The financial Market allows the public to invest in companies that seek financial support. Now you might be wondering, do big companies like Apple or Google need any financial support from the people? In simple words, yes. Companies that are big in size issue shares and bonds to collect funds to run the business. And other people want to invest their money. Hence companies and the people who want to invest, meet in the financial market.
Types of Financial Market
In the economy, three major types of financial market exits. As we know by now, the financial market is a place where buyers and sellers meet to trade any financial assets. Now let’s have a look at the places where they meet.
Money Market
In the money market, the financial assets that are being traded have a payback date which is less than a year or a year. Bonds that have a maturity date of a year or less, are included in this type of market. This place allows the public to have a quick return on their investments. Interbank transactions are a prominent example of the money market. The transactions between banks are rapid. Banks might borrow money from another bank or do a trade. This type of transaction happens within a day. It is known as “call money”. It helps to create a strong connection among the banks and help them face financial crisis. The money market is one of the most liquid markets to date. Investors who require quick return sees this market as an opportunity to utilize their lazy money. Lending and borrowing short term loans are a huge part of the money market.
Capital Market
Even though the capital market is a part of the financial market, it has its own identity in the economic sector. The financial assets that have payback or maturity date over a year are known as the capital market. This market allows the public to invest for a longer period. Companies that need a bigger amount and the people who’re looking for a lengthy return, meet in this market. The capital market is crucial because it covers prominent aspects of the financial market.
Bond Market
Captial market can be divided into two markets. The first one is the bond market. Bonds that have a maturity date over a year and provides interest to the public are a part of the capital market. Bond Market helps the public who want a set amount of interest with no risk attached to it. This market helps the public who want to get an earning from their money and doesn’t want to think about it. Companies that need big funding and but doesn’t want to increase their shareowners, issue in the bonds market.
Share Market
The share market is one of the most important markets in the financial market. Company shares are a prominent part of this market. As shares allow the public to buy equity and have the right to collect debentures, it has a separate fan base among all the investment instruments. In this market, companies who want to increase their capital and do want to pay debentures for it, issue their shares. Stock exchange handles this market in a country.
Types of Capital Market
So far we have only seen the parts of the capital market. To have a better understanding of the financial market, knowing the types of capital markets is important. If we focus on the features, it can have two types of the market of its own. One is the primary capital market, which allows newly issued bonds and shares to be introduced and traded. The other type is known as the secondary market where old the shares and the bonds that were newly issued in the primary capital market can be traded again. This allows the public to invest with greater profit and companies to get more funding for their business. The primary capital market is more liquid compared to the secondary capital market, but not as liquid as the money market.
Currency Market
The currency market is one of the most interesting types of all in the financial market. A place where the currency is traded is simply known as the currency market. This market allows the change of currency in a legal way. The currency market is famous among the international business because, in that market, the currency has to be changed legally since buyers and sellers are paying their bills with their currency. What makes the currency market interesting, isn’t the rapid use of it, It’s the features it has which are divided into two separate types.
Foreign Exchange Market
There two main types of currency markets. One is the Spot currency market, where you exchange your foreign currency right away with your currency. Entrepreneurs and companies take place in this type of currency market for the most. There’s another type of currency market which is the future currency market. In this type of market, the public or business wants the banks to give them the exchanged currency after a certain amount of time. It helps the businesses to bypass the economic loss they might have if they exchange their currency at the moment. This market is also known as the foreign exchange market.
Derivatives Market
This is what makes the currency market more interesting. It legally allows the buyers or sellers to have the power to bypass the risk they have and if their assumption about the future is right, it helps them win a lot of money. But it is somewhat a gamble because if the economy goes down, the return goes down with it. This market is also known as the derivatives market. The market allows the seller to pay in future contracts. Financial instruments like bonds, commodities, stocks, or mortgages are traded as futures contracts.
Conclusion
A financial market is a great place for financial assets to be traded. Stock exchange and investment banks play a huge role in this place by having the services they provide. The financial market has a broad chapter than these simple types and has a meaningful impact on the economy of a country that makes it so special.
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Ratul is one of the contributors to The strategy watch. As a business insights analyst, most of his writings concern business insights and business strategies for a better understanding of the business world.