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Types of Financial Markets
The financial market can't be summed up in a small definition since it is a broad area that includes any market where we have a buyer and a seller who exchange, i.e. trade assets, stocks, derivatives, and currencies. Financial markets have their own rules regarding transparent pricing, costs and fees, and general regulations that apply to all of the above.
Financial markets spread throughout the world since every corner of the planet has its own market and its active participants. The Forex market is definitely the most active one and the New York Stock Exchange with turnovers of trillions of dollar daily. The financial markets offer a series of tradable assets, and they have become available to individuals (like Forex), even though they used to be closed to the wider public until it was taken online in the 21st century. What kinds of markets exist can be found below.
The Stock Market
The stock market represents trading of shares of public companies, where investors buy these shares and gain ownership over the bought stock. They can profit from the company’s success if the company is performing well, and the company is in return getting the needed capital to improve further. The stock market can be divided into primary and secondary markets. The primary market refers to new securities on the exchange, whereby the issuer company earns the proceeds from sales, which it invests further in the growth of the company.
Secondary market includes an inner circle of trades between investors. One investor buys securities from another investor directly and skips to buy it from companies who sell the securities.
The Capital Market
The capital market refers to trading financial securities. It is open to individuals as well as to companies. Private companies, different organizations also participate by selling securities if they need money.
The Bond Market
Bonds represent a special category where the investor in bonds loans his investment to a corporate or governmental institution for one of their projects. Bonds are defined by the expiry of the loan and a fixed interest rate. They are very common means for funding projects, and their biggest clients are municipalities, governments, international governments, who need the loan for their activities. The bond market is associated with debt and loan. They can be split into governmental bonds, corporate bonds, municipal bonds, and Treasuries (chiefly in the USA).
The Spot Market
The spot market is a high-risk market whereby you can earn big but also lose big. Here, cash is exchanged or traded for goods right on the spot making it one of the quickest markets. The sale contracts in this market are in force as soon as the deal goes over the table. Prices that apply are current market prices, and they are paid in cash. This market should not be entered by beginner traders since it requires high trading skills, knowledge, inside information about the goods and prices, and macroeconomic analyses. That is why the market is suitable for high-profile corporate companies and hedge funds, and similarly experienced entities.
The Forex Market
The Foreign Exchange Market or simply Forex is the global market where currencies are traded. It is also called the most liquid market since its turnover is mind blowing with trillions of dollars. The Forex market is suitable for everyone, from individual to corporates, to banks. All currencies can be found in the market, and most financial traders are exactly in this market. The market is open day and night, except for weekends, but even then you can access the market if you trade an Asian session.
The Forex market changed from bottom to top with the turn of the century, when the Internet revolution changed the market forever by enabling access to everyone who is interested and who has an Internet connection. In the past, it was reserved for banks, big financiers, investment companies, etc., and now suddenly, if you have some money, you can join the market easily.
The Interbank Currency Market
This market is more limited than Forex since it is reserved for trading currencies among banks and other financial entities who have the assets and the means to play the Forex game on a larger level. Small traders and retailers are excluded from this market since it is exclusively inter-trading between financial institutions.
The Derivatives Market
This market gets its name from its value which is derived from the underlying asset. The market is somewhat more complex than the others since many factors play a role. First of all, it represents a contract, whereby the price is defined by the core asset’s market price. This is a market for experienced participants, and it requires profound knowledge on the movements of prices. It is appropriate for risk management as well. This group includes options trading, futures, and CFDs.
The OCD or dealers market include stocks that are traded literally over the counter and not for example on the regular stock exchange markets like the NYSE (New York Stock Exchange), but rather on the bulletin board specifically designed for OTC deals or daily publications with defined ask and bid prices known as the pink sheets. This market does not belong to exchange, but it serves for providing pricing information. Regulation of these markets is looser than on a regular stock exchange, where traders do not have to meet high requirements to enter trades. The traded securities are lower in price, but yet can be very speculative and risky.
The Money Market
The money market is yet another market type including trading in highly liquid financial instruments which have short maturity dates. It works on the borrow-and-lend policy for a short period, where participants can borrow some cash for a few days or months as long as the period does not exceed a year. What can be traded in this market is federal funds, municipal notes, Treasury bills (the USA only), etc.
The financial market encompasses many categories as portrayed in this review, and all traders fit into one category at least. That is the charm of the financial market; everyone can find their place here, no matter if they make millions or have modest incomes, whether they come from Africa or America, and whether they invest as a company or an individual.