Overview
Wall Street. The City of London. Tokyo. Financial markets are where capital meets ideas. They allow companies to raise money and investors to grow their wealth.
Core Idea
Liquidity: The ease with which an asset can be converted into cash without affecting its price. Cash is perfectly liquid. Real estate is illiquid. Markets provide liquidity.
Formal Definition (if applicable)
Market Microstructure: The study of the process and outcomes of exchanging assets under explicit trading rules. (How the plumbing works: Order books, bid-ask spreads, high-frequency trading).
Intuition
It’s a giant auction.
- Stock Market: Buying ownership in companies (NYSE, Nasdaq).
- Bond Market: Lending money to governments and companies (Bigger than the stock market).
- Forex (Foreign Exchange): Trading currencies (The biggest market of all).
Examples
- Primary Market: Where new securities are issued (IPO).
- Secondary Market: Where existing securities are traded (Stock Exchange).
- OTC (Over-the-Counter): Direct trading between two parties without an exchange.
Common Misconceptions
- “The stock market is the economy.” (No, the market looks forward; the economy looks at now. They can diverge.)
- “Buy low, sell high.” (Easier said than done.)
Related Concepts
- Bull Market: Prices rising.
- Bear Market: Prices falling (20% drop).
- Volatility: How much prices swing.
Applications
- Capital Allocation: Directing money to the most productive uses.
- Price Discovery: Determining the fair value of assets.
Criticism / Limitations
Markets can be irrational (Bubbles and Crashes). They can also be rigged (Insider Trading).
Further Reading
- Lewis, Flash Boys
- Shiller, Irrational Exuberance