Financial Market, Financial Markets

By: EconomyWatch   Date: 23 November 2010

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People who wish to earn more on their savings direct their funds to the financial market. Investments in the financial market, which includes trading in bonds, stocks and commodities, typically yield higher income than depositing money in a bank account. The financial market also represents higher risk than money deposited in a bank account. However, investors can minimize their risk exposure by diversifying their investments across various financial options and by transferring risks with the help of insurance policies. The main players in the financial markets are brokers, dealers, investment bankers and financial intermediaries.

Key Functions of a Financial Market

Financial markets:

  • Facilitate the transfer of funds from one entity to another for investment purposes or immediate use.

 

  • Set prices for newly issued and existing financial assets.

 

  • Offer financial asset-holders an opportunity to liquidate their assets.
  • Help in reducing transaction costs.

 

Financial Markets: Types

Financial markets comprise of:

  • Capital markets: Capital markets can be broadly categorized into the primary and secondary markets. While in the primary markets, companies generate new capital by issuing shares or bonds to investors, the secondary markets facilitate the trading of existing shares and bonds between investors. These markets can be further subdivided into the stock markets and bond markets. Stock markets offer trading facilities for shares, common stocks and stock derivatives. Some of the major players in the capital markets are the New York Stock Exchange (NYSE), the London Stock Exchange (LSE) and the US government bond market.

  • Derivatives and insurance markets: These markets are centered on risk management and risk transference. The derivatives market works towards reducing and managing financial risks. MATBA and ROFEX are some of the largest derivative markets. The insurance sector is involved in the transference of life, property and health-related risks from the policyholder to the insurance company.

  • Foreign exchange market: The forex market, which is the largest financial market in the world, facilitates the trading of the currencies of various nations.

  • Commodity markets: These markets facilitate the trading of commodities, such as gold, silver and agricultural goods. The Chicago Mercantile Exchange (CME) and Tokyo Commodity Exchange (TOCOM) are among the world’s most popular commodity markets.

  • Money markets: The money market deals primarily in short-term debt securities and investments, such as banker’s acceptances, negotiable certificates of deposit, repos and Treasury Bills.

 


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