Introduction
Financial markets broadly refer to any marketplace where the trading of securities occurs, such as bonds, stocks, foreign exchange, and derivatives. These markets are often known by different names, such as ‘Dalal Street’ (Bombay Stock Exchange) and the ‘Capital Market’. In the United States, people commonly refer to it as ‘Wall Street’ (New York Stock Exchange). Simply put, businesspersons and investors go to financial markets to raise capital for business growth and to earn returns by buying shares or bonds of various companies.
To explain this clearly, let’s assume you have started a business and want to raise funds to expand it. You would need to access a platform where you can raise money by selling your company’s shares or bonds in exchange for investment from investors. It is important to note that other types of assets are also traded on such platforms, including commodities, currencies, and derivatives. The stock market is just one type of financial market.
Similarly, if you have a sufficient amount of money and want to invest or trade, you can buy different types of assets such as bonds, equities (stocks), commodities, currencies, and derivatives.
Types of Financial Markets
There are mainly two types of financial markets:
- Capital Markets
- Money Market
1. Stock Market
In the stock market, companies offer their shares (a part of ownership in a company) to the public. People who buy a company’s shares are called investors. The stock market provides several advantages compared to the OTC (Over-the-counter) market, such as better liquidity, improved transparency, and proper price discovery of stocks or equities. In the case of OTC, both parties trade directly without the supervision of an exchange.
Let’s have a look at some popular stock markets:
Source: https://finshots.in/infographic/indias-stock-market-is-now-the-7th-largest-globally/
2. Bond Market
In the bond market, governments and companies raise funds from investors to finance various projects or investments. Simply put, it is a place where investors buy bonds, and the issuer returns the principal amount within an agreed time period along with interest. This is why bonds are also known as fixed income securities.
3. Commodity Market
The commodities market is a place where traders and investors buy and sell natural resources such as beef, corn, gold, and oil. Commodities are generally classified into two types: hard commodities and soft commodities. Hard commodities are natural resources that must be mined or extracted, such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock, such as corn, wheat, coffee, sugar, soybeans, and pork.
There is also a futures commodity market, where the price of items to be delivered at a specified future date is predetermined and agreed upon today.
4. Forex Market (Currency Market)
In the forex (foreign exchange) market, participants buy, sell, exchange, and speculate on currencies; hence, it is also known as the currency market. The forex market is the most liquid market in the world. It handles more than $5 trillion in daily transactions, which exceeds the combined volume of futures and equity markets. It is a global, decentralized, over-the-counter market. Participants include commercial companies, central banks, investment management firms, hedge funds, forex brokers, and retail investors.
5. Derivative Market (Derivatives)
A derivative is a contract between two or more parties whose value is derived from an underlying asset. There are mainly four types of derivative contracts: futures, forwards, swaps, and options. However, swaps are complex instruments and are not traded in the Indian stock market.
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