What are Financial Markets?
Financial markets are any place in which you can trade securities for low transaction costs. Securities are fungible financial instruments that can be traded in a financial marketplace including bonds, equities, international currencies like USD and Euro, and derivatives. A financial market acts as a complex system of rivers where different forms of money are riding the flow from one end to another. Buyers wish to buy at the lowest possible price, while sellers seek the highest possible price. Financial markets provide the liquidity required for businesses to expand and for entrepreneurs to raise money for their ventures. The information on these markets is available to the public which contributes to the transparency of transactions and reduces the risk of investment.
Types of Financial Markets
Depending on their function and the specific security at trade, financial markets are categorized into many types and forms, including the stock market, the over-the-counter (OTC) market, bond market, commodity market, and foreign exchange market (Forex), and the cryptocurrency market.
The stock market is the poster boy of financial markets and is what people imagine when thinking about financial markets. A stock market, equity market, or share market is a hub in which shares of ownership of public companies are traded. The price tag on each share fluctuates based on the company’s performance in the market and the overall trend of stock prices is an important indicator for evaluating a company as a whole. The end goal is to buy at low prices and sell when prices are sufficiently high. So a buyer places an order on a stock for the price that he or she wants to buy. A third party called a broker takes this offer and when someone else is willing to sell at the buyer’s desired price, the broker executes the transaction. Companies list their shares or stocks on stock exchanges, including NASDAQ, New York Stock Exchange (NYSE), or else over-the-counter (OTC).
Over-The-Counter (OTC) Market
Over-the-counter (OTC) or off-exchange trading or pink sheet trading is a decentralized trade, which meant that the exchange of securities such as stocks, commodities, and currencies directly takes place between two parties without the involvement of any third-party brokers. The same buy-sell dynamics described for the stock market also govern the OTC trading but there are no brokers involved and therefore there is less transparency and fewer regulations imposed on the trades. OTC is a non-physical market where trades are executed online or over the phone. It is an ideal place for low-traded and cheap stocks that do not meet the requirements of the stock market.
A commodity market is a hub for the direct trading of physical materials and products for money. Since commodity prices are prone to fluctuate and put the companies at risk, they lock their products’ prices in what’s known as a commodities futures market. Commodities primarily fall into one of two categories: Soft commodities which are grown or ranched, and hard commodities which must be mined or drilled out of the ground. There are also four less-generalized categories of commodities:
A class of soft commodities such as tea, rice, fruits, vegetables, and lumber.
A class of hard commodities including gold, silver, aluminum, iron, and copper.
A class of soft commodities including live animals and meat, dairy products, leather, and ivory.
A class of hard commodities including coal, crude oil, and natural gas.
The foreign exchange market or Forex is a decentralized global market where institutions and people can exchange currencies from all around the world including the USD and Euro. Banks conduct a huge share of the trades – almost a quarter of trades – and hedge funds are next in the rankings by being responsible for %11 of the trades. Forex can be conceptualized as a decentralized network of banks, commercial companies, investment management firms, hedge funds, and retail forex brokers and investors. Since cash is the most liquid form of assets, the Forex market has the highest liquidity among all the other markets. With a daily volume of $6.6 trillion, Forex is the largest financial market in the world.
A cryptocurrency market is where decentralized currencies such as Bitcoin, Ethereum, and Dogecoin are traded. Cryptocurrencies are powered by blockchain technology and exist on a decentralized network of computers and servers that’s called the blockchain network. Cryptocurrencies are fungible digital assets and can be created, traded, exchanged, and stored and primarily fall into either one of two categories: Coins and Tokens. A coin has its own blockchain and regulations, while a token runs on another coin’s blockchain and pays a fee in return. Bitcoin and Ethereum are well-known examples of coins, while Shiba Inu (SHIB), Tether (USDT), and Chainlink (LINK) are tokens that all run on the Ethereum blockchain. The decentralized trades that take place on the crypto market have no central authority to be supervised or regulated by.
Financial markets are created to facilitate the flow of money, goods, and assets and bring the institutions and individual investors to conduct trades. Each financial market is specialized in certain securities. Markets like the stock market are centralized, while other markets like the cryptocurrency market are decentralized and suffer from no central regulating body. The foreign exchange market or Forex is the biggest and most liquid of all financial markets with a daily volume of over $6.6 trillion. The future of financial markets seems to be headed towards more decentralized attitudes and the overall success of the cryptocurrency market is a major contributor to this speculation.
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