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What Is a Financial Asset Market?

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  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 17 November 2016
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A financial asset market is a location where a contractual right to a certain form of wealth is bought and sold. This is usually characterized by the liquid nature of the asset, or how quickly it can be converted to cash, and includes such financial assets as savings and checking accounts, stocks and bonds, and mortgages. One of the unique properties of wealth that is traded on such a market is that it does not necessarily have any direct or linear ties to actual physical value, such as with land, jewelry, or art.

Trading environments for a financial asset market, such as a stock market or bond market, are prone to fluctuate due to a variety of sometimes seemingly unrelated conditions in the marketplace. This results in a periodic trend with financial assets known as price bubbles. The value of assets tends to rise to a level that is beyond what the true value of the security is. When this bubble bursts, the market often sees a sharp decline to the point that the paper value of the asset is underrated.

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The act of trading in a financial asset market itself is what fuels the rise and fall of securities, by enhancing or following smaller trends with increasing levels of buying and selling. This creates a sort of feedback loop which exaggerates true market conditions, but which can often be predicted with some degree of reliability using mathematical models in a process known as technical analysis. Estimates of someone's wealth based on his or her investments in the financial asset market is a speculative value that is different from true net worth. It is also commonly used, however, in trading environments to categorize credit risk and the ability of a group or individual to meet debt obligations.

One of the main downfalls to the financial asset market is that it gives owners of market contracts a claim to actual physical assets that may be disputed if the business in which the assets are based shuts down. When bankruptcy occurs, usually a firm cannot pay off all of its creditors, and those who have financial asset claims are categorized by whose assets are liquidated first. Bond investments are usually considered more secure than stocks due to stronger contractual obligations, and preferred stock is paid off before common stock. The paper value of a financial asset can quickly convert to zero, however, regardless of what type it is, if a severe financial crisis hits the company to which the asset is tied.

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