment, the investor loses the spread. Low spread is advantage for investor