Financial Markets
Financial markets consist of the stock market, bond market, over the counter market, money markets, derivative markets, forex markets, commodities markets and cryptocurrency markets. In allocating resources and generating liquidity for businesses and investors, financial markets play a crucial role in facilitating the smooth running of market economies.
The buying and selling of different kinds of financial instruments, such as shares, bonds, currencies, derivatives, etc., creates the financial markets. To ensure that prices are efficient and appropriate, financial markets rely upon informational transparency. Due to a variety of macroeconomic factors, such as taxation, the market prices of securities may not reflect their true value.
The stock market is undoubtedly the most widely known financial market. Companies raise funds through initial public offerings (IPOs) in the equities markets. Shares are then traded between different buyers and sellers in what is referred to as a secondary market.
Investors and traders, both retail and institutional and market makers, who are specialists that maintain liquidity and provide two-sided markets, are typical stakeholders in the stock market. Brokers function as impartial middlemen who help buyers and sellers complete transactions and do not usually have any actual positions in stocks.
A bond is an asset where an investor lends money for a predetermined amount of time at a fixed interest rate. A bond can be viewed as an agreement outlining the terms of the loan and the payments between the lender and borrower. Corporations, as well as cities, states and other sovereign entities, issue bonds to fund operations and projects. Securities like notes and bills issued by the US Treasury, for instance, are sold on the bond market. The debt, credit or fixed-income markets are other names for the bond market.
The over the counter market (OTC) is a decentralized financial market. Investors acquire securities without the use of a broker. Trading typically takes place online rather than at physical locations, as opposed to the majority of stock trading, which is conducted through exchanges. OTC markets typically handle trades in equities, such as smaller or riskier companies that do not meet the listing standards of exchanges. However, a significant portion of the financial markets is the OTC market. In general, the OTC market transactions are significantly less regulated, less liquid and more opaque.
The money markets typically deal in highly liquid, short-term securities with maturities of less than a year. They are distinguished by a high level of safety and a relatively low rate of return. The money markets feature substantial volume trading between institutions and traders at the wholesale level. They include money market accounts opened by bank customers and money market mutual funds purchased by retail investors. Purchases of short-term certificates of deposit (CDs), municipal securities, or U.S. Treasury bills are just a few examples of how individuals might invest in the money markets.
A derivative is a contract involving two or more parties where the value is predicated on an underlying financial asset such as a security or collection of assets as an index. Secondary securities known as derivatives are those whose value is purely based on the value of the primary security to which they are tied. A derivative is worthless in and of itself. Instead of transacting in equities directly, a derivatives market can transact in futures and options contracts as well as other sophisticated financial products, whose value is derived from underlying securities, such as bonds, commodities, currencies, interest rates, market indices and stocks.
The market where participants can purchase, sell, hedge and speculate on the exchange rates between currency pairings is known as the forex (FX) or foreign exchange market. Since cash is the most liquid asset, the FX market is the most liquid market. Daily transactions on the currency market exceed $6.6 trillion, which is more than on the futures and stock markets combined.
The markets, where producers and consumers exchange physical commodities for cash, are referred to as commodity markets.
Cryptocurrencies, or decentralized digital assets built on blockchain technology, such as Bitcoin and Ethereum, have been introduced and have grown significantly over the past few years. Today, a variety of independent online cryptocurrency exchanges offer hundreds of cryptocurrency tokens for trading. These exchanges provide traders with access to digital wallets where they can exchange one cryptocurrency for another or for conventional currencies.
