The financial market is a broad term which can be confusing to explain. Basically, it refers to a marketplace where people trade financial assets and securities such as bonds, derivatives, stocks and foreign exchange.
The financial market is a top destination for businesses looking to grow their profit. Occasionally, a lot of companies and brands visit financial markets to trade in financial securities so as to raise enough money to grow their businesses.
Financial institutions such as banks use the money of their investors, customers to buy and sell financial assets.
Also, you too can also maximize the money in your possession by trading in the financial market.
By definition, the capital market refers to a place where various entities buy and sell different financial instruments.
The capital market is a part of the financial market where long-term debt or equity-backed securities are traded. Again, they are used to sell financial assets such as debt securities and equities.
The debt securities include bonds while the equities are stocks which is an incorporation of the ownership shares in a company.
The capital markets are made up of suppliers and users of funds. Savings and investments are financial properties which are transferred between the suppliers of capital to people in need of capital.
Capital markets play an important role in today’s economy as they get to move money away from the people who have it down to those in need of it.
Furthermore, the capital markets are divided into two categories namely; the primary markets and secondary markets.
- Primary Market
The primary market is a sector of the capital market where new issues of stocks are traded. In the primary market, investors buy securities that have never been traded directly from the issuing company.
In fact, all transactions in the primary markets are done between the investors and the issuing company. They can also be referred to as the New Issue Market (NIM).
- Secondary Market
The secondary market is a part of the financial market where financial instruments such as bonds, futures, stock and options are traded. Also, they can also be called follow on public offering and aftermarket.
In the secondary market, already-issued securities are bought and sold between investors. In fact, the securities that have been issued on the primary market can be traded in the secondary market.
Equally important, issuing companies do not play any role in the secondary market. It is normally overseen by regulatory bodies such as the Securities and Exchange Commission (SEC).
Some examples of exchanges in the secondary market include the Nasdaq, the New York Stock Exchange (NYSE) and the London Stock Exchange.
The most popular capital markets include the following;
- Stock Market
The stock market is a financial market where investors meet to buy and sell the shares of publicly traded companies.
A lot of successful businesses, organizations and corporations go to the stock market to raise enough money to expand and grow their businesses.
Stocks represent shares of ownership of a public corporation. Eventually, they are sold to investors through broker-dealers.
Each share has a price tag and the investors increase their profits when the companies perform well in the market.
The earnings of the investor are increased when stocks are bought at a low price and sold for a higher price.
For instance, Amazon.com, Inc. and Apple Inc. are companies that operate in America. The stock of both companies can be traded on the New York Stock Exchange (NYSE) and may possibly be traded on foreign exchanges.
The history of the stock market dates back to the year 1773. The London stock exchange started in a coffee shop where trader assembles to exchange shares.
- Bond Market
Bonds refer to fixed-income securities which are issued by governments along with corporations and organizations to raise capital.
The Bond market is a financial marketplace where investors can buy and sell corporate-issued debt securities.
In the bond market, an investor borrows a loan to people for a specified period of time at a defined interest rate.
The objective of the bond market is to secure long-term funding for public and private expenditures.
Types of Bond Markets
- Corporate Bonds. (They include Convertible bond, Callable bond. Investment-grade bond, Junk bond).
- Government Bonds (They include Federal government bonds, treasury bills, treasury notes).
- Municipal Bonds.
- Mortgage-Backed Bonds.
- Zero-coupon bond.
For example, if FXKlex company issues a 5-year bond on October 1st, 2019 at a cost of $50 each and pays 5%. The yield to maturity (YTM) is 10%, the principal is $50, the maturity date is October 1st, 2024 and the coupon rate is 5%.
The commodities market is a market created for investors, traders and companies to trade natural resources and commodities.
The commodity market is a virtual or physical marketplace where raw materials and primary products are traded. Some examples of the items traded on the commodity market are cocoa, rubber, coal, tin, gold, oil, corn, meat etc.
Commodities can be grouped into two types namely;
- Hard commodities
These are natural resources which have been obtained, mined or extracted from the source. Examples are crude oil, gold, copper, rubber, tin, zinc, iron ore etc.
- Soft commodities
These are agricultural and farm products such as corn, coffee, millet, pork, meat, sugar, sorghum, soybeans, wheat and livestock.
The money market is a part of the financial market where highly liquid and short-term maturities are traded. The primary aim of the money market is to provide short-term loans and securities to people.
Typically, the loan or borrowing period is equal to or less than 365 days (1 year).
Again, any market that is made of highly liquid and short-term assets can be described to be a money market.
Some of the financial assets traded on the money market are Treasury bills (T-bills), interbank loans, money market funds, repurchase agreements, bills of exchange, commercial paper, certificates of deposit (CDs), and short-term securities loans.
The major actors in the money market are financial institutions and money dealers who wish to borrow or lend money.
A derivative is measured as a financial asset with value is based on an underlying asset or a group of assets.
Likewise, the derivative market is the marketplace for derivatives. The derivative market offers tools for the management and control of financial risk.
The market can be further grouped into two;
Exchange-traded derivatives: These are where derivatives are traded on an exchange.
