6 Types of Financial Markets

A financial market is actually a market, where entities and people can trade commodities, financial securities and other similar assets at prices that are determined by pure supply and demand principles. Markets work by placing the buyers and sellers at one place, so that they can find each other with ease and then close the deal between them. There are various types of financial markets, depending on the type of the instruments that are traded and their maturity. Below are some of the markets discussed in detail ( Information courtesy: http://www.easymarkets.com ).

1. Capital market
The capital market helps in rising of capital on a long-term basis. There are two parts included in the capital market – a primary and a secondary market. And, this market is divided into two subgroups, namely stock market and bond market.
• By sharing the ownership of a company through stocks issuing and trading, the stock market provides financing.
• By accumulating debt through bond trading and bond insurance, the bond market provides financing.
A primary market is also known as the “new issue market”. Here securities, such as bonds and shares are created as well as traded for the first time, without using any intermediary like an exchange in the process.
A secondary market is also known as the “aftermarket”. Here investors buy previously issued securities such as options, futures, bonds and stocks from other investors rather form issuing companies themselves.

2. Foreign exchange market
The foreign exchange market helps in foreign exchange trading. It is the largest and the most liquid market in the world where an average value of more than 5 trillion dollar is traded on a daily basis. All the currencies in the world are traded here and any company, country or individual can participate in this market.

3. Commodity market
Trading in primary products is managed by the commodity market. There are two subgroups in which the commodities are classified- hard commodities and soft commodities.
• Raw materials that are typically mined are hard commodities, such as oil, iron ore, rubber, gold etc.
• Typically grown agricultural primary products are soft commodities such as sugar, coffee, cotton, wheat etc.

4. Derivatives market
Derivatives market helps in trading financial instruments, for example, futures contracts. It also helps in controlling financial risk. It is mostly from the value of an underlying asset that the instruments derive their value. The underlying asset can come in various forms, such as commodities, bonds, stocks, currencies or mortgages.

5. Over-the-counter derivatives
These contracts are privately negotiated as well as traded between the two counterparts, without using the services of an intermediary such as exchange. Securities such as exotic options, credit derivatives, forward rate agreements, swaps, forwards and other exotic derivatives are traded in this manner.

6. Exchange-traded derivatives
These are standardised contracts that are traded on an organised futures exchange. Some examples are futures, put options and call options.
So these are the different types of financial markets where you can trade and make lot of money. Happy trading!
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