Types of Financial Markets

Financial markets refer to those markets where financial transactions of various types take place between two parties that is buyers and sellers. Financial Markets vary in size, range, geographic scale, location, and in structure and that is the reason why it is important to know various types of financial markets. Given below are the types of financial markets which are there –

  1. Capital or Stock Market – In these markets investors buy and sell shares or securities of public and private sector companies. Stock market are of two types that is primary market where the companies issue shares to general public through initial public offering and secondary markets where existing securities are bought and sold by investors depending on news and fundamentals of the companies which are listed. Capital markets are very liquid and complex in comparison to other financial markets.
  2. Commodities Market – Commodities markets are those where various commodities like wheat, rice, pulses, gold, silver, crude etc.., are bought and sold by investors, speculators and arbitrageurs. Commodities are of 2 type’s one is soft commodities; they are those commodities which are grown. Cotton, rice, wheat, oats, rubber are some of the examples of soft commodities, second type of commodity is hard commodities; they are those which are mined from the ground. Copper, aluminum, gold, silver, crude are some of the examples of hard commodities.
  3. Currency Market – In these markets as the name suggests one can buy and sell currencies of the countries. These markets are 24 hour market and majority of transactions in these markets are done by banks and financial institutions like hedge fund, mutual funds, venture capitalist and so on. The main purpose of the foreign exchange or currency market is to help international trade and investment and foster global growth.
  4. Money Market – Money market refers to those markets where financial instruments which are of short term maturities are traded. These markets help both companies as well as government to tide over short term liquidity problem, if one has excess liquidity in the form of cash then one can buy in money market and in times of liquidity crunch one can sell short term securities which are lying idle with the company or government in money markets. Treasury bills, commercial paper, bankers’ acceptances, deposits, certificates of deposit, bills of exchange are some of the instruments which are traded in money market.
  5. Derivatives Market – Derivatives are those financial instruments which derive their value from the value of other assets and hence their value depends on the value of underlying asset. Derivatives are perhaps the most complex and innovative products and that is the reason why there has been tremendous surge of interest in derivatives and daily volume of transactions which happen in derivatives markets has crossed trillion of dollars . Forwards, futures, options, swaps are some of the examples of derivatives instruments which are used in derivatives market.

As one can see from the above that various financial markets performs various functions and hence all of them are important for the smooth functioning of the economy and country as a whole.

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