A financial market is a market for the creation and exchange of financial assets. You participate in financial markets when you buy or sell financial assets.
- Price discovery
- Liquidity to financial assets, and
- Reduce the cost of transacting
Classification of Financial Market
|Basis of Classification||Types of Market|
|Nature of claim||Debt Market
|Maturity of claim||Money Market
|Seasoning of claim||Primary Market
|Time of delivery||Cash or Spot Market
|Organizational Structure||Exchange Traded Market
The debt market is a financial market where participants can issue, buy, and sell debt securities, such as bonds and Debentures. Debt securities are essentially loans to the issuer, and the buyer of the security receives periodic interest payments in exchange for lending their money. For example, a government might issue bonds to fund its operations, and individual investors can purchase these bonds to receive periodic interest payments.
The equity market is a financial market where participants can issue, buy, and sell ownership stakes in companies, known as stocks or shares. Investors in the equity market can benefit from capital appreciation due to growth in the underlying company, as well as any dividends paid out. For example, an individual can buy shares in a publicly traded company, such as Apple, and participate in the company’s success through increases in the stock price and any dividends paid.
The money market is a financial market where participants can buy and sell short-term debt securities, such as Treasury bills and commercial paper, with maturities of less than one year. The money market is seen as a low-risk investment option, as the securities traded in this market are generally considered to be low-risk and highly liquid.
The capital market is a financial market where participants can buy and sell long-term debt securities and equity securities, such as bonds with maturities greater than one year and stocks. The capital market is seen as higher risk than the money market, as the securities traded in this market are generally considered to have higher risk and potentially higher returns.
The primary market is the financial market where new securities are issued and sold to the public for the first time. In the primary market, issuers of securities raise capital from investors, and the securities are typically bought and sold directly from the issuer. For example, a company might issue an initial public offering (IPO) to raise capital in the primary market.
The secondary market is a financial market where securities that have been previously issued and sold in the primary market are bought and sold. In the secondary market, securities are bought and sold between investors, rather than directly from the issuer. For example, an individual might buy stock in the secondary market from another individual, rather than directly from the company that issued the stock.
Cash or Spot Market:
The cash or spot market is a financial market where participants can buy and sell securities for immediate delivery and payment. In the cash market, transactions are settled on the spot, or immediately. For example, an individual might buy foreign currency in the cash market to use for a trip.
The forward market is a financial market where participants can buy and sell securities for delivery and payment at a specified future date. In the forward market, the price of the security is determined at the time of the agreement, but the actual exchange of the security and payment takes place at a future date.
The futures market is a financial market where participants can buy and sell futures contracts, which are agreements to buy or sell a specific security at a specified future date at a predetermined price. Futures contracts are used to hedge against price fluctuations or to speculate on future price movements.
Exchange Traded Market:
The exchange-traded market is a financial market where securities are traded on a centralized exchange, such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). In an exchange-traded market, the exchange acts as an intermediary, bringing buyers and sellers together to trade securities.
The over-the-counter (OTC) market is a decentralized market where financial instruments, such as stocks, bonds, commodities, and derivatives, are traded directly between two parties without intermediation by a central exchange. OTC transactions are typically customized and are privately negotiated, meaning that the terms of the agreement are unique to each transaction. OTC markets provide flexibility and enable participants to transact in securities or derivatives that may not be listed on a central exchange. However, they also pose greater credit and counterparty risk, as there is no central clearinghouse to guarantee the trade. OTC markets are used by a wide range of participants, including corporations, financial institutions, and hedge funds.
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