Types of financial markets and their descriptions

Financial markets exist as a result of the financial transition that is driving the global economy. They instrumentalize the flow of money and, in the nick of time, make a transition to someone's pocket as loss or gain. It's all encapsulated in a series of shapes; stocks, commodities, derivatives, bonds, forex, real estate, private equity and assets that the traders can label for sale and purchase. These are exactly the roads that put money on pedestals for back and forth traffic. For a subtle understanding, let's start by knowing the definition of the market.

Do you know what the 'market' is?

A market is in place to exchange goods for money or a valuable item for the required products and services. The two parties involved are called sellers and buyers. With the growing technology, it now takes two forms; physical and virtual.

Physical market

It is a kind of market where people buy their clothes, typical foods and other goods to live, survive and experience luxury from an outlet, showroom or shop face to face.

Virtual market

It is an online location or platform where retailers shop for any item they like without stepping out of the comfort of their home. The payment method favors options such as credit cards and internet banking.

Likewise, when finances get into the struggles of markets, the fundamentals stay the same but take on different shapes and dynamics.

Defining types of financial markets

1. Stock market

It's a place where stocks of the government-funded companies are listed for fundraising and cumulative growth on a plethora of stock exchanges such as Nasdaq, Nikkei and Dow Jones. Investors, brokers and traders gather here for the issue, sale and purchase of shares or shares. The financial activities follow institutionalized formats that follow a series of guidelines and conditions.

Various authorities are undertaking the process of satisfying the ownership of shares to an individual and a company. According to a report published in CNBC on December 24, 2019, during the nascent phase of the COVID-19 pandemic, the global stock market was approaching $ 90 trillion.

As of March 2020, the New York Stock Exchange tops the list as the largest stock market operator in the world with a market cap of $ 25 trillion. NASDAQ ranks second with a market cap of $ 11.23 trillion.

Classification of inventories

Growth Stocks - The purpose of these stocks is to provide benefits and not dividends. These stocks are expected to grow.

New Issues - These are also known as Initial Public Offerings (IPO), which is the most preferred method for a newbie to participate.

Yield Shares - These types of stocks are suitable for both bull and bearish markets. Even in unfavorable times, dividend works as a bonus.

Defensive Stocks - Such stocks remain undaunted during the fall of the market. It doesn't pull down much. The companies consist of consumer goods.

2. Goods market

It is a type of market that deals with items that add value to lives and are necessary for livelihoods. Traders trade and trade natural resources such as oil and gas and precious metals, namely; gold, platinum. In addition, investors buy and sell wheat, corn, meat and other edible goods.

Traders generally use forward contracts to invest in commodities. Experts consider it one of the most viable ways to interact with the market as it is volatile and unpredictable. Identifying future offers also provides opportunities for hedging.

Supply and demand is the most important factor determining the valuation of commodities. Low supply quantities result in higher values and vice versa. Advances in technologies such as online trading push the market further as volumes increase.

Types of goods

Majory, raw materials are divided into four categories: - Agriculture, Metal, Livestock & Meat and Energy.

Agriculture: The raw materials here belong to the cultivation of crops or from agricultural holdings. They include wheat, corn, soy, cocoa, barley, sugar, etc. These products are volatile as they depend on weather conditions. When the supply is at the lower end of the population demand, an investor can take advantage of the situation.

Energy: It is a demanding entity directly related to the growth of a country as it fuels countries. Household appliance cars, they depend directly and indirectly on gasoline, heating oil, crude oil and natural gas. Traders looking to make their way into the sector should keep a close eye on OPEC (The Organization of the Petroleum Exporting Countries) and American countries to recognize the prices. According to Statista, global crude oil demand has increased from 85.3 million barrels per day in 2006 to 101 million barrels per day in 2020.

Livestock and meat: it is the daily commodity and most of the people in the world are non-vegetarians. It includes pork bellies, live cattle, lean pigs and forage cattle.

