Sun, June 16, 2024

Demystifying Different Kinds of Financial Markets

people huddling for financial markets

The phrase “financial markets” is a broad term that describes the marketplace where buyers and sellers trade assets like stocks, bonds, currencies, and derivatives.

Financial markets generally have:

  • Transparent pricing
  • Basic regulations on trading, costs, and fees,
  • Market determiners of prices of securities that trade

You have access to a large number of financial markets and exchanges, with a lot of choices for financial products for your portfolio and diversification.

Capital Financial Markets

This is where you trade financial securities. Basically, companies and other entities use this market to raise funds. Capital markets have both primary and secondary markets.

Stock Markets

You must be very familiar with this. It’s where you buy and sell shares of public companies. Stock markets offer companies access to capital, so they are very important for the economy.

You can divide this market into two main sections: the primary and the secondary market.

  • Primary market – this is where new issues first come.
  • Secondary market – any subsequent trading will take place in this market.

Bond Markets

A bond is basically a debt investment in which you can loan money to an entity. The firm or governmental entity borrows the fund for a set of time at an interest rate. Entities that use bonds include:

  • Companies
  • Municipalities
  • States in the US
  • Foreign governments

Commonly, these entities use the funds from bonds for projects and activities.

Money Market

This is where investors trade instruments with high liquidity and very short maturities. Participants use this market to borrow and lend in the short term.

Securities that fall under the money market include:

  • Negotiable certificates of deposit
  • Bankers’ acceptances
  • US Treasury bills
  • Commercial paper
  • Municipal notes
  • Eurodollars
  • Federal funds
  • Repurchase agreements

Cash or Spot Market

financial markets represented on a computer screen

Investing in this market offers chances of huge gains—and equally huge losses.  Traders sell goods for cash and deliver at the drop of the hat.

This means that contracts you buy or sell on the spot market are effective right away. You use cash on the spot at the current prices.

Derivatives Market

A derivative’s value comes from the value of the underlying asset or assets. It’s a contract that newbie traders would usually find complicated by nature.

Some examples of derivatives are:

  • Forwards
  • Futures
  • Options
  • Swaps
  • Contracts for differences

Forex and Interbank Market

The interbank market is the financial system and trading of currencies among banks and financial institutions. This doesn’t include retail investors and smaller trading parties.

Meanwhile, the forex market is where you can trade currencies, along with other retail investors. It’s the biggest and most liquid market in the world, averaging $1.9 trillion in trade volume every day.

Primary vs. Secondary Markets

The primary market issues new securities on an exchange, and this is why you can also call it the new issue securities.

The secondary market is where investors buy securities or assets from other investors instead of from the issuing companies.

The Over-the-Counter (OTC) Market

The OTC market is what we also call the dealer market. OTC means the stocks do not trade on an exchange. Rather, they trade on the over-the-counter bulletin board or the pink sheets.

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