Many countries operate a free market economy to drive national economic growth. Although economists suggest that a totally free market does not exist in the world today, its principles influence most business sectors, including fintechs and online trading services.
Understanding Free Markets
A free market is an economic system in which the government does not influence the prices of goods and services. In such a system, supply and demand are balanced directly by regular market forces, and businesses are privately owned rather than state-owned.
Most developed countries operate a free market. A few, like North Korea, adopt a command economy where the government sets stringent price and production levels. Businesses can set prices for their goods or services in a free market system. A good example of how free markets operate is farmers selling groceries at the price they deem fit. An online trading platform setting trading fees or a fintech fixing workers’ monthly salaries is another description of how free markets work.
Businesses don’t face any restrictions on pricing their products. However, it’s rare to see a country with a completely free market. Instead, in capitalist economies, the government employs a free market system to a greater extent, whereas in mixed economies, command economy components are also used. Many economists, however, argue that the best economy is a free market system.
Free Markets in Finance
In finance, a free market is one where interactions between financial institutions and investors are driven by supply and demand without the government controlling prices. A fintech company can perform a stock split to increase the number of its shares in circulation, which will correspondingly reduce the cost of each share without any government intervention.
In foreign exchange, a free market operates where the government does not peg the exchange rate but allows it to fluctuate based on the currencies’ supply and demand. Under specific scenarios, like inflation, the government may feel compelled to peg a currency to another stable currency like the US dollar. Pegging a widely unstable currency to a stable one helps boost economic activity by providing exchange rate stability to facilitate international trade.
Free markets promote higher volatility in the stock and forex markets. This heightened volatility is because speculation among investors can cause the price of a share or currency to surge or dip as demand fluctuates. In addition, a few insider traders can set up market manipulation tricks to influence the more prominent market participants to buy or sell an asset.
The Characteristics of a Free Market
A free market is defined by the following:
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The Right to Private Ownership
Individuals or companies in the private sector hold the majority of resources instead of the government. Correspondingly, the private sector controls which products and services are available to consumers at any time.
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Extensive Commerce Activities
Due to less government interference in commerce activities, more businesses provide commercial services. This promotes trade and allows for the presence of multiple financial institutions offering competitive interest rates to attract businesses.
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Zero Barriers to Market Participation
In a free market, no one is exempt from selling or buying. Each individual can freely decide what to produce, sell, or purchase and in what quantity without any hard-and-fast rules.
How Free Market Principles Are Shaping the Industry
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Innovation
Fintech companies and forex brokers can ideate and explore unique product offerings to meet consumer needs in a free market economy. They can create new financial products anytime to improve user experience without the government specifying what to focus on. Fintech and online trading platforms can also use artificial intelligence to build AI agents and deliver advanced finance insights to establish their relevance in the market.
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Competition
As fintech and investing platforms find ways to meet consumer demand, they also strive to stand out from competitors. A company can offer massive product discounts to drive sales, launch new technology to attract users or charge more for added services. In a free market, companies are free to use various marketing tactics to improve revenue.
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Accessibility
Any entrepreneur can set up a fintech or launch an online trading platform in a free market system. At the same time, consumers can choose any brand for financial services like loans and investment options. The relationship between consumers and businesses influences, to a large extent, how financial institutions set pricing for their products and services. Consumers decide which of the options available is a good value for their money and opt for the best. This constrains companies to set competitive prices without being monopolistic.
The Balance Between Free Markets and Economic Regulation
Free markets depend on the market forces of supply and demand to decide how valuable a product or service is. They’re driven mainly by innovation and promote healthy business competition, which regulates product pricing. Fintech and online trading platforms thrive in a free market due to the flexibility in determining service offerings. Although there is positive sentiment toward free market economies, most countries that adopt a free market system eventually run a mixed economy where command markets are used in specific scenarios.