Metals: - The main metals engaged by buyers are gold, silver, platinum, copper, aluminum, zinc, etc. As of August 2019, the market size of gold was 170 billion US dollars (Statista.com). During the uncertainty of the market, investors are taking a path to gold as the precious metal is reliable, valuable and durable, with the global economy trusting it.

3. Forex market

Foreign currency means trading the currency of one country with another based on valuation. For example, a visitor from the US visiting a European nation would exchange dollars for euros or British pounds. The market that offers the opportunity is the forex market. It is a decentralized space where the determination of exchange rates is done through the prism of transactions and where currencies of different currencies are exchanged. You can register with forex broker to dive into the forex industry.

Major international banks, financial sectors and centers that anchor and shift the global economy are the active and important participants in the market. In 2019, the average daily turnover for forex was $ 5.1 trillion. The reason for this is that it is a liquid market with numerous buyers and sellers operating 24 hours a day.

Currency exchange can work in the following ways: -

Spot markets

Forward Markets

Future markets

Option markets

Switches markets

4. Bond market

It is commonly known as credit or debt market and some call it fixed income market where traders buy and sell debt securities or bonds produced by governments or listed entities trying to raise money for welfare projects, business expansion and other expenses.

Segmentation

The bond market can be broadly divided into two sections: primary market and secondary market.

Primary Market: - It is the market where newly issued bonds are first traded. It is the first transaction between a publisher (government) and a buyer.

Secondary Market: Here, the debt securities or bonds already traded are available for purchase and sale in the public domain after descending from the primary market. Intermediaries are there to help investors buy and sell.

Different types of bonds

There are several classifications of the bond market: -

Government Bonds: These bonds allow investors to harvest interest from governments rather than providing the debt. It is a way of lending money to the government, and in return they pay interest to the bearer. The full principal is repaid on a fixed date. Usually, a government bond makes payments or issues coupons every six months. It is relatively less risky as an investment.

Mortgage Backed Bonds: - It is a type of bond where an investor or holder has a claim to real estate assets that are available as collateral. It has security of property mortgages with the support of property owners.

Municipal Bonds: - These are the bonds that have been attracted by local authorities of states and cities for fundraising for the development of district schools, local airports and seaports in a municipality, parks etc. It is also known as 'muni' debt securities.

Corporate bonds: - Corporations issue such types of bonds to raise funds for the expansion of their projects and activities. Here the owner of the bond receives 'interest' in return as payment at a fixed or variable interest rate from time to time. The full capital is released when the bond reaches maturity.

Emerging Markets Bonds: - These bonds are issued in the emerging economies of the world or the developing countries. The government and companies of these countries are the issuers. In particular, these bonds pose a greater risk to an investor compared to others.

PS: The total size of the bond market worldwide as of 2017 was $ 100.13 trillion according to SIFMA

5. Derivatives market

This type of market refers to the financial market, which is exclusive to various financial instruments, including financial assets and financial derivatives. Here, the value of derivatives and contracts being traded depends on the trading asset.

Types of the derivatives market

Over-the-Counter Derivatives: - These are the contracts (also known as OTC) where two individuals or parties make a deal or negotiate privately without an exchange or intermediary. In this way, products or securities such as forwarding rate agreement, swap, credit derivatives, etc. are traded. They remain largely unregulated, which gives traders flexibility.

Exchange Traded Derivatives: - It is a listed financial contract that is traded on a regulated or standardized futures exchange. It includes call options, futures and put options. Investors must make an initial deposit cleared by a clearing house before trading these instruments.

PS: - According to BIS (Bank for International Settlements), total outstanding nominal amounts for the year 2019 for the contracts were US S $ 1198 trillion. However, its gross market value was meager (by comparison) at $ 23.6 trillion.

Essential characteristics that are being absorbed by financial markets

Unlike the funds that an investor invests, there is equal opportunity for everyone.

These markets are tailor-made for traders, investors and debtors. Treatment given to individuals is fair and appropriate.

From an individual trader to governments and conglomerates, the financial markets provide capital for expansion and growth.

It lightens millions of jobs around the world.

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