Types Of Financial Markets: Definition and Functions

When people talk about the market in the field of economics, they refer to the number of sellers and buyers in the area.

A lot of things depend on the market. For example, the cost of the item, the value of the material, and the demand for the item- everything depends on the market. This is why many people research the market before starting their venture.

Now, there is something that you should know. There are different types of markets. They can be classified based on the nature and competition levels that exist. Based on the structure of the market, the economy changes.

Some of the most common and famous global markets are Stock markets, financial markets, foreign exchange markets, and media markets. In this article, I will provide details about the financial market.

If you want to know about financial markets and the types of financial markets, then keep reading…

What Is the Financial Market?

This topic is something that I have been asked a lot of times. But unfortunately, the topic of financial markets is also something that people can easily misunderstand. That is why I am going to be as explanatory as possible.

A Financial market refers to an area or a marketplace where the trading of stocks, bonds, and other derivatives is done. This type of market is an exception, as unlike other marketplaces of the economy, this one exists physically.

In other words, the financial market is a physical location where several purchases and trading regarding stocks and bonds are made. Therefore, this type of market helps to raise the country’s finances.

Financial markets are known to trade in all forms of securities that are essential for the smooth functioning of capitalist society.

These assets are either exchanged or traded OTC (over-the-counter). If the market fails, it results in recessions and other economic disruptions like unemployment.

There are many types of financial markets. To get to know about them in detail, keep reading…

Types Of Financial Markets

When we talk about the financial market, certain things come to mind. For example, we think of all the things that are related to it, like stocks, bonds, and other derivatives.

Based on all this, the financial market is divided into certain categories. The different types of financial markets in India are:

1. Bond Market

This form of financial market offers opportunities for most companies to secure the money or capital that is needed to finance them.

Most of the time, debts and other securities that the government issues are dealt with in this form of market. The return and the risks that are associated with the bond market may vary.

The risk is interlinked with the credit of the issuer. One thing that remains constant is the fact that the rate of interest is directly proportional to the credit risk.

The bonds in a bond market are more like promises that are made to the companies or government to repay the amount within a fixed period. The companies have to pay the principal price or amount for the settlement.

2. Stock Market

The stock market is probably omnipresent in the financial markets. These are physical places where companies and businesses come together to list their shares and stocks. These are then sold and bought by the investors or the traders.

3. Derivatives

A derivative or a derivative market is a form of the financial market where the contracts or derivatives are traded based on the present value of the market. The firms have the power to either deal in futures, contracts, options, or swaps.

In other words, derivatives are a form of a financial marketplace where the two parties meet and agree to trade certain financial assets. It is worthless in itself. However, they are more like secondary securities that are very important to the economy of a country.

4. Commodity Market

These are more like venues where the consumers and the producers come together to exchange or trade physical goods and commodities. In other words, this form of financial market deals with several physical assets like oil, rice, wheat, or even gold.

As the price of these commodities is never fixed and is subject to change due to several external factors worldwide, a separate physical market is made for these commodities.

5. Over-the-Counter Markets

An over-the-counter market is a decentralized one, which means it does not have any physical location, and it conducts all its trading electronically. Here, all the markets participate and trade directly without needing a broker.

OTC markets trade only in certain stocks, but most stock trading is done through exchanges. Certain companies, like riskier and smaller ones, do not meet some listing criteria, so OTC markets do not work with those companies.

Some derivative markets are exclusively OTC, and they cover an essential part of the financial markets. The transactions that take place in OTC markets are less regulated, opaque, and less liquid.

6. Money Markets

Basically, the money market trades in products with short-term maturities that are highly liquid and come with a high degree of safety and lower interest returns than any other market.

If we think of it from the wholesale perspective, this market involves large-volume trades between the traders and the institutions. From a retail perspective, it includes money market mutual funds that individual investors buy and the accounts that bank customers open.

Individuals can also invest in money markets as they purchase municipal notes, certificates of deposits for short terms, or U.S. Treasury bills.

Financial Markets: Functions

When it comes to the functions of a financial market, the list is almost endless. But let me try to point out some of the major functions of a financial marketplace. Some of the most important functions of a financial market are:

• It helps to determine the securities and the price of these securities


• Helps lower the cost or price of transactions


• It makes sure that the savings are put into productive use


• It helps to make the financial assets much more flexible

Frequently Asked Questions (FAQs):

Here are a few questions that are most commonly asked. Let’s figure those out before we ed this article.

1. What Are The Two Main Types Of Financial Markets?

There are several types of financial markets. However, two of the primary forms of financial markets are the Capital market and the Money Market.

However, when dealing with this in detail, one may find that there are many forms of financial markets. Some of them are Stock Markets, Bond markets, OTC (Over-the-counter) markets, derivative markets, and Money markets.

2. What Are Financial Markets?

Financial markets are physical marketplaces where securities, bonds, stocks, and other derivatives are traded.
 
Here, the buyers and the sellers trade all forms of financial instruments like stocks, bonds, and equities of numerous international currencies. This form of market is extremely important for a nation’s economy.

3. What Are The Roles Of Financial Markets?

The financial market is one of the major and most crucial elements of a capitalist society. This market ensures a low cost of information and transactions.

It also provides investors with the tools to invest and sell and the security to deal with all major financial assets. It further provides all the necessary facilities to ensure that there is interaction between the borrowers and the investors.

4. Who Are The Participants Of A Financial Market?

Regarding the financial markets, the participants are mainly investors and speculators of the market and economy.

There are brokers, hedgers, and arbitrageurs, for example, who play a major role in the financial market apart from the direct investors and the buyers.

Wrapping Up!

A financial market is a form of trading where securities, bonds, and stocks are traded. It is one of the main and crucial markets in the world, and the countries’ economies depend on it.

One of the most important functions of the financial market is to ensure that the price of the securities is always available in the market. The performance of the assets determines the money or the capital.

In this form of market, the traders, the investors, and the buyers come together to make transactions regarding the liquid assets and ensure that the securities are traded in time.

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