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Trading in Financial Markets and financial assets
The term market is used for a place where many commodities are traded or a place where only one commodity is traded. A market works by facilitating many interested buyers and sellers to gather in one place, making it easier for them to find each other. A country which relies on interactions between buyers and sellers to allocate resources is known to have a market economy. Nowadays, a market may be a physical location or an electronic system where people can access the system and interact with others.
Financial market allows people to buy and sell financial assets such as financial securities like currencies, stocks and bonds. There are three or four types of financial markets in major financial centres throughout the world. They are:
Money markets are dominated by major banks and other financial institutions and mainly short dated funds are traded in money markets. Large firms also borrow and lend on money markets.
The type of funds that are traded on money markets, are as follows.
- Short term inter-bank loans. Terms may vary from overnight to 12 months or more.
- Short term inter-company loans. Large firms lend and borrow directly.
- Bills of exchange. This is similar to a post-dated cheque. A customer issues a written commitment to pay a specified amount to a supplier on a future specified date. The supplier can either hold it until the date of maturity or trade with a bank at a discount if he needs money before the maturity.
- Certificate of deposit. These are issued by banks at a fixed interest rate for a fixed term up to 90 days.
- Commercial paper. These are unsecured short term loan notes issued by large firms. They generally mature between a week and 3 months or even 9 months. The commercial paper can be traded before the maturity date.
- Eurocurrency. These are currencies held on deposit with banks outside their country of origin.
Capital or Securities Market
Capital or securities markets trade in longer-dated securities usually over 12 months such as shares and stocks. Stock exchanges, the bond market and the Eurobond market are examples for capital markets.
Capital market provide a primary market for raising new capital for companies in the form of equity to new share holders or existing share holders. Also capital markets allow trading in existing securities where investors are provided with a means of selling their investments.
The Foreign Exchange Market
A currency of a country is traded for the currency of another in the foreign exchange market. Individual retail traders are a small fraction of the foreign exchange market and they only participate indirectly through banks or brokers. The foreign exchange market is very large in size and includes trading between large banks, central banks, currency speculators, multinational companies, governments and other financial markets.
To read more about Foreign exchange market, click the link below:
If there is only one single currency in this world, there would be no foreign exchange market, no foreign exchange rates, no foreign exchange. But in our world with many countries having their own national currencies, the foreign exchange market plays the most important role of providing the machinery for making payments between countries, transferring funds and purchasing power from one currency to another, and determining that important price, the exchange rate.
Derivatives are used as hedging devices to reduce risk and is a generic term for a range of traded financial instruments that have developed from securities, commodities and currency trading. London International Financial Futures and Options Exchange is one of the major derivatives markets in the world.
The derivatives market can be divided into exchange-traded derivatives market and over-the-counter derivatives market.