Financial Markets is applied to any type of market where trading in securities takes place. So that the stock market, market of derivatives, Forex, along with the bond market are relevant to the term. In this regard, financial markets are essential to provide failure-free service of a system.
Essence of the Financial Markets
As it has been mentioned before, the financial market is of great importance as it guarantees a flawless operation of capitalist economies. The reason lies in distributing resources and initiating liquidity for enterprises and entrepreneurs. Assets are traded without much of a hustle. By virtue of financial markets, investment products, particularly securities, ensure income for the individuals with excessive monetary means, such as funds providers, or loan suppliers. Therefore, these financial facilities are open to borrowing entities.
A formation of financial markets happens due to buying and selling processes of various monetary tools through equities, derivatives, currencies and bonds. The concept presupposes data transparency that, in turn, underwrites adequate prices. Estimated market value of securities can not always address its inherent worth because of tax establishing, for instance.
Certain financial markets are considered narrow, and, as a result, counterproductive. While others fulfill securities dealings in billions of dollars on a daily basis. The last case may be illustrated with the NYCE.
It’s also important to note that the exchange of capital can take place both within one country or go beyond its borders. Therefore, there is a distinction between national and international financial markets. If the national ones are regulated by the legislation and supervisory authorities of a particular state, then international rules come to the rescue in transactions between countries.
Types of Financial Markets
At the beginning, we have already made reference to the division of financial markets, and mentioned several of them. Let’s consider all the types in detail.
Forex market. Also known as the foreign exchange. In fact, these are all platforms where the banknotes purchase and sale takes place. Forex is considered the largest financial market that doesn’t stick to one country. Transactions can be concluded directly between participants, on specialized platforms, within the exchange or in banks.
Currently, Forex is considered intensely merchantable, exceeding the daily deal scope on the stock and bond markets. As Forex has been gathering pace, the market has become more reachable for private entities and institutions, through advances in the information technologies.
Forex trading process suggests buying or selling a currency of a certain state, i.e. a material conversion is not carried out. Anyway, the market anticipates opening the account in a particular currency. The trader’s aim is to track the price hike or drop, in order to gain the profit.
Stock markets. This is the platform, where the enterprises are able to allocate their shares, for carrying out selling and buying processes for traders and investors. So that firms have a possibility to raise debt funds by initial public offering (IPO). A noteworthy detail is that shares trading afterwards is carried out on the secondary market, and the players are different - sellers and buyers.
The enterprise shares can be vended on the largest exchanges, such as FWB, Hong Kong Stock, NASDAQ, etc. By the way, a majority of transactions are performed on regulated markets. These bourses guarantee the economic climate, along with capital growth and dividend yield.
There exist various indices that investors take into account for monitoring the stock market, for example, the Dow Jones Industrial Average (DJIA) and the S&P 500.
Bond markets. Bonds may be considered as loans by investors who lend financial facilities to the issuer. As a follow-on, the issuer promises to repay the monetary means at a certain future date, along with interest payments at regular intervals. The maturity of bonds determines a time period of receiving funds back (the amount of initial investment).
Rating agencies are able to assign scores that show how risky these investments are in terms of possible default or changes in value. The main rating agencies are Moody's, Standard & Poor's (S&P) and Fitch Ratings.
Cryptocurrency markets. If national currencies are issued only by the state’s official authorities, then the idea is that anyone who has sufficient capacity can create a cryptocurrency. It is also not possible to pay with the currency everywhere. Therefore, the market is quite closed and highly risky. Nevertheless, the transactions are equivalent to the Forex. There are many platforms for the purchase and sale of cryptocurrencies, the largest ones are well regulated, but the smaller can be very risky.
Over-the-Counter markets. Also known as the OTC. In terms of functionality, these markets are regulated not so strictly, and, as a result, possess higher risk levels. A trade takes place electronically, while actors carry the deals directly, that means the broker is absent. Securities with a low degree of reliability are involved.
The securities are bought at its own peril and risk, the exchange cannot guarantee safety. Moreover, there are derivatives that are traded only over-the-counter, for instance, forward contracts.
Money markets. One of the most common operations in the financial system is transferring financial facilities in debt. The trade is conducted with highly liquid facilities that are described as an advanced level of reliability and relatively weak percentage figure of income. However, there exists an important limitation — the repayment period of less than a year. The type presupposes short-term transactions. These are usually loans to private individuals, credit cards, payday loans, floating debt securities, for instance, bonds, or repo transactions.
The market players are:
- Loan suppliers provide capital at a certain interest.
- Credited parties take monetary means, and refund them with percents.
- Intermediaries assist in conducting transactions.
Derivatives markets. In fact, derivative is a type of contract between the parties who undertake to transfer a pre-agreed asset (or amount of money) at a certain time and at a certain price. Since their prices are linked to their underlying assets, derivatives are used both to increase and to reduce the risk of owning an asset.
The nominal value of financial instruments traded on the global derivatives market already exceeds $100 trillion, while the value of transactions is approaching $500 billion per year.
The major division of derivatives are:
- Options and warrants that confer the right to sell or buy certain assets at the price fixed in the contract.
- Futures, i.e. forwards standardized for the exchange trading.
- Swaps, or the contracts for the assets or payments exchanged for a certain period, at a price agreed in advance.
Commodities markets. Usually, physical goods trade is implicated: products (including agricultural, for instance, grain, tea, wheat, salt), resources (such as oil, gas, coal) and metals (gold, etc.). Transactions can be concluded in the spot format, that means with immediate delivery, but it happens more often with deferred delivery on the futures market.
Advantages of Financial Markets
The intense development of financial markets has been going on for several years. It is accompanied by the creation of specialized financial institutions and suitable infrastructure. Now we are unable to conclude that the current state of financial markets is final. Every year, the system of financial relations between the actors changes.
Let’s point out the advantages of these financial relationships:
- A clear and unified system for all the market players. Formed and regulated relationships allow avoiding chaos in the assets exchange.
- A possibility to generate revenue. The variability of transactions is very high.
- Centralized platforms that provide convenient tools. It is possible not to deliver bags of grain to potential buyers, but to create a supply contract on the futures and options market and sell grain at the predetermined price.
- Safety. Official markets, especially with stock exchanges, are very well regulated, which reduces the risks of non-execution of transactions.