This is “Securities Markets”, chapter 8 from the book Finance for Managers (v. 0.1).
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One of the most difficult ideas to define is the concept of a market. Some physical places are called “markets”, and there we expect to see individuals negotiating and exchanging with each other. In the modern age, some markets have become electronic, moving to the internet and other “virtual” systems. But we can also speak of the market for a product or marketing an idea, which implies that a market goes beyond a physical or virtual space. A market can be formed by the beliefs of individuals, and some of these “information markets” can be more accurate in making predicitions than any of the participating individuals! Two defining characteristics of a market are connections between individuals (or companies) and exchange of some sort (usually including information, but often of products or currency).
Modern social networks, like Facebook, are a prime example of the power in making connections. As more and more people are involved, the benefit of the network grows at an even faster rate. Likewise, the more products a supermarket has, the easier it is for shoppers to compare offerings and to make buying decisions. And the more shoppers a store can attract, the greater economies of scale can be realized, to the benefit of the store and the shoppers.
Financial markets (like the New York Stock Exchange) and institutions (like banks) also make use of these network effects and economies of scale, but with capital and information instead of groceries or wall posts. Financial institutions are the major participants in these exchanges, and help to facilitate individuals’ and companies’ access to markets.