Demand for Financial Market Assets

When analyzing the bond, stock, and other financial market instruments, it’s important to know what causes demand of these “products”. There are really a few reasons why a person would want to invest in these financial market instruments. These instruments are in demand, when it is something that people want to buy. There are really several factors that decide whether or not a particular financial market instrument is in demand.

* Wealth- Wealth is basically described as total resources owned by a particular individual, including their various assets. Typically, the more wealth a person has the more resources they have available in order to purchase these assets. As more wealthy people have resources to purchase these assets, the demand for these assets will obviously increase. It also makes sense that demand for these assets increase with wealth, because typically wealthy are very financially responsibly, and know to purchase these types of assets in order to earn a higher rate of return. Therefore, if everything else is held constant, an increase in a person’s wealth can easily increase the demand for these types of assets.

* Expected Returns- This is the return rate of the particular asset, that can easily be compared to the return rate of other assets, to see which offers a better solution. The expected return is basically defined as, how much a person can expect to gain from holding that particular asset. When picking one out, you want the asset that has the best expected return, as it will make you the most money. Therefore, an increase in an asset’s expected return will result in an increase in demand for that particular asset.

* Risk- Risk is defined as the degree of uncertainty associated with a particular return on an asset, in comparison to other financial market assets. Naturally, the degree of risk for a particular asset, greatly affects the demand for that particular asset. Depending on the person’s personal preference, they may want a low risk asset, a medium risk asset, or a high risk asset. Typically, the higher the risk, the higher the rate of return. Typically, if the level of risk for a particular asset increases, the demand for that asset will decrease, as people will think it is probably not a safe investment.

* Liquidity- Liquidity is defined as how quickly and easily an asset can be turned into cash. This can also affect the demand for a particular asset. A asset that can easily be bought and sold, is typically said to be very liquid, as it can be turned into cash easily. A house, is an asset that is considered not as liquid, as it’s not as fast and easy to sell, and also has expensive selling fees associated with it. In conclusion, the more liquid an asset is, the higher the demand for that particular asset will be.

Overall, there are plenty of factors that affect the various demand curves for different financial market assets, such as bonds, stocks, money market accounts, and more. You must weigh each of the above options, and look for the best choice for you.