A market can be defined as the sum total of all the buyers and sellers in a particular area. This can be in a geographic region like the traditional markets where people would physically get together for trade goods, and services.
Examples of market participants are:
The idea is equally applicable to both finance and commerce. Transactions can occur in either separately or simultaneously. For example, a purchase of a physical good using a credit card will enter into both markets.
With the introduction of electronic communications, markets expanded beyond the physical realm. No longer did buyers and sellers have to trade directly. This allowed for the establishment of exchanges which allowed traders to buy and sell goods.
The digital transformation took this to another level. As the speed of communication networks increased, they became global and near instantaneous. Today, trillions of transactions take place each day, covering both financial and commercial goods.
Market Types
When people use the term market, it often means the potential for a particular product or service.
This means a market could apply to a business or industry. How much of a product can the market bear? It illustrates how important supply and demand is upon production, prices, and revenues.
The financial world is full of markets. Each asset class is considered a market. Some examples are:
- stocks
- bonds
- FOREX (or currency)
- futures
- cryptocurrency and other digital assets
- derivatives
When people talk about "The Market", they are often referring to the United States stock markets, specifically the Dow Jones Industrial Average also known as The Dow. This is also known as the "Big Board'. These indexes are the major exchanges in the equities realm.
Real estate shows another facet of markets. The entire real estate spectrum is thought of in this light. It then can be broken down by type such as commercial or residential. We then have single or multi-family units. Finally, each geographic location can be considered to be a market.
A business is often defined as a market. We see grocery stores termed "supermarkets".
Bring Buyers And Sellers Together
For markets to thrive, buyers and sellers need to be brought together. Efficiency is gained the better this is accomplished.
Commercial entities seek to attract buyers to their locations through marketing. Traditionally this was done through retail stores. The 20th century saw the construction of large department stores and retail supercenters in an effort to provide more products in one location.
The Internet took this concept into the digital world. Amazon because one of the most visited websites, a virtual location that replaced physical stores. Purchases took place in the non-physical realm with fulfillment coming from a hub of warehouses.
Most corporations now have an online presence. Anything that sells to the public is done so, in part, through the Internet. While some might be simply information sources, other complete the transactions. Tesla is an example of a company that sells its products exclusively online, a big change for the automotive industry which traditionally went through dealers.
Exchanges have served as the market for financial products. This brought buyers and sellers together by linking orders coming in from brokerage firms. In an effort to provide liquidity when participants enter the market, there will often be a market maker. This is usually a financial institution who takes on the role of ensuring the capital or assets are available when needed.
Historically, exchanges were centralized. These are know called centralized exchanges (CEX). The distinction came into being when blockchain and cryptocurrency started to grow. As technology advanced, the ability to operate in a peer-to-peer manner allowed for the deployment of decentralized exchanges (DEX). Here we see the market still operating in totality yet without a centralized entity bringing buyers and sellers together.
Just like the Internet altered how people interacted with markets for commercial products, decentralized exchanges are doing the same for finance. The tokenization of real world products might move them into this arena also.
Market Mechanics
Infrastructure changes has altered the way markets operate.
In ancient times, a market would be located in a geographic area. Merchants and traders would show up. Each brought either their wares for sale or cash to purchase. The goods were physically swapped for coins (mostly). It was a simple process albeit not without risks. Due to the lack of security, coin money was wrought with danger. Robbery was commonplace with little recourse.
Another issue was the lack of unit of account. In markets where traders were coming from a wide geographic area, it was not uncommon to have coins from many different kingdoms. This make accounting very difficult as prices were usually set in one currency.
Globalization alters the size of markets. What was once relegated to a single nation became a world market. Multi-national corporations could sell the same products to many different nations.
The non-physical world also expanded the hours that markets were open. Amazon, for example, can be accessed 24 hours per day, 365 days a year. People can place orders anytime.
Cryptocurrency is an asset that has exchanges open 24/7. Unlike the traditional financial markets, which harken back to the days of human traders, this can operate digitally.
Costs also declined greatly. Transaction fees are a fraction of what they once were, where they still exist. Most brokerage firms did away with commissions on trades, something that was rather expensive 40 years ago. They had to shift their focus to assets under management as the basis for their business model.
Authorized versus Unauthorized
Markets tend to come with regulation. Governments provide oversight in an attempt to ensure markets are efficient. It also tries to deter illegal practices that provide an unfavorable advantage to certain players.
This can relate to things such as the breaking up of monopolies, civil suits brought by entities such as the Securities and Exchange Commission (SEC) and outright arrest of those engaged in criminal activity.
Throughout history we were presented with black markets. These are markets that operate outside the approval of the government or law. This could be illegal market places that are not sanctioned or the trading of illegal products such as narcotics or guns.
On the Internet, this is known as the darknet. Here we find illegal activity that operates in a manner similar to a "dark alley" transaction. Buyers and sellers come together for the sake of trading.
It is the 21st century version of a black market. One of the best known markets was Silk Road which was opened in 2011 and shut down in 2013.