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What Is a Financial Environment?

Osmand Vitez
Osmand Vitez

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.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

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.

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Discussion Comments


That is a good example, Certlerant.

Luckily, the market has begun to show signs of improvement, including some easing of lending restrictions, decreases in jobless claims and renewed consumer confidence and spending.

As a result, businesses can begin to launch or continue projects that were put on hold. This should put more money back into the economy, as well.


After the financial crisis that began in 2008, the money available for new or existing businesses dried up quickly.

Lenders, who were suffering losses from borrowers who were unable to pay, were reluctant to provide financing and applied very strict terms to business lending.

In addition, individual investors were feeling the pinch of the recession as a result of factors like worthless investments and job loss. As a result, they were holding on to any money they did have available for investment.

This is a classic example of how changes in the overall market have an impact on both business and investment, making existing problems worse before consumer confidence returns.

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      Businesswoman talking on a mobile phone