Financial markets encompasses trading of many different securities such as stocks, money markets, bonds, forex, commodity markets, derivatives and cryptocurrency markets. In most of these financial markets, the core values of activities that take place here is trading, where buying and selling interplay in the markets. This can be exchange of one goods and services, or in the case of currency market, the term implies exchange of one current for another. For instance using
Dollar ($) to buy for
Euro (€). The attention of most investors, financial institutions and retail traders have geared towards Financial markets since there a lot of cash inflow and huge funds in circulation that enable a lot of individuals to invest or trade.
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We might be hearing some great names that come under financial market like Goldman Sachs , HFBC, JP Morgan. These are all great names of firms in Financial markets own by Investors or group of Investors.
The main objective of Financial markets is to make money or profits. For instance financial markets have institutions like Bank which operate on daily bases received cash from investors and giving out cash for investment purposes. It's services that are rendered in returns for money. Financial market brings two group of people, these are investors or lenders and borrowers. We have two groups of` borrowers, Governments and companies looking to borrow moneys. For instance if you’re a borrower, you’re going to pay cost, that’s interest. Actually, the investors take some returns of interest.
Financial market can be broken down into money market, capital markets. Capital market can be broken down into equity and debts. Financial market is also bringing lenders and borrowers together. Where Lenders or
Investors hold their funds, while borrows do not have funds to trade. So it’s this financial market which link them by directing them through communication and collaboration for Investors to lend the borrowers capital on fixed durations and terms of conditions to expand their businesses. Either little or huge interest is levied on the funds received from Lenders of Borrowers. In this the institution of financial market like Banks act as intermediary who receive some percentage of interest on the funds received by the borrower in the cause of returning.
In this case Financial market can be operated in either physical location like Banks of Newyork stock exchange, London stock exchange and Tokyo stock exchange or electronic system such as computer like National Association of Securities Dealers Automated Quotations(Nasdaqs)
Types of financial markets
We have so many types of financial markets which comprise of capital markets (stocks markets, bonds markets, OTC), money markets, derivatives markets, forex markets, spot market, interbank markets, credit markets, commodity markets, equity markets and cryptocurrency markets.
Capital market is the type of financial market where buying and selling is operational to connect buyers and sellers together to trade on stocks, bonds, over-the-counter (OTC), currencies and other important assets as I had already mentioned. Actually they bring innovations by supporting small businesses and large businesses to grow. Examples of capital markets are the Banks that have most of big time investors that trade with them. What these Banks do is to use their capital as lending capitals for the borrowers on fixed interest rate that have been negotiated for a specific time duration so that the borrowers can use to trade and return the traded capital plus the interest. On percentage base, the Banks get profits split with the investors for trading with them. So the capital investment acts as intermediary by cannelling investment and savings. Because what most Banks do is to offer savings Banking, Investment Banking, fixed deposits and current account deposits for individuals, organizations and institutions as the kind of services they render. So we have the suppliers of capital like the retail Investors and Institutional Investors. Most Investors are into either long term or short term investment which ever way that suit them. This ideally enable the Banks to raise a lot of funds.
Let’s delve little into primary and secondary market which are the two main categories of capital market. The primary markets involve selling of securities such as stocks or bonds for the first time to Governments, companies and other groups as equity or debt-base. This may include Initial Public Offering (IPO). The secondary markets involve buying and selling the existing securities like stocks by brokerage firms, investment funds to other individual investors. The trade can be on stock exchange, OTC, Nasdaq etc.
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The
stocks market is a market where individuals or investors have to buy and sell publicly listed shares in the financial markets. Shares are therefore assets or securities in which individuals are entitled for or owe some portion of that assets. We have institutions like Banks and other private companies where investors are shareholders of certain assets or securities. If the company makes profits on those assets, the individual
shareholders have some percentage of profits to be shared. In the same way if the company make loss on the shares of the assets purchased, it means all the shareholders have to bear that loss. Dividends being profits which are paid for the individual shareholders of the company assets either monthly, quarterly or annually depending on the company’s terms and agreements with the individual shareholders.
