What is a Financial Market?
A financial market is a market in which people trade in financial stocks and derivatives at low transaction costs. Securities include stocks and bonds, commodities, and precious metals known as commodities in the financial markets.
The term “market” is sometimes used to refer to exchanges, organizations that facilitate trading in financial stocks, such as an exchange or a commodity exchange. This can be a physical location (like the New York Stock Exchange (NYSE), London Stock Exchange (LSE), JSE Limited (JSE), Bombay Stock Exchange (BSE), or an electronic system like NASDAQ.
Much of the stock trading takes place on a stock exchange; however, corporate actions (merger, spin-off) take place outside of an exchange, while any two companies or persons may for any reason agree to sell the shares from one to the other without using an exchange.
Trading in currencies and bonds is largely bilateral, although some bonds are traded on an exchange and people build electronic systems on exchanges to do this. There are also global initiatives such as the United Nations Sustainable Development Goal 10, which aims to improve the regulation and oversight of global financial markets.
In a market, buyers and sellers come to a common platform on which the buyer buys goods and services from the seller for money.
Types of Financial Market
1. Stock Markets
Perhaps the most ubiquitous of financial markets are stock markets. These are venues where companies list their shares and are bought and sold by traders and investors. Stock markets, or equities markets, are used by companies to raise capital via an initial public offering (IPO), with shares subsequently traded among various buyers and sellers in what is known as a secondary market.
Stocks may be traded on listed exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq, or else over-the-counter (OTC). Most trading in stocks is done via regulated exchanges, and these play an important role in the economy as both a gauge of the overall health in the economy as well as providing capital gains and dividend income to investors, including those with retirement accounts such as IRAs and 401(k) plans.
Typical participants in a stock market include (both retail and institutional) investors and traders, as well as 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 who do not take an actual position in a stock.
The stock market is a type of capital market that deals with the issue and trading of stocks and shares at a certain price.
2. Bond Markets
A bond market is a form of capital market in which buyers and sellers are involved in trading bonds. A bond is a security that an investor borrows money on for a period of time at a predetermined interest rate.
You can think of a bond as an agreement between the lender and the borrower that contains the details of the loan and its payments. Bonds are issued by corporations as well as communities, states, and governments to fund projects and operations.
The bond market sells securities such as Treasury notes and bills of exchange. The bond market is also called the debt, credit, or fixed-income market.
3. Commodity Market
A market that facilitates the sale and purchase of raw materials is called a commodity market. The commodities market, like any other market, includes a buyer and a seller. In such a market, the buyer buys raw products such as rice, wheat, grain, cattle, etc. from the seller at a mutually agreed price.
Commodity markets are places where producers and consumers meet to purchase physical commodities such as agricultural products (e.g. corn, cattle, soybeans), energy products (oil, gas, emission certificates), precious metals (gold, silver, platinum), or “soft” Raw materials (such as cotton, coffee, and sugar). These are known as spot commodity markets, where physical goods are exchanged for money.
However, the majority of trading in these commodities takes place in derivatives markets that use spot commodities as underlying. Forwards, futures, and options on commodities are traded both OTC and on public exchanges around the world such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
4. Money Market
As the name suggests, the money market is people who are engaged in lending and borrowing for a short period of time. The money markets typically trade in products with highly liquid short-term maturities (less than a year) and are characterized by a high level of security and relatively low-interest rates.
At the wholesale level, the money markets involve large-volume transactions between institutions and traders. At the retail level, they include money market funds bought by private investors and money market accounts opened by bank customers.
Individuals can also invest in the money markets by buying short-term certificates of deposit (CDs), municipal bonds, or US Treasury bills, among other things.
5. Derivatives Market
The market that deals with trading contracts derived from another asset are known as the derivatives market.
A derivative is a contract between two or more parties whose value is based on an agreed underlying financial asset (such as security) or a range of assets (such as an index). Derivatives are secondary securities, the value of which is determined solely by the value of the primary security to which they are linked. In and of itself, a derivative is worthless.
Instead of trading stocks directly, a derivatives market trades futures and options contracts and other advanced financial products that derive their value from underlying instruments such as bonds, commodities, currencies, interest rates, market indices, and stocks.
6. Future Market
The Future market is a type of financial market that deals with trading in financial instruments at a specific rate at which delivery will be made in the future.
Futures markets are where futures contracts are listed and traded. Unlike forwards, which trade OTC, futures markets use standardized contract specifications, are well regulated, and use clearinghouses to complete and confirm trades.
Options markets such as the Chicago Board Options Exchange (CBOE) also list and regulate options contracts. Both futures and options exchanges can hold contracts on various asset classes such as stocks, fixed income securities, commodities, etc.
7. Insurance Market
The insurance market deals with trading in insurance products. Insurance companies pay a certain amount to the immediate family members of the policyholder in the event of the premature death of the policyholder.
8. Forex Market or foreign exchange market
The foreign exchange market is the market where participants can buy, sell, hedge, and speculate the exchange rates between currency pairs. The foreign exchange market is the most liquid market in the world as cash is the most liquid asset.
The foreign exchange market processes more than $ 5 trillion in transactions every day, more than the futures and stock markets combined. As with the OTC markets, the forex market is decentralized and made up of a global network of computers and brokers from around the world.
The forex market consists of banks, trading companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.
10. Mortgage Market
One type of market in which various financial institutions make loans to individuals for various residential and commercial properties for a specified duration is known as the mortgage market. Payment is made to the person concerned upon submission of certain required documents and fulfillment of certain basic criteria.