Hey there! Welcome back once again. In the last few blogs, we discussed the financial markets and their functions. We also learned about why financial markets are regulated. In this blog, we will discuss the various types of Financial Markets.
Did you know the term “Financial Markets” refers to the markets that are used to raise finance for the long term (the Capital markets), short term (the Money markets), or both? Well, financial markets refer broadly to a marketplace where the trading of securities occurs. It may include the stock market, bond market, forex market, and derivatives market. Let us understand these financial markets in detail.
- Stock Markets:
- Stock Markets are markets that trade or provide financing through the issuance of shares or common stock of listed companies and enable further trading via an Initial Public Offering (IPO) in listed exchanges. Each share comes with a price, and investors make money when stocks are bought at a cheaper price and sold at a higher price. Stock markets are also known as secondary markets.
- Participants in a stock market include (both retail and institutional) investors and traders, market makers (MMs), and specialists who maintain liquidity and provide two-sided markets. Brokers are third parties that facilitate trades between buyers and sellers but do not take an actual position in a stock.
- An over-the-counter (OTC) market is a decentralized market (does not have physical locations) and is used for trading electronically. The participants trading in securities directly between each other without getting a broker involved are far less regulated, less liquid, and opaque. OTC markets handle trading in certain stocks that are smaller or riskier and that do not meet the listing criteria of exchanges. Certain derivatives are traded exclusively at OTC.
- Bond markets provide financing through the issuance of bonds, and enable subsequent trading, giving opportunities to companies, municipalities, or sovereign governments to secure money to finance a project or investment.
- A bond is a security bought by investors from a company or government where in return the company or government returns the amount of the security within an agreed period plus interest at a pre-determined rate.
- The bond is also known as a debt, credit, or fixed-income security.
- Money markets are markets that trade in products with high liquidity and short-term maturities (less than one year) and are characterized by a high degree of safety and a relatively low return of interest.
- Usually, the money markets involve a large volume of trades between institutions and traders.
- Such a market involves (Derivatives) secondary securities or contracts whose value is based on the market value of the underlying asset being traded.
- Exchanges might list contracts on various asset classes, such as equities, fixed-income securities, commodities, and many others.
- The forex (foreign exchange) market is where participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs globally.
- Cash is the most liquid form of asset in the forex market. The forex market is decentralized, consisting global network of computers connecting the world with banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers, and investors.
- The commodities market is where traders and investors trade in the primary economic sector, buying or selling natural resources or commodities such as crops (wheat, corn, soybean, fruit, vegetables), livestock, cocoa, oil, meat, gold, etc, rather than manufactured products.
- This is a specific market created for such soft commodity & hard commodity resources as its price is unpredictable.
- Commodities market venues are places where producers and consumers meet to exchange physical commodities and these are known as spot commodity markets, where physical goods are exchanged for money usually.
- The bulk trading in commodities takes place on derivatives markets that utilize spot commodities as the underlying assets.
- Forwards, futures and options on commodities are exchanged both over the counter and on listed exchanges.
- With the introduction of decentralized digital assets that are based on blockchain technology, there is a rise in the cryptocurrencies market that facilitates the trading of digital assets such as Bitcoin, Ethereum, etc.
- Today, cryptocurrency tokens are available easily and traded globally across independent online crypto exchanges.
- Such crypto exchanges host digital wallets for traders to swap one cryptocurrency for another or fiat currencies across the world such as dollars, euros, etc.
- Futures and options trading is also now available on major cryptocurrencies. Decentralized exchanges are also available which operate without having any central authority.
Thus, to conclude, Financial Markets help in lowering the unemployment rate as it offers plenty of new job opportunities. It also provides a platform wherein the participants like investors, debtors irrespective of their size, are bound to receive fair and proper treatment. They also provide government organizations, companies, and individuals access to the capital.
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