Financial Market Simplified
What we call 'the Financial Market' can be simplified to two major groups:
- Borrowers: People or entities that need money in order to execute a plan.
- Lenders: Those that give money to the borrowers, in order to get it back with interest at a later date.
Borrowers
There are two main groups of borrowers:
Entrepreneurs
They will take on a loan in order to create a business, increase their portfolio of investments, etc, with the hopes of getting a higher return than the interest of the loan.
Non-entrepreneurs
These type of borrowers need money in order to increase or maintain their quality of life.
Lenders
While some borrowers don't necessarily take a loan in order to make a return, most lenders only lend if there is an expected return on their investment.
Connecting Borrowers to Lenders
In our modern world, there are 3 main bridges between this two groups:
Banks
Most money deposited in banks is used, directly or indirectly, to lend to families and business.
Bond Markets
Governments and businesses can sell bonds, which can be described as a formal I.O.U. (I owe you), in which the seller of the bond agrees to pay the buyer their money back, with interest.
Stock Markets
Business can sell stock, that represent small shares of the company, in order to get money now.
Investors buy stock in order to get dividends, which the company pays if they turn a profit, or to sell the stock to someone else at a later date, for a higher price.
DeFi
In the future, Decentralized Finance will also probably play a major role in how borrowers and lenders connect!
Conclusion
In the end, financial markets are just a bunch of borrowers and lenders trying to make some money, either because they have an idea or they know someone who has.
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