Financial markets can be found in almost every nation in the world. Despite some being very small with only a couple of participants others, such as the New York Stock Exchange and the Forex markets, trade trillions a day. Some of these markets have been open to private investors since they began whilst others decided to maintain the exclusive domain of major international banks and other financial professionals up until the end of the 20th Century.
When it comes to market trading, a financial market is a broad term used to describe a market place where both buyers and sellers get involved in trading assets including equities, bonds, currencies and derivatives and can be recognised by their transparent pricing, basic regulations on trading, costs and feeds as well as their own market forces that determine the prices of securities that trade. In recent years, many of these different financial markets have been affected by changes in technology which is evolving more and more every day.
A capital market is one where individuals and institutions trade financial securities. Each country has their own capital markets which can vary in size and growth, capital markets in Africa may be different from those in Europe or America. Often, organizations and institutions in both the public and private sector sell securities on the capital markets in an attempt to raise funds.
No matter what, governments and corporations require capital funds to finance their operations in order to pursue their own long term investments. To be able to do this, a company must raise money through the sale of bonds and stocks under the company’s name to be sold and bought in the capital markets.
Stock markets are one of the most important factors of a markets economy as they give companies who have access to the capital and investors the opportunity to gain ownership within the company and identify potential gains based on future performance. Here, investors can buy and sell shares in stock markets between publicly traded companies. Usually the market is divided between the primary and secondary market. Whilst the primary market is the first place where new issues are offered, the secondary market is home to any subsequent trading. The stock market can be volatile at times, particularly when there is political instability within a country, meaning some investors are beginning to worry that there is a calm before the storm on Wall Street this year.
If an investor loans money to a corporate or governmental entity, this is called a bond. It involves borrowing an amount of money for an agreed period time at a secured interest rate. They are used by a number of companies, foreign governments, states and municipalities to fund an array of activities and projects. Bonds can also be bought and sold by investors around the world on credit markets.
The money market is just one asset to the financial market where financial instruments that tend to have high liquidity and short maturities are traded between banks or other financial institutions. To put it simply, the money market is used to borrow and lend money for up to just under a year. Whilst investors are prepared to take more risk and tolerance when it comes to investing in capital markets, money markets are a great alternative to hold funds that ae required in a shorter period of time.
Cash or Spot Market
In this highly complex yet vulnerable market, it is a rule that items sold for cash and contracts that are either bought or sold on the market are delivered and implement immediately. Compared to other markets, the cash or “Spot” market prices are established in cash at the current market price whereas other trades are usually settled at forward prices, meaning that those who decide to invest can either be rewarded with a big gain or suffer from a large loss. The New York Stock Exchange is an example of a regulated cash market and this stock exchange is also a rare example of a market that is safe from automation.
The derivative market is called the ‘derivative’ for a reason because its value is acquired based on its underlying asset or assets. Although a derivative is a contract, the contract price is set based on the market price of the core asset. For inexperienced traders seeking to speculate, the derivative market is not ideal due to its complexity but can be used as part of a risk management program protect against the risk of an adverse move.
Forex & Interbank Market
The interbank market is part of the financial system and currency trading performed between banks and financial institutions, not including retail investors and small trading parties. Although some interbank trading is executed between banks on behalf of a large customer, the majority of interbank trading occurs from the banks own account.
The forex market is one of the largest and most liquid markets in the world in terms of the total value traded and exceeds $1.9trillion every day – including all of the currencies in the world today. Although the forex market the largest market in terms of the value traded, any person, firm or county can participate since there is no central marketplace for the exchange of currency to take place. Live Forex trading can be highly beneficial as it allows you to take advantage of the latest updates on the market. However, to succeed at live trading you need to meet certain criteria, including learning how to use the Forex trading software and setting realistic goals before you start.
Primary & Secondary Markets
The primary market is where a majority of investors have their first opportunity to engage in a new security issuance. The funds that are gained from the sale by the issuing company or group is used to fund operations or develop the business where as the secondary market is where investors buy securities or assets from investors as opposed to issuing companies on their own. So essentially, the primary market is the place for new shares and the secondary market is where formerly issued securities must be traded that can be sold multiple times by investors.
The OTC Market
Otherwise called the over-the-counter market, the OTC is a type of secondary market which may be referred to as a dealer market, used to describe stocks that are no longer trading on stock exchange and are usually are traded for companies that don’t fit the criteria to list on a stock exchange. Although OTC market involves trading of financial instruments including stocks, commodities and currencies, it is performed directly between two parties without administration of an exchange.
Third & Fourth Markets
Third and fourth markets usually don’t involve individual investors since they require a significant amount of shares to be negotiated per trade. Instead, the third and further market operates with transactions decided between broker dealers and large institutions through OTC electronic networks. Whilst the third market incorporates OTC transactions between the two, the fourth market is only made up of transactions made between large institutions to avoid placing orders through the main exchange platforms which could significantly increase the cost of the security. The trades carried out by the third and fourth markets will have little, if any effect, on the average investor since both markets are equally as limited.
The purpose of financial institutions and financial markets is to help firms make money by either taking out a loan from and bank and repaying it over a period of time with interest, issue bonds to borrow money from investors to be repaid at specific interest rate or by offering investors part ownership in the company for a claim on its residual cash flow in stock.