What are financial markets and why are they important?

This page was last updated on 19 May 2020

What are financial markets?

They might sound confusing, but financial markets basically exist to bring people together so money flows to where it is needed most.

Think of companies like eBay, which match buyers and sellers to set a price for everything from second-hand furniture to the new iPhone. Financial markets match buyers and sellers to set a price for financial assets.

What are "financial assets?"

Shares refer to the ownership of part of a company.

Bonds are essentially just loans to governments or large corporations

In foreign exchange markets, people exchange one currency for another.

How do financial markets help me?

They can provide an opportunity for you to invest money in shares (also known as equities) to build up money for the future.

Over a long period of time this can often provide a better return than opening a savings account at your bank. However buying shares can be risky. It is important to remember that the value of any investment can go down as well as up, and getting good returns in the past does not always mean they’ll be good in the future.

Financial markets also allow people to take out insurance. Insurance companies need to use financial markets to make sure you will receive a pay-out if you have an accident, such as losing or damaging your mobile phone.

Financial markets enable banks to borrow money, helping them to make loans to people wishing to borrow – whether that’s attending university with a student loan, say, or buying a house with a mortgage.

Why do financial markets matter?

Play Why do financial markets matter? video

Bank of England's KnowledgeBank guide to what are financial markets and why are they important.

Hello, my name is Molly and I work at the Bank of England. Here at the Bank of England we always need to keep an eye on what’s happening in financial markets. Financial markets may seem confusing, but essentially they exist to bring people together, so money flows where it is needed the most. Markets provide finance for companies so they can hire, invest and grow. They provide money for the government to help it pay for new roads, schools and hospitals. And they can help lower the costs you face buying food at the supermarket, taking out a mortgage or saving for your retirement. So when they work well, financial markets can be big drivers of prosperity, but as the financial crisis has shown, markets can get it wrong. That’s why the Bank of England is working hard to ensure that markets are fair, that they’re there when we need them, and that those working in financial markets are held accountable for their actions. Only by doing this, can we build real markets for the good of the good of the people of the United Kingdom.

How do financial markets help businesses?

Financial markets provide finance for companies so they can hire, invest and grow.

For example, Apple started in a garage in California. While it had some great ideas, it needed money to make them happen.

In 1977, it persuaded a single investor to loan the company $250,000. Over time, the company grew and less than five years later it was able to borrow over $100 million from financial markets by selling shares in the company.

Apple is now worth hundreds of billions of dollars and employs over 100,000 people.

So, when they work well, financial markets can make the country much better off.

What’s our role in financial markets?

As the 2007 financial crisis showed, when markets go wrong they can cause a lot of harm. In the crisis markets proved fragile. This fragility spread to the wider economy. Banks were less willing and less able to provide loans to households and companies. This meant lower economic activity and more people out of work.

That’s why it’s important we make sure financial markets operate in a safe way.

Our role includes:

Collecting information about financial markets. It’s vital we talk to people working in financial markets so we understand what’s happening, what the risks are and consider how to address them together.

Managing market operations – the buying and selling of things owned by the government, to change the amount of money available in banking system. A few examples of this are quantitative easing, printing money and managing the UK’s gold and money reserves (our country’s investments) on behalf of the government. We also hold a small number of foreign currency reserves, and carry out payments to other countries for government departments and a small number of their customers.

Setting standards for financial markets. By doing this, we aim to make sure financial markets are fair and there when you need them.