Welcome to Yognut, in this blog we are going to talk about 5 different types of Financial Markets. In today’s world, we should have knowledge about the different types of financial markets so, we can invest or make some money for our development and it’s also one way to keep money safe and continuously growing.
There are many types of markets that exist, but after doing so much research we are here bringing some of the best financial markets to keep your money safer and increase its value. You must have some prior knowledge about how markets work and on which ethics it run so that you can invest your money wisely at very low or minimum risk.
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What is Financial Markets?
The financial market is defined as a marketplace, where people can trade and create their assets at a low transaction cost financially like: paper bonds, stocks, shares, and currencies. This market plays a very crucial role in growing the economy of a country. The financial market also plays a major role in raising funds from investors to savers.
Basically, Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. Often, they are called by different names, including “Wall Street” and “capital market,” but all of them still mean one and the same thing. There are so many financial markets, every country is home to at least one, though they vary in size.
Here are 5 different types of financial markets:-
1. Stock market
A Stock Market is a cluster and loose network of economic transactions where buyers and sellers buy and sell stocks also called share of stock, bond and other securities, which represent ownership claim on business. Here each share comes with price and investors make huge money easily if they perform well according to trade. It does not matter only to buy stocks but how to buy the right stock that will make money this decision helps investors.
The word Trade commonly used in the stock market defines the transfer of a stock or security from a seller to a buyer and this requires both parties to agree on a price. There are various indices that investors can use to monitor how the stock market is doing so that they can buy at a low rate and earn high profit by selling it.
Stock is categorized in various ways and one of them is country domicile. By country, the largest market was the United States(about 34%), followed by Japan(6%) and United Kingdom(about6%).
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2. Bond Market
Bond Market (also known as debt or credit market) is a type of financial market where it offers private and government companies to secure money to finance a project or investment. Unlike other market bond market is fixed for a certain period of time. Its primary goal is to provide long-term funding for public and private expenditure.
Classification of the bond market:-
- Government and agency
- Mortgage-backed, asset-backed, and collateralized debt obligations
As of 2017, the size of worldwide bond market (total debt outstanding) is estimated at $ 100.13 trillion .
3. Commodities Market
The Commodities Market is a type of financial market where traders and investors buy or sell natural resources and commodities like oil, gold, corn, and meat. Here one benefit that investors access about 50 major commodity markets worldwide with purely financial transactions.
Here some of the terms used in commodities markets are:-
- Cash commodities or “actuals” refer to the physical goods-e.g., wheat, corn, soybeans, crude oil, gold, silver-that someone is buying/selling/trading as distinguished from derivatives.
- In a Call, option counterparties have a financial contract where buyers purchase the right but not the obligation to buy an agreed quantity of a particular quantity.
- The alternative trading system (ATS) of electronic trading featured computers buying and selling where human intermediation or interference is not necessary it can be done without it.
- The exchange-traded commodity is a term used for commodity exchange-trades or commodity-traded notes.
- A commodity contract for difference(CFD) is a derivative instrument that mirrors the price movements of the commodity underlying the contract.
4. Derivative Markets
Derivative Market is a type of such financial market that involves derivatives or contracts whose value is based on the market value of the asset being traded. Types of the market in finance The legal nature of these products is very different and the way of trade can be changing.
Participants in the derivatives market:-
- Margin traders
The derivatives market in Europe has a notional amount of €660 trillion.
5. Foreign Exchange Markets
Foreign Exchange Market is a type of financial market which is made up of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers, and investors. It is a global online network, here buyers and sellers are involved in the purchase and buying of foreign currencies.
This market determines foreign exchange rates for every currency. The foreign exchange market works through financial institutions and operates on several levels. The forex market is the backbone of international trade and global investing. It is critical to support imports and exports, which are necessary to gain access to resources and to create additional demand for goods and services.
Three major functions of foreign markets:-
- Transfer function
- Heading function
- Credit function
Function of Financial markets
- Save Money and Time:- This market helps both sellers and buyers to find each -other without a waste of time and money. Due to the handle of a huge number and amount of transactions this market makes transaction costs lower.
- Mobilization of Economy:- To make economy successful their’s need money to move in the market not sit idle. This helps those who need money for the business and slowly make money bigger.
- Price Determination:- Investors are aiming to make profits from their assets. It’s determination upon the demand and supply chain of an asset in the market. Investors and industries interaction forces to determine the price.
- Makes financial assets liquid:- Buyers and sellers assets that they trade in the financial markets have high liquidity. This gives access to buy and sell those assets and convert them in cash anytime. This liquidity is the reason behind investors to participate in trade.
Benefits of the above types of market in finance
- Raising the Capitals:- Financial market plays an important role in raising the capital for companies. One side creates a chance for companies to raise their funds and another side gives investors an opportunity to invest in good companies.
- Lenders:- It attracts lenders who give money to somebody else, in condition with returning the money with interest.
- Borrowers:- Here borrowers also get their chance to get the loan at a low amount of interest. Both private and government companies and even banks are offering loans at short term and long term cash flow.
- Cross border activity:- This market help in cross border activity such that people from different countries come here to trade.
I hope you like the different types of Financial Markets. For the last few years, the role of the financial market has taken a drastic change, due to a number of factors which are the low cost of transactions, high liquidity, investors protection, transparency in pricing information, adequate legal procedures for settling disputes, etc.