6 main types of financial markets

The financial market is a system of economic relations in which individuals and legal entities, as well as the state, can exchange financial assets with each other, such as securities, foreign currency, derivative financial instruments, etc.

There are different types of financial markets, and their characteristics depend on the properties of the financial assets being traded. 

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In this article, we will look at the main types of financial markets.

Capital market

Financial assets with a circulation period of more than a year are traded on the capital market. The capital market can be divided into a stock market and a debt market (debt market).

  1. The stock market is a type of capital market that buys and sells securities (mainly stocks and bonds). In turn, the stock market is classified according to the nature of the movement of securities:
    • Primary market – in which the organization issues securities for the first time, the issue can be public (IPO) or closed.
    • Secondary market – in the secondary market, transactions are carried out with securities already issued earlier.
  2. The debt market (debt market) is a market in which debt instruments (usually loans) are traded with a maturity of more than a year. Due to the high transaction amounts, the debt market is more accessible to institutional investors.

Some financial markets are small with little activity, while others, such as the New York Stock Exchange (NYSE), trade trillions of dollars in securities every day.

There are various indices that investors can use to track the health of the stock market, such as the Dow Jones Industrial Average (DJIA) and the S&P 500.

Money market

Highly liquid financial assets with maturities of up to one year circulate on the money market. The main instruments in the money market are short-term securities, currencies and interbank loans.

The money market allows borrowing funds for a very short period of time, for example: an overnight loan gives a bank the opportunity to borrow funds for a day from the Central Bank or other banks.

Such loans are provided at the interbank rate, benchmarks for which may be rates such as LIBOR (London interbank rate), LIBID (London interbank rate) and others.

Individuals can also invest in money markets by buying short-term certificates of deposit (CDs), municipal bills, or treasury bills (relevant for the US).

money market

Currency market

The foreign exchange market is a market in which participants can buy, sell, exchange and speculate currencies. The foreign exchange market is the most liquid market because cash is the most liquid asset.

The foreign exchange market is characterized from an organizational and technical point of view as an aggregate network of modern communication facilities connecting national and foreign banks and brokerage firms and investors.

In the foreign exchange market, it is also possible to conclude urgent foreign exchange transactions, such as futures, options and currency swaps.

A currency swap is a currency exchange transaction that includes the immediate purchase and sale of two currencies (spot transaction) and a counter transaction for the exchange of the same currencies after a certain time.

Commodity market

In the commodity market, traders and investors buy and sell natural resources or commodities. 

There is a commodity futures market in which the prices of commodities to be delivered at a certain time in the future have already been determined and fixed.

Products are usually classified into two subgroups:

  1. Solid commodities (these include recoverable resources such as gold, silver, oil, iron ore, etc.);
  2. Soft goods (this is commonly referred to as agricultural products).

A striking example of the commodity market is the St. Petersburg Stock Exchange, which since 2013 has been trading in real goods (metals, raw materials, and others).

commodity market

Derivatives market

Derivatives market is a type of financial market in which derivative financial instruments (derivatives) are traded: options, swaps, futures, the value of which is based on the market value of the underlying assets.

A derivative financial instrument (derivative) is a contract between two or more parties, the value of which is based on an agreed underlying financial asset (for example, a security) or a set of assets (for example, an index).

OTC market

The OTC market is a decentralized market in which market participants trade securities directly between two parties without a broker. Trading is conducted electronically. The OTC market is engaged in the exchange of publicly traded shares that are not listed or quoted on stock exchanges. OTC stocks are less attractive than primary stocks because OTC markets require less regulation.

Listing – the procedure for adding the issuer’s securities to the list of traded securities on the stock exchange for admission to trading.

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