What Is a Financial Environment?

A financial environment is a part of an economy with the major players being firms, investors, and markets. Essentially, this sector can represent a large part of a well-developed economy as individuals who retain private property have the ability to grow their capital. Firms are any business that offer goods or services to consumers. Investors are individuals or businesses that place capital into businesses for financial returns. Markets represent the financial environment that makes this all possible.

Historically, firms were very small or even nonexistent in economies or financial markets. Though a few firms have always been in existence, the ability for a large number of firms was not possible until markets became more mature. Mature markets allow for more access to resources necessary to produce goods and services. As firms begin to grow, expand, and multiply, higher capital needs to persist in order for firms to succeed. Capital sources include money from outside parties, such as investors.

Many times investors are individuals who have more capital than is necessary to provide a sufficient living standard. Any excess capital can actually make individuals more money if they invest the funds into a firm that offers a financial return. This symbiotic relationship in the financial environment allows both parties to increase their capital. Many different factors play a role for individuals making investments. A few of these may include risk, current market conditions, and competition, among others.

The last player in the financial environment is the market. Markets represent any place where sellers and buyers can meet together and exchange items. In most cases, the exchange is capital for goods or services. Markets may be local, regional, or international, depending on the economy. Free markets tend to have fewer government regulations, allowing for an increased exchange of goods due to lower transaction costs.

A financial environment can exist anywhere so long as the major players exist in the economy. Newer markets tend to have fewer resources and lower levels of economic activity due to their lack of resources. The financial environment is also subject to the business cycle, which dictates the stages of growth and decline in the economy. For example, when a new financial market or environment receives an influx of resources, it has the ability to grow and expand as the players see fit. Decline occurs when the market is saturated with goods and services due to a lack of demand.