Like the food sector with fast food chains, whole food markets, fresh produce, farmers’ markets, etc. the financial sector also has different sectors meant for trading and transacting different types of financial instruments. Financial markets were built over a period of time to accommodate the growing economy and demand for investment sectors for investors from different sections of society. Once you understand the various “departments” that are together called “Financial Markets”, you will be able to understand financial instruments and why they play an important role in that sector.
Financial Markets – Understanding Their Types:
Capital Markets
Companies that want to grow and expand business, but do not have the private capital to make that happen, come to the public to raise funds for their ventures. However, an individual person won’t be able to support the financial want of the companies. So the public at large put in their bits of money known as “shares” and in turn, are counted as “shareholders” or co-owners of that company, valued at the amount of the share being held. These shares or equity are traded on stock markets on a daily basis and it is here that companies build their reputation, financial standing and capital based on the price at which a share is traded.
Bond Markets
These markets hold debt instruments that are to be paid back to the investors, with interest after a period of time that may be medium-to-long term. Governments and government-owned companies issue bonds to the public that are traded. These are medium and low risk investments. The best part about bonds is that there are definite returns, because you are investing in the government that doesn’t look like it is going to dissolve any time soon. Have you ever heard of a “Treasury”? These are basically bonds that are stored by the government.
Cash Or Spot Market
The same way that you exchange money for goods, cash or spot markets are short term investment markets for high riskers. Transactions usually take place within a day. It’s a delicate and complex system but there are high gains to be made. For those who are willing to put in their risk, they may or may not get the returns for. It’s a gamble. It’s basically meant for those companies that want short term capital for a quick project and plan to payback with a high rate of interest in a short period of time. DO NOT get into this until you learn what the market is about in detail.
Derivatives Market
This market is extremely complex and it takes years for “experts” to even understand it fully. The name comes from the instrument “deriving” its value from the core product. There are many instruments under derivatives – futures, options, put, call, etc. Again, the risk is medium to high, because there is a price that is discussed and set before the date when the derivative expires. Speak to someone who is familiar with the market before investing.
