A financial market can be defined as a marketplace where assets such as equities, bonds, currencies and derivatives are traded between buyers and sellers. Financial markets are also known to have the following characteristics, transparent pricing, conditions and regulations on trading, fees and costs (Investopedia). Bonetti and Cobham (1992) state that financial markets can be seen as a system which allows ultimate lenders also referred to as the economic agents to lend money ultimate borrowers. Ultimate lenders are those who save out of their incomes whereas ultimate borrowers are the ones who invest and buy these assets. The UK financial market has three components which form the market, the stock (equity) market, bond (debt) market and
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As it is the worlds largest financial market it offers benefits that the other two markets do no which attracts more investors. It has the following characteristics which differentiates the market from the other two, starting with lower trading costs, with stocks and bonds investors would need to invest a high sum to seek reasonable returns whereas in the foreign exchange market, it is open to those with little income as only a few hundred pounds would be enough to start trading. It has excellent transparency, which means there’s free trading information available to everyone therefore investors would have the market information beforehand and this would help them to make a trade. It also has superior liquidity, traders have the choice of purchasing whichever currency they would like, the superior liquidity allows them to trade without affecting the price/returns. The final characteristic is that it has strong market trends (tjfengcal.com). A floating exchange rate is when the government allows the exchange rate to be influenced by foreign-exchange market mechanism. This is determined by the demand supply of that particular currency (Economics.help, 2012). Arnold (2010) states that the fixed exchange rate is the opposite, as the government or central bank decides the official exchange rate to another country’s currency, this is done to sustain the value of he currency. This also allows the government to keep low inflation which means low interest rates and rise in trade and investment. In 2015, the UK saw a rise in its share of global foreign exchange, rising to $5.1 trillion in April last year. This was a result of strong trading within the UK which consisted of prime brokerage, investment banking and hedge funds (TheCityUK, 2015). The following table shows how the exchange rate between UK and other currencies.
As it is the worlds largest financial market it offers benefits that the other two markets do no which attracts more investors. It has the following characteristics which differentiates the market from the other two, starting with lower trading costs, with stocks and bonds investors would need to invest a high sum to seek reasonable returns whereas in the foreign exchange market, it is open to those with little income as only a few hundred pounds would be enough to start trading. It has excellent transparency, which means there’s free trading information available to everyone therefore investors would have the market information beforehand and this would help them to make a trade. It also has superior liquidity, traders have the choice of purchasing whichever currency they would like, the superior liquidity allows them to trade without affecting the price/returns. The final characteristic is that it has strong market trends (tjfengcal.com). A floating exchange rate is when the government allows the exchange rate to be influenced by foreign-exchange market mechanism. This is determined by the demand supply of that particular currency (Economics.help, 2012). Arnold (2010) states that the fixed exchange rate is the opposite, as the government or central bank decides the official exchange rate to another country’s currency, this is done to sustain the value of he currency. This also allows the government to keep low inflation which means low interest rates and rise in trade and investment. In 2015, the UK saw a rise in its share of global foreign exchange, rising to $5.1 trillion in April last year. This was a result of strong trading within the UK which consisted of prime brokerage, investment banking and hedge funds (TheCityUK, 2015). The following table shows how the exchange rate between UK and other currencies.