Understanding the Financial Markets | Types of Financial Markets

Understanding the Financial Markets | Types of Financial Markets

Financial Market

Financial Market refers to the marketplace where the activities related to the creation and trading of different financial assets such as bonds, shares, commodities, currencies, derivatives, etc., take place and it provides the platform to sellers and buyers of the financial assets to meet and trade with each other at a price as determined by market forces.

Types of Financial Markets.

1. Money Market

A Money Market is a type of financial market for lending or borrowing short-term loans with a maturity of less than 1 year. The players are usually corporates, banks, and financial institutions as a huge amount of money are involved. The instruments dealt with in the money market are Treasury Bills, Commercial Papers, Certificates of Deposit, Bills of exchange, etc.

2. Capital Market

Capital Market is a type of financial market for the trading of stocks (shares) and bonds. This market is used for lending or borrowing money for the long term. Capital markets are further split into primary and secondary markets. The companies issue shares in the form of equity or preference shares or fixed interest-bearing bonds in the primary market. Once the shares are issued, the investors subscribe to them at a lower price and later sell them to another investor at a higher price to earn profit in the secondary market.

The Primary Market is that part of the capital market where new securities are created and directly purchased by the investors from the issuer. The creation of new securities facilitates growth within the economy. Once the securities are purchased by the investors, they can be traded in a “secondary market” like the stock exchange, bond market, or derivatives exchange.

The Secondary Market is a market where securities are offered to the general public after being offered in the primary market. These securities are usually listed on the Stock Exchange. The major portion of trading happens in the secondary market. It can be divided into two kinds of markets, one is the equities market and another is debt market.

3. Derivatives Market

Derivatives Market is a type of financial market that deals with the trading of Futures, Options, Forward contracts, and swaps. They can be dealt with either over the counter or in exchange-traded derivatives. Derivatives derive their value from the underlying asset and are used to manage financial risk due to a price change.

4. Commodity Market

Commodity Market facilitates the trading of commodities like gold, oil, wheat, rice, etc. There are around 50 major commodity markets all over the world.

5. Foreign Exchange Market

Foreign Exchange Market facilitates the trading of currencies. These markets are operated through financial institutions and determine foreign exchange prices for every currency.

6. Spot Market

Spot Market is a market where transactions are done on spot and in cash only.

Market participants. Markets act as a platform for buyers and sellers to interact in the financial environment. The buyers and sellers of the financial markets are known as Market participants. These participants include investors, speculators, and institutional investors.