Types of financial markets

Types of financial markets

In the strict sense, financial markets are spaces where economic agents, suppliers, and demanders, carry out the negotiation of various financial assets. But how many types of markets are there and what differentiates them? To answer these questions, we review below the fundamentals of the financial markets and the criteria that classify them.

The main difference in the categorization of the markets is due to the different evaluation criteria. Some criteria attend to how the operations are carried out, while others are classified according to the securities traded and their different classifications. We examine the different.

Types of financial markets

  1. Depending on how the market works
  2. According to the intervention of the authorities
  3. According to the stage of negotiation of the assets
  4. According to the degree of formalization
  5. Based on assets traded

Depending on how the market works

Due to their operation, the markets are classified as direct, intermediated, and auction markets.

  • It is called direct market when the exchange of shares or titles is carried out directly between buyers and sellers, that is, without the intervention of specialized agents. The buying and selling of shares that are not listed on the stock exchange are examples of a direct market.
  • Intermediated markets are those in which at least one of the agents participating in the operation is a financial intermediary. Examples of this type of market are banking and the mortgage market.
  • Finally, when there are centralized mechanisms in charge of publishing purchase and sale orders, as occurs in the stock market, they are classified as auction markets.

According to the intervention of the authorities

The degree of intervention of the monetary authorities determines the difference between free and regulated markets:

  • When the volume and price of assets obey the movements of supply and demand, that is, prices are agreed between sellers and buyers, it is known as a free market.
  • When there is a competent authority that regulates the volume, price, and financing of assets, it is known as a regulated market.

An example of these markets is given in the supply of electricity in Spain, which, although it does not reach a total liberalization process, offers consumers the freedom to choose which marketer will pay their bill, and consequently, at what rate.

According to the stage of negotiation of the assets

  • They are called primary markets when the securities in exchange are newly issued.
  • Secondary markets consider the exchange of ownership over existing assets.

Under this criterion, the first issuance of a company’s securities, called a public offering for sale (OPV), corresponds to the classification of primary markets. Once the securities are listed on the stock exchange, in addition to the publication of the volume and price of the transactions carried out, they will be traded in the so-called secondary market.

According to the degree of formalization

According to the degree of formalization, markets are classified into organized and unorganized:

  • Organized markets are those whose negotiations obey pre-established rules and regulations under a stock market scheme.
  • In non-organized markets, on the other hand, the trading of financial assets is carried out outside the stock market, which is known as an over-the-counter scheme where transactions depend on what the parties agree independently.

Based on assets traded

Based on the characteristics of the assets traded, financial markets are classified into money markets, capital markets, stock markets, and bond markets.

Money market

The money market, or money market, is a set of wholesale markets for the exchange of money and other short-term financial assets. Distinctive characteristics of financial assets traded in a money market are high liquidity (possibility of being converted into cash immediately and without significant loss of value during the operation) and a low level of risk.

Examples of money markets are short-term credit markets (loans, credits, etc.) and securities markets (Treasury bills, corporate notes, mortgage securities, etc.).

Among the functions of the money market is financing to balance the State deficit, facilitate the achievement of economic policy objectives and, mainly, provide the possibility of obtaining titles or securities with high liquidity and profitability to keep a part of the wealth.

Capital market

The capital market is a market where the financial assets traded present a higher level of risk and maturity in the medium or long term. These assets are, for example, shares and long-term debt securities. Stock markets are capital markets.

In the capital market, investors have the possibility of obtaining returns through the shares acquired, while companies obtain capital, through the shares placed (sold), to finance working capital and expansion projects.

Capital Markets – Fixed Income

The fixed income market is a set of markets for trading financial assets whose remuneration has been previously determined. These financial assets are considered a lower risk investment, so their return is generally lower compared to equities.

The securities traded in the fixed-income market can be issued by the States, public bodies, and private fixed-income companies.

Fixed-income assets include certificates of deposit, Treasury bills, and promissory notes, as well as bonds, issued in the medium term, and debentures, with long-term maturity.

These markets encourage investment and financing of States, companies, and public institutions through investors and savers.

From its operation, the factors that influence its price and how to operate: 

Capital markets – Variable income

The variable income market is also identified as the stock market. In this market, the price of instruments is determined by the law of supply and demand. The return on the equity market works throughout the life of the issued asset. When we talk about the stock market, we are generally referring to the equity market.

The stock market reflects the economic situation at a global level, of the countries and also of the companies in particular. This is because variations in supply and demand reflect changes in the economic environment, such as interest rate adjustments, inflation, social and political events, and natural disasters.

One of the functions of the equity market is to provide companies with the necessary means for their operation and growth. Investors, on the other hand, seek the acquisition of corporate rights, as well as the possible return on the profits achieved by the company (dividends).

Foreign exchange market

Also known as forex, the foreign exchange market is one in which the participating agents convert from one currency to another.

The foreign exchange market is fundamentally an unorganized market, where transactions are made over the counter, that is, directly. In this decentralized market, foreign exchange trading takes place directly between buying and selling agents, such as individuals, companies, and central banks.

The foreign exchange market allows you to exchange one currency for another: with them, companies can cover payments for debt acquired in another currency and also anticipate and protect themselves against currency fluctuations that could affect the company.

Financial derivatives market

In the financial derivatives market, operations are carried out through financial instruments or products whose value is not determined directly, but is derived from the price of another asset, called the underlying. Among the underlying assets, we find shares, stock indices, raw materials, currencies, etc.

The derivatives market offers investment financial instruments for speculation on future movements in the prices of underlying assets, as well as hedging instruments.

Get to know the financial markets in-depth, from its operation to the possibilities to obtain profits by trading.

By Master James

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