What are the financial markets?
The financial markets are where financial instruments like securities and derivatives are traded. The markets exist to create liquidity for individuals, businesses, and organisations by letting the money flow where it’s needed.
For example, the US Treasury sells bonds to raise money for governmental operations. The people or organisations that buy these bonds as investments as they are a low-risk way to earn interest.
Types of financial markets
Financial markets can also be categorised further based on the type of assets traded. These categories include the following:
Most markets operate through what are known as exchanges, which acts as a platform that facilitates trades and disseminates price information. One of the most well-known exchanges is the New York Stock Exchange (NYSE). Others, like forex, are decentralised and do not operate under any exchanges.
Where the markets are located
There are three International Financial Centres designated by the International Monetary Fund located around the world: one each in Tokyo, London, and New York.
Another metric, the Global Financial Centres Index, ranks financial centres by competitiveness and lists New York, London, Hong Kong, Singapore, and San Francisco in the top 5 respectively.
The market participants
With a basic understanding of what the financial markets are, it’s time to get to know the various stakeholders.
Commercial Banks: Retail and investment banks that accept deposits from, and give loans to the public to make a profit.
Central Banks: A national bank that provides banking and financial services, as well as implement monetary policies for its country’s government. Examples include the Bank of England (BoE), and America’s FED (Federal Reserve).
Brokers: A person or a company that arranges transactions between a buyer and seller. Voice brokers do so verbally, while electronic brokers are usually digital platforms that facilitate these transactions.
Institutional Investors: Entities that pool money to invest in assets. These can include commercial and central banks, pension funds, and hedge funds.
Retail Investors: Individuals that invest in securities. The increase in low-to-none commission online platforms and unprecedented access to the markets have created a rapid rise in the number of retail investors in recent years.
Types of products on the market
What is traded on the markets? Any type of financial asset that is traded is known as an instrument. These can be stocks, bonds, currencies, commodities, or derivatives like options or swaps. However, all of these are traded based on two broad categories.
The first is Exchange-Based trading, which is conducted on a centralised, highly regulated exchange. Examples of exchanges include:
The second category is Over-the-Counter (OTC) trading. This refers to securities that are traded through a broker-dealer network rather than a centralised exchange. Examples include:
Types of Investors
What kind of trader are you？ While there are several different styles of trading, they all fall broadly under two categories:
Hedger – A person whose primary motivation is not to seek profits, but instead reduce the risks associated with adverse price movements in a security.
Speculator – A person seeking large profits in return for large risks by trying to anticipate price movements in the market.