UNDERSTANDING FINANCIAL MARKETS
Why is understanding financial markets so important to everyone?
Our understanding of financial markets is important to each of us because financial markets are fundamental to the way in which we all live our lives and contribute to our society through our work. In this complex world, financial markets impact nearly all aspects of our lives. Understanding how financial markets work may allow us to make choices that may help us grow our financial assets and provide income to us in the future, and allows us to have many more options as to how we wish to live our lives.
What are the main markets that make up our economic system?
The best way to begin to think about our economic system—and to understand ultimately how these systems interact with each other, and what information is relevant to our understanding of financial markets—is to divide our complex system into three main markets: Services, Products, and Financial. At its core, ultimately there are people (who create the demand that fuels the system), capital (used to clear the transactions), and buyers and sellers. The understanding of how these components work together and affect each other is the basis for understanding how to invest in these markets.
What is the basis of our financial markets?
The basis of our financial markets, a key component of our economic system, is needs-driven. For example, a financial institution may need capital, and must then find an intermediary to obtain this capital. At the same time, a corporation may need capital to retool an old factory, and seeks it from a financial institution. A corporation may also need to raise capital through the sale of its equity, using a price determined by the perceived value of the company's ability to be profitable, as well as the inherent value of the company's products or services, its assets and liabilities, the supply and demand for equity of similar companies, and the broad economic conditions when the company makes the offer, among many other variables.