What is financial market?
A financial market is a trading place for the creation and trading of financial assets such as shares, debentures, bonds, currencies, etc. The financial markets play an intermediary role between the savers and investors.
Types of Financial Markets:
It is important to know the types of financial markets. Following are different types of financial markets:
- The money market
- The credit market
- The capital market
On all three markets trading takes place in the commodity of money as well as in liquid assets and derivatives.
Size of the Financial Markets:
The size of these markets is quite enormous. According to an IMF estimate in 2011 the size of the capital market alone was around 145 trillion US dollar, by comparison, global GDP in 2011 only amounted to 70 trillion US dollars about two-thirds of the capital markets total volume are bonds issued by states and corporates and the other third is the market capitalization of listed companies this is the total value of their shares.
Let’s first start with money markets. Money markets are short-term markets. Usually, money is lent on these markets to bridge short-term liquidity gaps.
Banks also lend each other excess liquidity overnight or for a very short period of time on the money market. However, this interbank market temporarily came to a complete half as a consequence of the financial crisis of 2008-2009. On top of this, there are foreign exchange markets where currencies are traded. The prices on foreign exchange markets are referred to as exchange rates. They express the price of one currency in another currency in the second market.
The credit market is dominated by large and small retail banks. These banks deposit or borrow money from central banks and lend it in turn in the form of loans to private households and two companies securitization.
For example in the form of asset-backed securities like mortgage bonds makes it possible for the bank to sell their future claims against their tours to financial investors in continental Europe but also in China and Japan the credit market operated by commercial banks is the most important source of financing for the real economy.
The other form of financing of the real economy takes place through the issuance of shares and bonds.
Capital market is a market where medium and long term financial assets are traded.
Companies raise core capital by offering shares that give investors direct ownership into respective companies and companies issue bonds through which they borrow money from investors.
The owner of a bond is, therefore, a creditor while a shareholder is a co-owner.
This can make a big difference in the case of insolvency. States also raise funds through capital markets when tax receipts are insufficient.
Capital market is further categorized into two different markets:
The primary market is a market for the trading of new securities. At this place, the fresh issuance is made by the companies.
The secondary market is also known as the stock market. Where already issued securities are traded.
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