Understanding Financial Markets

What are Financial Markets?

Financial markets is a marketplace where buying and selling of securities like stocks, bonds, derivatives, commodities, currencies, etc. occur. These markets may include securities which are listed on an regulated exchanges or are traded Over-The-Counter(OTC). Financial markets basically provide a way for those who have excess money to invest and those who are in need to money to borrow.

Financial markets play an important role in creating liquidity for capitalist economies. Financial markets are transparent as they ensure that the prices set are efficient and appropriate.

Types of Financial Markets

Stock Markets

Stock markets are a place where trading of equities occur. Equity is the value of shares issued by the company. In a stock market, securities are traded via Primary Market and Secondary Market. In Primary Market, securities are issued to investors directly by the issuer. Companies raise capital by an Initial Public Offering(IPO). Primary markets are also known as New Issue Markets.

Secondary markets are where investors buy and sell securities they already own. The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments are traded.

The most popular stock exchanges in India are National Stock Exchange(NSE) and Bombay Stock Exchange(BSE).

Bond Markets

The Bond Market is a marketplace where participants can issue new debt, known as primary market and buy and sell debt securities, known as secondary market. A bond is an financial instrument in which an investor loans money for a specific period of time at a pre-determined interest rate. Bonds are issues by  municipalities, states, and sovereign governments to finance projects and operations. Debt securities usually include bonds, but it may include notes, bills, and so for public and private expenditures.

Money Markets

Money Markets involves trading of securities that are highly liquid and are issued for short time period with low interest rates. Money market consists of various financial institutions and dealers, who seek to borrow or loan securities. Examples of securities traded in money markets are treasury bills, commercial papers and certificate of deposits. Money markets are considered a safe place to invest as they have high liquidity.

Money markets are Over-The-Counter(OTC) markets which means that they are not regulated and not structured. Money markets give lesser returns however they offer a variety of products.

Derivatives Market

Derivatives markets are financial markets for derivatives like futures, options, forwards, etc. Derivatives are financial instruments whose value is determined by the value of the financial instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks. The four major types of derivative contracts are options, forwards, futures and swaps. Futures and Options are listed and traded on stock exchanges while forwards and swaps are not.

Forex Market

The forex (foreign exchange) market is a market where people can buy, trade, hedge, and speculate on currency pairs’ exchange rates. Because cash is the most liquid of assets, the Forex market is the most liquid in the world. The currency market conducts more than $5 trillion in daily transactions, which is higher than the combined volume of the futures and stock markets. The forex market, like the OTC markets, is decentralized and is made up of a global network of computers and brokers from all over the world. Banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors make up the forex market.

Commodities Market

Commodities markets are gathering places for producers and consumers to trade physical commodities like maize, livestock, and soybeans, as well as energy goods (oil, gas, and carbon credits), precious metals (gold, silver, and platinum), and “soft” commodities (such as cotton, coffee, and sugar). Spot commodities markets are those where tangible things are exchanged for money.

Cryptocurrency Markets

Cryptocurrencies like Bitcoin and Ethereum, which are decentralised digital assets based on blockchain technology, have been introduced and have grown in popularity over the last few years. Hundreds of cryptocurrency tokens are now accessible and traded on a patchwork of independent online crypto exchanges throughout the world. These exchanges provide traders with digital wallets via which they can exchange one cryptocurrency for another or fiat currencies like dollars or euros.