Financial Markets, Money Markets
Any place or system that gives buyers and sellers the ability to trade financial instruments like bonds, equities, various international currencies, and derivatives is a financial market. Financial markets make it easier for people who need money and people who have money to invest to talk to each other. Financial markets enable participants to transfer risk (typically through derivatives) and promote commerce, in addition to making it possible to raise capital. Financial market transactions are governed by regulations and best practices, but they also carry some risk. The OCC provides guidance and resources for national banks engaged in financial market activities.
IMPORTANT TAKEAWAYS
• A financial market is any market where securities are traded.
• In addition to stock and bond markets, there are forex, money, cryptocurrency, and commodity markets.
• These markets may include assets or securities that are either listed on regulated exchanges or traded over-the-counter (OTC).
• Economic disruption, including a recession and rising unemployment, can occur when financial markets fail. The flow of capital is made possible by financial markets, as is investment and risk management, and economic expansion is encouraged. Knowing about the financial markets By providing businesses and entrepreneurs with liquidity and capital, financial markets are essential to the functioning of the capitalist economy. The markets make it easy for buyers and sellers to trade their financial holdings.
Financial markets create securities products that provide a return for those with excess funds (investors/lenders) and make these funds available to those needing additional money (borrowers).
One type of financial market is the stock market. When people buy and sell financial instruments like shares, bonds, currencies, and derivatives, financial markets are formed. In order to guarantee that the markets set prices that are both effective and appropriate, they heavily rely on informational transparency. Some financial markets are small with little activity, and others, like the New York Stock Exchange (NYSE), trade trillions of dollars in securities daily. The equities (stock) market is a financial market that enables investors to buy and sell shares of publicly traded companies.
The primary stock market is where new stock issues are sold. Any subsequent stock trading occurs in the secondary market, where investors buy and sell securities they already own.
IMPORTANT NOTICE
It's possible that the intrinsic value of securities that are traded on the financial markets doesn't always match their prices. Types of Financial Markets
Markets come in all shapes and sizes. Each one focuses on the types and classes of instruments available on it.
Money Markets
Products with short-term maturities of less than one year are typically traded in the money markets, which are characterized by a high degree of safety and a relatively lower interest return than other markets. Institutions and traders engage in large-scale trades in the money markets at the wholesale level. At the retail level, they include money market mutual funds bought by individual investors and money market accounts opened by bank customers.
Short-term certificates of deposit (CDs), municipal notes, and U.S. Treasury bills are additional ways for individuals to invest in the money markets. bills from the Treasury, among others Stock Markets
Perhaps the most well-known financial markets are stock markets. These are venues where companies list their shares, which are bought and sold by traders and investors. Stock markets, also called equity markets, are used by companies to raise capital and by investors to search for returns.
Stocks may be traded on listed exchanges, such as the New York Stock Exchange (NYSE), Nasdaq, or the over-the-counter (OTC) market. Most stock trading is done via regulated exchanges, which play an important economic role because they are another way for money to flow in an economy.
Typical participants in a stock market include (both retail and institutional) investors, traders, and specialists who maintain liquidity and provide two-sided markets. Brokers are third parties who help buyers and sellers make trades, but they don't actually own any stocks. Bond Markets
A bond is a security where an entity issues a debt instrument. Although the lender is the investor, bonds can be viewed as an agreement between the lender and the borrower. Bonds are issued by corporations as well as by municipalities, states, and sovereign governments to finance projects and operations.
For example, the bond market sells securities such as notes and bills issued by the United States Treasury. The debt, credit, and fixed-income markets are other names for the bond market. Forex Market
Participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs in the forex (foreign exchange) market. The forex market is the most liquid market in the world, as cash is the most liquid of assets. More transactions are handled daily on the currency market than on the futures and equity markets combined. As with the OTC markets, the forex market is also decentralized and consists of a global network of computers and brokers worldwide. The forex market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.
Over-the-Counter Markets
An over the counter (OTC) market is a decentralized market—one without physical locations where trading is conducted electronically—in which market participants trade securities directly (meaning without a broker).
While OTC markets generally facilitate trading of smaller or riskier companies that do not meet the listing criteria of public exchanges, most stock trading is done via the public exchanges.
Certain derivatives markets, however, are exclusively OTC, making up an essential segment of the financial markets. Broadly speaking, OTC markets and the transactions that occur in them are far less regulated, less liquid, and more opaque.
Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).
Rather than trading stocks directly, a derivatives market trades in futures and options contracts and other advanced financial products that derive their value from underlying instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks.
Futures markets are where futures contracts are listed and traded. Unlike forwards, which trade OTC, futures markets utilize standardized contract specifications, are well-regulated, and use clearing houses to settle and confirm trades.
Commodities Markets
The venues where producers and consumers meet to exchange physical commodities like agricultural products (like corn, livestock, and soybeans), energy products (like oil, gas, and carbon credits), precious metals (like gold, silver, and platinum), or "soft" commodities (like cotton, sugar, and coffee) are known as commodities markets. Spot commodity markets are places where money is exchanged for physical goods. However, spot commodities serve as the underlying assets for the majority of trading in these commodities on derivatives markets. Forwards, futures, and options on commodities are exchanged both OTC and on listed exchanges around the world, such as the Chicago Mercantile Exchange (CME).
Cryptocurrency Markets
Thousands of cryptocurrency tokens are available and traded globally across a patchwork of independent online crypto exchanges. These exchanges host digital wallets for traders to swap one cryptocurrency for another or for fiat currency such as dollars or euros.
Users of many cryptocurrency exchanges are vulnerable to hacking and fraudulent activity due to their centralized platforms. There are also decentralized exchanges that operate independently of any centralized authority. Direct peer-to-peer (P2P) trading is supported by these exchanges without the need for an actual exchange authority to facilitate the transactions. Futures and options trading are also available on major cryptocurrencies.
Illustrations of Financial Markets The above sections make clear that the "financial markets" are broad in scope and scale. We will consider the OTC derivatives market's role in the financial crisis of 2008-09 and the role of stock markets in bringing a company to an initial public offering (IPO) as two additional concrete examples. IPOs and stock markets As a company establishes itself over time and grows, it needs access to additional capital. It will frequently require much more capital than it can obtain from ongoing operations, conventional bank loans, venture capital, or angel investments. Firms can raise the amount of capital they need by selling shares of themselves to the public through an initial public offering (IPO). This transforms the company's status from "private" with a small number of private shareholders holding shares to publicly traded with public investors holding shares. The initial public offering (IPO) also gives early investors in the company a chance to cash out a portion of their stake, often with substantial rewards. Initially, the underwriters set the IPO price through their pre-marketing process.
Once the company's shares are listed on a stock exchange and trading commences, the price of these shares fluctuates as investors and traders assess and reassess their intrinsic value and the supply and demand for those shares at any given moment.