A financial market is an intermediary between the buyer and seller for trading assets like stocks, bonds, derivatives, commodities, and foreign exchange at a determined price.
The financial market plays an important role in the economy by allocating limited resources. It helps in the mobilization of savings and determines the price of the securities.
It helps businesses to grow and raise money by creating liquidity. Depending on the level of activity some financial markets are small, and some are big. There are different types of financial markets which are described below:
1) Stock Market
A stock market is a place where the trading of a series of exchanges takes place. Stocks are shares that are owned by successful public corporations and investors perform well in the market by making money with the stocks.
The stock market is regulated by the regulatory authority. It provides a platform where a number of buyers and sellers meet and interact.
It brings thousands of market participants for making transparent transactions. It is convenient to buy stocks in the stock market as it ensures fair pricing.
2) The Bond Market
A bond market is a place for obtaining large amounts of loans. Investors buy bonds from an organization and the organization returns the amount of the bonds plus interest within an agreed period.
There are various types of bonds like corporate bonds, treasury bonds, emerging market bonds, mortgage-backed bonds, and municipal bonds.
In order to raise capital for maintaining operations and growth companies issue bonds. In the bond market, three parties are involved in the transactions and they are issuers, underwriters, and purchasers.
3) Commodities Market
A commodity market is a place for trading raw or primary products such as oil, meat, corn, gold, etc. It is a specific market for unpredictable prices of products.
There are two types of commodities_ hard and soft commodities. Hard commodities are naturally extracted resources like gold, oil, rubber, etc. Soft commodities are agricultural products like sugar, corn, coffee, etc.
Commodities can be invested in a number of ways and the most effective way is buying into a future contract.
4) Derivatives Market
This is the market for providing risk transfer of securities, commodities, and currencies. Basically, a derivative is a contract based on an underlying asset between two or more parties.
A derivative is a financial instrument that derives its price from fluctuations in the underlying assets. The most commonly purchased assets for derivatives are stocks, bonds, interest rates, currencies, and market indexes.
Derivatives are used to hedge an underlying asset and their value comes from the fluctuations of that asset’s value. Derivatives are used for internationally traded goods to ensure a balanced exchange rate.
Depending upon a variety of transactions derivatives have many uses. Derivatives market offer transfer of risks by enabling the creation of strategies. There are different types of derivatives used for risk management and they are futures, forwards, swaps and options.
The derivatives market can be a useful place for businesses and investors. It provides a way of hedging against unfavorable movements of rates. Derivatives are based on the price of another asset that’s why it may get difficult to determine the value.
5) Forex Market
The forex market is the most liquid global marketplace for exchanging national currencies because of the worldwide reach of trade, commerce, and finance. Currencies are traded against each other here.
In order to conduct foreign trade currencies are needed to be exchanged in the forex market. With changing price quotes, the forex market can be extremely active any time of the day.
In the forex market currency risk is hedged by fixing a rate at which transaction will be completed.
Changes in the supply and demand for currencies creates daily volatility in the forex market.
The liquidity of the forex market makes it easy to enter and exit a position in any of the major currencies. For trading in the forex market, it is required that the trader understand the economic fundamentals and indicators.
6) Money Market
The money market is the place where the purchase and sale of large volumes of short-term debt products take place. The main transactions of the money market are wholesale transactions between financial institutions and companies.
It plays an important role in the global financial system by enabling economic units to manage their liquidity position. Money market funds facilitate security with the aim of never losing money and keeping net asset value.
There are various types of money market instruments like money market funds, money market accounts, commercial paper, certificate of deposit, banker’s acceptance, Eurodollars, repos, etc.