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Financial market is the general term for sub-markets in which financial products are traded: money market, capital market, credit market and foreign exchange market.

Submarkets

In the money market and capital market, investors provide money as deposits, in the credit market money is demanded. Money market and capital market are different in terms of maturity of investments. However, there is no official period for the duration of the investment. The money market generally covers periods of up to six to twelve months, while the capital market covers longer investment periods. The counterpart of the financial market are the markets in which goods are traded.

Definition and performance of the financial market

In addition to defining the content of the financial market, one should also take a look at the functions of the financial market. In general, the financial market performs four important functions in addition to trading money:

• Lot size change
• Deadline transformation
• risk conversion
• Advertising evolution

These four points give the financial market an important function that goes beyond the character of a pure trading venue. Conclusions about the behavior of market participants can be drawn from individual developments.

Lot size change

The change in lot size provides information about investors' willingness to invest. Suppose there is a demand for a large trench. A contribution consists of many small fractional amounts. In this case, investors may only want to take a limited risk and contribute only a small amount. Funds may also be scarce and no individual investor can raise the required amount.

attainment transformation

Within the range of maturity evolution, money lending periods and money lending periods are opposite to each other. Investors and recipients must coordinate their ideas as part of the transformation. Maturity variation relates not only to the duration of the investment, but also to the duration of the associated fixed interest rate. If the investment period exceeds the fixed interest rate period, interest rate risks arise for the people involved. The borrower is exposed to the risk of interest rate increases, the lender is exposed to the risk of interest rate decreases. Since the capital is locked, he cannot switch to another investment.

risk transformation

As a part of risk evolution, different risk perceptions of the involved parties are aligned with each other. There are two approaches to risk conversion:

• Risk reduction: the required capital is divided among several investors, the risk is distributed and thus reduced.
• Risk Sharing: Segmented and segmented contracts are more individually tailored to the risk interests of the participants.

Advertising evolution

Credit institutions collect data from their customers. On the one hand, these serve to analyze customers and their business activities. On the other hand, through publication, they enable other market participants to perform reverse analysis of the respective bank and its creditworthiness.

Therefore, primary lenders do not need to contact each borrower directly to get an idea of their creditworthiness. The borrower only needs to disclose his financial condition to the concerned bank.

Other financial market functions

The main function of the financial market is the brokerage of funds. Since behind every need for money there is usually a production process or a trade process in the commodity market, the financial market directly intervenes in the entire economy.

For commodity market participants, investment costs, i.e. financing costs, for the production of goods must be kept as low as possible.

The financial market also enables the individual interests of lenders and borrowers to be aligned, as it also functions in a virtual sense as an association.

Last but not least, he ensures that only participants with a legitimate interest have access. Some admissions restrictions select potential participants. A classic example is buying stocks. No private investor can buy shares directly on the stock exchange. In this context, a licensed stockbroker is always required.