Types of Financial Markets

Financial markets are the space where financial transactions are carried out. In simple words, they can be defined as the site where assets can be bought and sold. Anyone who wants to raise money can leverage financial markets and engage in trade. 

Financial markets can be classified into different categories. Here’s everything you need to know:

Over-the-counter market

An over-the-counter (OTC) market doesn’t have any physical existence. One can trade in the market electronically without the involvement of a broker. Compared to other markets, OTC markets are less regulated and offer lesser liquidity. Stocks of smaller companies are traded in OTC markets. 

Derivatives market 

This refers to the financial market where securities are traded whose value is linked to a specified underlying asset, such as debentures, shares, or any currencies. Derivatives exist purely in the form of contractual agreements between two parties.  The value of a derivative contract is determined by the market price of the underlying asset. There are various types of contract options available in the derivative market, such as forward contracts, future contact, and options contracts. 

Stock markets

The most popular type of financial market is where shares of listed companies are traded. They are also known as secondary markets. Both retail and institutional investors take part in the stock market. Unlike other markets, stock markets are heavily regulated. 

Stock markets also use a variety of indices that track the movement and price of shares being traded. Investors also use these indices to make their investment decisions. 

Commodities market 

This refers to the market where natural resources or commodities are bought and sold by traders. Examples include meat, oil, gold, etc. Since the price of such goods can be unpredictable, a separate market is created for their trade. Commodities can also be traded on the commodities futures market, where the trade is conducted in real-time on the prevailing prices, but the delivery is at a future date. 

Bond market 

As the name suggests, a bond market is a place where investors can buy bonds from companies issuing them. It is also known as the fixed-income or debt market, as companies issuing the bonds do it to raise money, and the return received by the investors is pre-decided based on the interest rate of the bonds. 

The bond market is classified into the primary market and the secondary market. The primary market is where new issues of bonds occur that are traded between the buyer and the company. These bonds are offered to the public for the first time. On the other hand, in the secondary market, bonds are already sold in the primary market and are up for sale again. Usually, a broker plays an important role in the secondary market and acts as an intermediary for the sale between the seller and purchaser. There are various modes of transactions popular in the secondary market, such as mutual funds, life insurance policies, and pension funds. 

Forex market 

Forex markets facilitate the trade of currency. It is possible to buy, sell, and enter into hedging contracts. The key participants of forex markets include central banks, investment management firms, hedge funds, and forex brokers. 

Why are forex markets important for the economy?

Forex markets offer several benefits, such as:

  • Providing a platform for buyers and sellers to carry out transactions
  • Helping in price determination through market forces
  • Allowing investors to put in their hard-earned money safely
  • Makes it easier for sellers to find a buyer 
  • Allowing investors to quickly liquidate their tradeable assets and convert them into cash

Are there any potential pitfalls of financial markets? 

Determining the intrinsic value of any asset may not be possible due to how financial markets function. There are also several factors at play in financial markets that can make it impossible to predict the outcome of a trade. 

But even then, financial markets play an important role and enable traders to buy and sell a variety of financial assets. There is also greater information transparency in most markets, which is immensely helpful for investors. Regardless of the size of the trade or the status of the investor, there are plenty of opportunities for everyone to engage in a trade. If you are interested in trading in stocks or investing in the mutual funds market, reach out to our team of experts at Moneyfront. We are happy to guide you in the right direction.