- Over-The-Counter (OTC) markets
Over-The-Counter (OTC) involves a decentralized platforms where retail traders can trade in many instruments like stocks, commodity and currencies markets electronically without any intermediary or third party executing the products or instruments. What we have to understand is that it involves no real location where trading is done since it’s electronically base. The issue of two party’s involvement could be associated with counter-party risk where one party in the process of transaction of OTC commodity may default and end up one losing his asset.
Bonds market involves investors giving credits to Governments or companies in agreement or promise to return the fixed amount of credit at certain period of time with the interest. The interest could be calculated as coupons. Some of the bonds agree percentage rate that are paid for every month till the bond matures. Let’s take for instance a Government of Ghana received $10,000 for infrastructural development like sugar factory for 10 years period with the bond promise of paying $10,500. But every month the Government of Ghana is paying 2% coupons on the $10,000 amount received. This means the Government is paying $200 coupons every month till the date that it matures for him to pay all the $10,500. Many people think in this way that bond is more risky, but if the credit borrowed is used judiciously for the planned development project, profit can be raised before the maturity date for the bond. Penalty is attracted for defaulters of bonds.
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Money markets are markets offered by individual for only short term say 3 months but less than a year. They allow Government and other institutions and Banks to raise money by selling securities to investors and at the same time allow invertors to sell securities to individuals. An example is the fixed deposit or treasury bills which most individuals investors can deposit certain amount say $20,000 and get returns of 3% on the total amount deposited at the Bank for the treasure bill or fixed deposit. The investors can agree on terms with the Bank to withdraw the profit plus the amount deposited or can leave original money deposit for recurring for every month. In this case, the profit is cash out and the actual money would be left in the account for investment. What happens is that, the Banks takes this money deposited to also work and get some returns of interest. Another form of money market is the mutual fund that are contributed by individual cooperate bodies. These funds are given as loans to individuals and the borrowers. The loans are spread for the borrower to pay within a short time.
In the
derivatives markets offering of future contracts is very common. Trading can be OTC or exchange trade derivatives. It comprises of commodity, stocks and currency markets where the trader can speculate the future markets.
The
forex market is the market involving foreign exchange
currencies. currency can be traded by investors either by buying one currency for another currency or selling one currency for another currency. This exchange investment can be done physically or virtually. For instance in my Country where I use Ghanaian cedi, I can use my Ghanaian cedi to exchange for the US Dollar upon speculating the market that the US Dollar is likely to increase. Electronically, there is also a virtual platform where traders or investors trade buy selling or buying one currency for another currency, for instance GBP/USD. There is Over-The-Counter (OTC) involvement like the
Broker who have a brokerage platform that allow traders to execute trades in return for commissions.
In
commodity markets, it involves trading with physical materials like cocoa,
gold, fruits,
oil and sugar. Commodity markets can be categorize into two, hard commodities and soft commodities. Examples of hard commodities can be natural resources that can be mined or extracted like gold, diamond, and oil. Soft commodities are many from agricultural produce such as corn, sugar and wheat.
These are
markets where digital
currencies are in circulations for marketing. Individual investors can buy or sell one all more cryptocurrency assets using their crypto wallet accounts.
The blockchain technology offers a platform for trading cryptocurrency market. One of the unique thing is that it’s a decentralized platform which does not involve any third party influence. We have chunk of cryptocurrencies that one can invest, either through buying and holding or selling it for one crypto upon speculating the market conditions. One risk is that crypto is also volatile market which novice and experienced investors should be careful when trading.
In summary, financial markets are very broad markets which one can trade the above explained various markets like capital markets, money markets, stocks and bonds markets, forex markets, commodity markets and cryptocurrency markets. We therefore advise investors to choose what suit them base upon their knowledge of studying how those markets are invested. Some of the markets are very flexible while others are highly liquid and volatile. But in all, experience is what most matters in any investment market. In future we would delve in details how each market behave, why it’s good or not good for investment. Thank you!
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