Financial markets are markets in which parties exchange resources through financial tools. It promotes capital raising and the development of capitalist society but also creates liquidity for corporations and opportunities for investors and traders.
There are different kinds of financial markets including the markets of stocks, bonds, forex, commodities, and other derivatives. What are each of these, and what purpose do they serve? Let’s find out.
The Stock Market
The stock market is one of the financial markets’ most common investment means. It is the place where participants hold, exchange or cash out shares listed on the stock exchange.
These shares are issued by corporations that want to raise capital to strengthen their capital position and business development.
The Bond Market
This is a financial market where governments can raise capital for their budget. It’s also a vital channel for central banks to dictate monetary policy.
The bond market is in fact divided into two financial markets: the primary market and a secondary market.
- First, in the primary market, governments, corporations and financial institutions sell bonds to investors to raise capital.
- Bondholders can then sell their bonds to cash out in the secondary market.
The Forex Market
Because each country has its own currency and monetary policy, individuals, businesses, banks, and governments often convert their own currency into foreign ones. This is where the global forex market comes into play.
Forex is the only one of the financial markets open 24 hours a day, five days a week. Thus, participants can trade currency pairs around the clock during this time.
The Commodity Market
In the commodity market, commodities are exchanged as futures contracts, options, and exchange-traded funds (ETFs). Examples of goods you can trade on the financial commodity markets include oil, natural gas, soy, corn, beef, and metals.
The Gold Market
Gold is one of the most popular commodities; many also view it as an asset preserving value. It represents a haven for capital during inflation or political and economic downturns.
Since gold is a limited resource, it is also a reserve asset. Participants in this financial market are, for example, gold-mining companies, businesses, individuals, financial institutions and central banks.
Stock Market Indexes
In order to combat the daily volatility of stock markets, financial markets have developed indexes or indices. Indexes are in fact combinations of stock fluctuations calculated for investors to understand the performance of a particular industry across multiple markets.
Some of the most popular stock indices include the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, Nikkei 225, Hang Seng, and FTSE 100.