In today's episode of “Saving and Investing”, Michael Fischer explains why we have financial markets. If you've been following along, you can probably guess that their primary function is to encourage interaction between providers of capital (savers and investors) and users of capital (companies and governments).
Why do financial markets exist? (2:19)
In his book, Michael elaborates on the subject:
Because there are so many different users and providers of capital with different needs and preferences, there is more than one financial market, and also there are different terms used to describe different areas of the financial markets.
There are the stock and the bond markets of course — where providers of capital make funds available as owners or lenders, by investing in the slices of equity and debt of users of capital respectively. Investors also often refer to the money market, which is a financial market for short-term debt of one year or less, and the capital market — the market for transactions of over one year, which would include the stock market.
(Sometimes the terms are used a little loosely, and the term capital market is often used to refer to the entire financial market.)