When most people think of financial markets, they think of the stock market. They are unaware that there are different types of financial markets that achieve specific goals. To help raise liquidity, markets trade a variety of products. Each market relies on the other to create investor confidence.
What are Financial Markets?
Financial markets, from the name itself, are a form of the marketplace that offers a venue for the selling and purchasing of assets such as bonds, stocks, foreign exchange, and derivatives. Also, they are known by several names, like “Wall Street” and “ capital market,” but all of them still mean one and the same thing. Simply put, businesses and investors can go to financial markets to raise money to grow their business and to make more money, respectively.
To put it more clearly, let us imagine a bank where the individual maintains a savings account. The bank may use its money and other depositors’ money to lend to other individuals and organizations and charge interest.
The depositors themselves often gain and see their money increase through the interest paid to it. The bank, therefore, serves as a financial market that benefits both depositors and debtors.
Different Types of Financial Markets
Many people think about the stock market when speaking about capital markets. We don’t know there are other kinds that achieve different goals. Markets exchange a variety of products to help raise liquidity. Each market relies on each other to create confidence in investors. The interconnectivity of these markets means when one suffers, other markets will react accordingly. Following are the different types of financial markets:
1. Stock market
The stock market is one of the most popular types of financial markets, the stock market trades shares of ownership of public companies. Each share comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to purchase stocks. The real challenge is in selecting the right stocks that will earn money for the investor.
There are various indices that investors may use to track how the stock market is doing, such as the Dow Jones Industrial Average ( DJIA) and the S&P 500. When stocks are purchased at a lower price and are sold at a higher price, the investor earns from the sale.
2.Capital Market (Bonds)
A capital market is a type of financial market for the trading of stocks (shares) and bonds. This market is used for lending or borrowing money for the long term. Capital markets are further divided into primary and secondary markets. The organizations sell shares in the form of equity or preferred shares or fixed interest-bearing bonds in the primary market. If the shares are released, the investors subscribe to them at a lower price and later sell them to another investor at a higher price to gain profit in the secondary market.
Derivatives Market is a kind of financial market which deals with buying and selling Futures, Options, Forward contracts, and swaps. They can be dealt with either over the counter or in exchange-traded derivatives. Derivatives derive their fee from the underlying asset and are used to manipulate financial risk due to a change in price.
Commodity Market helps the buying and selling of commodities like gold, oil, wheat, rice, etc. There are around 50 major commodity markets all over the world. There is a specific market for such resources because their price is unpredictable.
5.Foreign Exchange Market (Forex Trading)
The Foreign Exchange Market is also an important type of financial market that enables the trading of currencies. These markets are operated thru financial institutions and decide foreign exchange prices for every currency.
Advantages of the Financial Markets
- It provides a platform for corporations to raise money for the long run and short term each.
- Companies will raise capital at a lower value as compared to taking a loan from commercial banks at a better interest rate. Also, business banks don’t lend a large number of loans.
- Companies have the flexibility to raise capital from the market pro re nata from time to time till it exhausts its authorized share capital.
- The intermediaries in financial markets like banks, financial institutions provide financial and strategic practice to firms and investors each. they supply data, guidance, and skilled services which will not be available otherwise.
- It provides a platform to trade and deal with multiple shares, securities, bonds, derivatives, etc. all the just the once.
- Stringent rules and rules within the financial market gain the confidence of each investor and corporations and facilitate boost the economy.
- Provide a platform for international, inter-currency money lending, and borrowing.
Disadvantages of the Financial Markets
- Too many formalities with the aid of regulatory bodies can make the whole system time-consuming.
- Sometimes, corporations can’t afford to enter the financial market due to stringent policies and regulations. They are unable to set-up resources that want continuous monitoring and compliance check procedure.
- The investors can lose their cash due to the non-availability of data or due to unawareness.
- The corporations can grow to be more profit-driven rather than investor driven company. It’s very important that the Board of Directors take selections taking into consideration all its stakeholders and avoid exploiting the use of investors’ cash for their own profit.