Financial Market
Overview
The Financial Market is a marketplace where buyers and sellers trade assets such as equities, bonds, currencies, derivatives, and commodities. These markets are defined by the transparent pricing, strict regulations, costs and fees, and market forces determining the prices of securities.
Types of Financial Markets
Financial markets can be categorized into different types based on several factors such as the type of security traded, the term of the trade, the type of issuance, and the type of trading platform.
Capital Market
Capital markets are venues where savings and investments are channeled between suppliers who have capital and those who are in need of capital. The entities involved in the capital market range from private individuals to institutional investors, and businesses.
Money Market
The Money Market is a segment of the financial market in which financial instruments with high liquidity and short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.
Spot Market
In a Spot Market, financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery. Delivery is the exchange of cash for the financial instrument.
Derivatives Market
The Derivatives Market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
Forex Market
The Forex Market or foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency.
Functions of Financial Markets
Financial markets play a crucial role in the overall economy of a nation. Some of the primary functions of financial markets include:
Price Determination
In financial markets, the price of securities is determined by the forces of supply and demand. The buyers and sellers interact in the market to arrive at a price they both agree upon.
Funds Mobilization
Financial markets facilitate the transfer of funds from investors to companies. This helps in promoting both savings and investments.
Liquidity
Financial markets provide a platform for buyers and sellers to interact and trade securities. This provides liquidity to the securities and ensures that investors can easily convert their securities into cash whenever required.
Risk Sharing
Financial markets allow for the transfer of risk from those who undertake investments to those who provide funds for those investments. Derivative markets are especially significant in this context as they provide avenues for risk sharing or hedging.
Structure of Financial Markets
Financial markets structure can be divided into several sub-components such as primary market, secondary market, and OTC market.
Primary Market
The Primary Market is where new securities are issued for the first time for the purpose of raising capital. The securities are sold directly by the issuer to the investors.
Secondary Market
The Secondary Market is the market where securities are traded after they have been initially offered in the primary market. Most trading occurs in this market.
Over-The-Counter Market
The Over-The-Counter Market (OTC) is a decentralized market where trading of securities is done directly between two parties without the supervision of an exchange.
Regulation of Financial Markets
Financial markets are typically regulated by a government-appointed regulator, which enforces rules and regulations designed to protect investors and maintain the integrity of the markets. In the United States, the primary regulators are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).