Over-the-counter derivatives: These are where derivatives are traded over-the-counter (OTC).
Some of the financial products traded on the derivatives market include futures, options, forward contracts, swaps, and contracts-for-difference.
These financial products can be obtained or purchased through brokerages.
A future market or futures exchange is a financial marketplace where people purchase and sell standardized futures contracts.
In this market, the participants buy and sell certain quantities of a financial instrument which will be delivered on a specified future date.
The history of the futures market can be traced to 1750 BC, when the 6th king of the Babylonian empire, Hammurabi enacted the Code of Hammurabi.
This legal promulgation allows Babylonian merchants to sell their assets, goods and items to people at an agreed price to be delivered at a later date.
Typical examples of the futures markets are the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Chicago Board Options Exchange and the Minneapolis Grain Exchange.
Foreign Exchange Market
This market is commonly referred to as the Forex market, FX market or currency market. It is an over-the-counter (OTC) financial marketplace where people buy, sell, exchange and speculate on currencies.
In terms of trading volume, the forex market is rated as the largest market in the world. It is made up of financial institutions, central banks, investment management firms, investors, individuals, forex dealers, hedge funds and retail forex dealers.
This financial centre determines the exchange rate for foreign currencies. Moreover, it is a decentralized market where global currencies are traded.
Some types of the foreign exchange markets are;
- Spot Market: In this market, currency transactions are traded rapidly.
- Future Market: In this market, the transactions deals with payment and delivery at a specified date at an agreed exchange rate.
- Forward Market: This market is quite similar to the futures market. However, in this market, the terms and conditions ate negotiated between the two parties involved (buyer and seller). Also, the terms of the agreement can be negotiated to meet the needs of the traders.
Cryptocurrency is referred to as digital currency or instrument which can be used as a medium of exchange between two or more persons.
A cryptocurrency uses cryptography technology to secure financial transactions and confirm the trading of assets
So Also, the cryptocurrency market is a marketplace where virtual currencies are traded. A lot of digital currencies are traded in the cryptocurrency market.
Some of these currencies operate on blockchain technology. A blockchain refers to a public ledger which is used for recording transactions across a disparate network of computers.
The first blockchain-based cryptocurrency in the world is Bitcoin. It was created in 2009 by a developer named Satoshi Nakamoto.
Cryptocurrency wallets are used to keep the private and public keys, which is used to track, spend or receive cryptocurrencies. Some examples of cryptocurrency wallets are Coinbase, Electrum, Ledger, Bitcoin Core, Trezor etc.
The spot market or cash market is a place where financial commodities like currencies are traded for fast delivery. In this market, cash is offered in exchange for the financial instrument.
The spot market should not be taken for the futures market. In the futures market, delivery is agreed at a later date but in the spot market, the delivery takes place over 2 working days of the trade date.
The current price of a financial asset is described as the spot price. This is the price at which a financial asset is sold or purchased immediately.
Also, in this market, perishable and non-perishable commodities can be sold in exchange for money and delivered immediately or within a short space of time.
Typical examples of items traded on the spot market are oil, grains, gold, and natural gas.
Types of Spot Market
- Exchange: This is an organized market where securities and commodities are traded on an exchange with the current market price.
- Over the counter (OTC): In this market, trading activity is based on contracts which are openly negotiated between two parties. Unlike the exchange market, the contract terms are not determined by the guidelines of a centralised exchange but between the parties involved.
Interbank Lending Market
The interbank lending market is a financial marketplace where financial institutions like banks extend loans to one another for a specified period of time.
Typically, most of the loans are obtained on a short-term basis and are matured in a week or less.
Under the federal reserve requirement regulations, banks and other financial institutions are required to have a sufficient amount of liquid assets or cash for such bank to serve its clients.
If banks lack enough cash and liquid assets to meet up with this regulation, they have no other option than to borrow on the interbank lending market.
In the same vein, other banks with surplus liquid assets can offer loans to other banks and receive interest on the loaned assets.
The London Interbank Offered Rate (LIBOR) happens to be one of the commonly used benchmarks for short-term interest rates.
It is determined by the demand and supply of Eurodollars in London’s capital markets.
Functions of the Financial Markets
The financial markets have played a crucial role to strengthen, maintain and balance the global economy. Also, these roles cannot be overemphasized.
Some of the functions of the financial markets are;
- They create an open and regulated platform for people to obtain large amounts of capital.
- They help businesses to minimize risks.
- The financial markets help traders to sell assets and properties with ease. Buyers and sellers can trade securities at any time around the clock. They ensure that you do not have to go far to get a buyer or seller of a financial asset.
- It determines the price of financial securities.
- It helps investors to make a profit from the sale of their securities.
- It allows people to invest their savings for productive use.
- The financial market is an easy way to get capital for your business.
In spite of the regulatory bodies and institutions in the financial market, there seem to be certain cases of instability especially in terms of price and rate fluctuations.
Also, there have been cases of fraud which have raised the concern for stringent policies by the regulatory bodies.
However, the regulatory institutions have provided some level of transparency to help us decide the best channel to invest our money. The financial market has helped to circulate money around the world. Impressively, it provides enough opportunities for all to thrive.