The financial market is a rather broad term that encompasses several individual markets under its umbrella. A market’s textbook definition is a place where people, companies and/or entities can trade financial securities, commodities and other assets at prices determined by the properties of supply and demand. In other words, markets are places where buyer and sellers can find each other easily and conduct business together.
Each type of market specializes in their own commodities and rules that separates it from the pack. How and what the trade give each market its own unique profile. This article will outline each market so that you can determine the best place to invest your money and help maximize your returns.
Perhaps where our minds go to first when we think of financial markets, capital markets are where companies can raise funds and individuals can buy shares of companies. Typically, these markets raise capital on a long-term basis, which is over a year. The capital market is broken down into two groups—the stock market and the bond market.
The stock market is where the trading of shares of a company are traded, which is how this market generates money. Ownership of pieces of a company trade hands here.
The bond market operates in a similar fashion. Here, contributors can issue new debt or buy and sell debt securities. The bond market is where an entity goes to acquire a large loan.
Another characteristic of the Capital Market is where it is a primary market or a secondary market. A primary market is where shares and bonds are traded for the very first time. For companies this is called the Initial Public Offering.
A secondary market is where traders can purchase stocks that have been previously held by someone else. This is the common image you may have of Wall Street. The New York Stock Exchange and Nasdaq are both secondary markets.
Foreign Exchange Market
As you might have inferred from the name, foreign exchange market concentrates its efforts in the foreign markets. The foreign exchange market not only determines the foreign exchange rates, but it home to the trading of countries’ currencies. More than $5 trillion is the average that is traded on this market on any given day. Also, the foreign exchange market is the largest and most liquid market on the planet.
The Commodities Market deals with the buying and selling of natural resources and of other products. About 50 commodities are traded on this market. There are two kinds of commodities traded, soft commodities and hard commodities.
Items that are grown are considered soft commodities These are agricultural goods like coffee, wheat, cotton, sugar and the like.
On the other hand, hard commodities are items that have to be mined or extracted like gold, rubber, iron ore and oil.
The Money Market is a market that traffics in short-term loan between banks and other financial institutions. Short-term, in this case, is considered less than 1-year. Large companies, financial institutions and governments are the forces the short-term loans. Interestingly enough, there is not a formal money market, instead it is an informal network of these large lending forces.