Understanding Different Types of Financial Markets

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A financial market is a marketplace where the buyers and sellers engage in financial transactions involving securities like equities, bonds and commodities. It is the market forces, that is, the supply and demand that decides the pricing. The term financial market, in fact, may be used to refer to exchanges like the stock exchange, examples of which include the NSE (National Stock Exchange of India), BSE (Bombay Stock Exchange), NYSE (New York Stock Exchange) etc.

Financial Market:

A financial market is a marketplace where people meet each other with the intention of buying and selling goods or services. The prices of the exchange are, however, pre-set. The supply and demand forces of the market control the key to the pricing of these products.

Financial markets are the conduit for the transfer of money between lenders and borrowers. One of its stated functions is to enhance the capital. This is to say that the income of the individual who lends the money finds revenue in the form of interests. This not only brings profits to the lender but also increase the national income. It is through financial markets that an individual can liquidify his/her assets.

Another essential function of the financial market is its ability to increase the savings and investment. It builds a culture among people that promotes saving, which naturally results in more significant investments. As a result, the capital accrues. The national capital builds up and benefits from the saving spree of its citizens.

What are the different types of financial markets?

A financial market is the hub of investors. The financial markets are classified into different categories depending on the maturity of the financial assets and the trading structure of the securities. Listed below are the different types of financial markets.

Capital Market:

This financial market engages in the trading of financial securities such as equities and bonds. Companies raise capital by selling their securities, which consists of stocks and bonds. The sale and purchase of these items happen in the capital market. Companies in the public as well as the private sector domains indulge in the trade of financial securities.

The capital market is again composed of the stock market and bond market.

Stock Market:

This is the realm of publicly traded companies. A publicly traded company raises capital by issuing stocks. With the purchase of each stock, the buyer owns a small share of this company. In short, the company distributes its ownership through the trade of stocks. As the company records profits, so do the shareholders. It is, therefore, a win-win.

Bond Market:

Bond market, also known as debt market is the trading ground for bonds. Bonds are issued to the lenders/investors to raise money for an agreed period. After the specified time, the bond expires, and the creditor who in the case is the company building the capital pays back with interest. The investors can buy and sell bonds in the bond market.

Money Market:

A money market is a place where short-term buying, selling, borrowing and lending takes place. Commercial papers, certificates of deposit, bills of exchange are some of the financial instruments. High liquidity and short maturities mark these instruments. It matures within a year. The returns are low but the liquidity of the commodity is high, and hence, it is a safe market to place your bets.

Spot Market:

Also known as cash market, where the sale and delivery after the transaction occur with immediate effect. The dealings with cash are settled as they say ‘on the spot'. This feature contrasts the spot market to the other kinds of market discussed here that are examples of the futures market. In the spot market, the current market prices are paid for the goods/services. This market is far less popular compared to others because it requires higher skills and in-depth analysis. It is generally not a sought out choice for the people new to the practice of investments.

Futures Market:

It is the direct opposite of spot market. It involves futures contracts, an example being the derivatives market (explained below). In this market, the people traded futures contract. The term futures contract indicates that the delivery of the purchased products will take place sometime in the future.

Derivatives Market:

The derivatives market, as the name suggests, deals with the trading of financial instruments that are derived from the other assets. It is yet another example of a market with high levels of complexities, unsuitable for those inexperienced in trading. The financial instruments include futures contracts whose prices are fixed by the assets from which they are derived.

Over The Counter Market:

In over the counter market, trading happens directly between the two parties and not through the conduit of exchanges. In other words, the trading is not done on a platform like the stock exchange. It is also known as a dealer market as the trade occurs via a dealer network. It takes place electronically unlike the stock market and the likes.

Interbank Market:

Interbank market is the trading venue for banks and other financial institutions. The buyer and seller, both are banks. That is, one bank lends to another for a specified period. This period is not likely to go beyond a week or so.

Foreign Exchange:

Also known as forex, foreign exchange is a global market for trading currencies. This market sets the foreign exchange rate. Its vast trading volume makes it the largest market in the world. The market works around the clock except on weekends. This is also the most liquid market in the world.

Commodity Market:

There is also another type of marketplace, called the commodity market, that deals with the trade of primary products. This is either a physical or a virtual marketplace. The prime example of it is the century-old Chicago Board of Trade (CBOT). In this type of market, the commodities are classified into soft and hard commodities. Hard specialities include natural resources like gold and oil that are mined. Soft commodities are agricultural products like wheat, sugar, cone, coffee etc. The CBOT is involved in the trade of hard commodities like corn, wheat, soya bean etc. and hard commodities like gold and silver.

Apart from this, the capital markets are also divided into the primary and secondary market. In the primary market, the initial public offerings (IPO) are bought. The IPO refers to the newly issued securities by a company. Secondary markets deal with the trading of the securities that are already in the market. The primary difference between the two is that in the former, the transaction takes place between the issuers and investors while in the case of the latter, it happens between two investors.

Why is it important to understand the role of financial markets?

As they say, knowledge is power. To be more precise, understanding the different types of financial markets and their roles pay off, even if you don't run a business organisation.

By studying about this, a person interested in investing, get to know which market is more suited to his/her ideas and goals of investing. It is at the end of the day, all about calculating the risks and making the safest bet. In matters like these, it is imperative to make an informed choice. For a person who has the reins of business, understanding the concepts of the different types of the financial market is not just important but necessary. This way, s/he can decide which markets are to be used for their business. This shows that the knowledge of financial markets is vital to investors and borrowers alike.

The types and roles of financial markets are just the tips of the iceberg. To be someone at the helm of a business, it is necessary to know a lot more. It is essential for them to understand the nuances of the changes in the financial systems around the world. This necessitates a thorough education in finance management.

If you intend to be under the light in business world, read on to find out what course would be apt for you.

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Executive programme for Banking and Financial Sector

This is an advanced banking and financial management programme. This is a course specially prepared for existing managers and executives who feel they are on the back foot regarding the global scenario of finance and banking. To understand and comprehend the economic policies and the happenings around the world, one should have ample knowledge of the matters regarding finance. This course allows you to develop that insight. By elaborating on the various principles and theories one should know, the programme prepares them to follow the events around the world.

While it is true that the managers have their plates full with organising and conducting their business, it is also true that to adapt and change with the times; the managers have to be equipped to face the challenges they might not be necessarily familiar with. However, by taking up courses that will bring an improvement in your management style and knowledge, you can rise above these strong challenges.

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