January 21, 2013

Types And Functions Of Financial Markets

A financial market is a platform where people trade in all kinds of equities. They involve shares, bonds and currencies. There are usually many different external forces that determine the pricing of these equities in the respective market. There are different kinds of markets including:

• Capital markets
• Money markets
• Third and fourth markets
• Over the counter markets
• Forex market
• Derivative markets
• Cash or spot market

This article will look into some of the common markets from the list above.

Capital markets

This is the most common type of financial market present today. In this type of market, the public and private sector trades in various securities. Most companies also sell part of their shares in an attempt to raise capital. There are two types of capital markets. These are the stock market and the bond market. In the stock market, investors buy and sell shares of the companies listed at the bourse. It provides funds for the company while at the same time it gives the investor a chance to earn money by either, buying low and selling high, or earning through dividends.

Bond markets on the other hand are a bit different as they are loans that people can give to companies and even the government. This loan is then paid back with interest. With bonds, it does not matter whether the company will gain or lose money. They will have to pay back the bond either way.

Money markets

The money market is also getting famous very fast. It is a platform for lending and borrowing money then paying it back within a very short period of time. The money market involves things like the treasury bills, banker’s acceptance and even the municipal notes among other things.

Forex Markets

The Forex market on the other hand is a platform where currencies are traded. Different countries have different currencies and they all weigh different as compared to other currencies. This is actually the most liquid and largest financial market in the entire world. It is very busy and many people have made a lot of money in it. One benefit of this market is that it is open 24 hours a day 7 days a week. This is because different countries have different time zones, but, they all want to trade in the market.

Derivative markets

Derivative markets are known as one of the most complex markets in the list above. This is a contract that is drafted for the purpose of trading. People buy and sell these contracts depending on the price of the underlying share in the capital market. Derivative markets include the trading of options, futures and forwards. It is one market that is only dominated by the experts of trading.

Third and fourth markets

This market is not very common due to the fact that it does not involve individual investors. It is for large institutions and trades are between the broker and the dealer. This is because it deals with huge volumes of shares that individuals could not afford.

Cheryl Mourey is an investment adviser. She has been in the finance industry for more than a decade now. She got his inspiration from Kelly Ruggles.

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