Components of Financial Markets

Financial markets are broken down into various components based on the asset that is traded and the length of financing offered:

Capital Markets: Capital markets are concerned with raising capital for entities through issuing equity stock or long-term debt. Let us explore some of the elements of capital markets.

a) Stock markets: They are markets that companies leverage to raise capital by creating shares. The shares are sold to external investors, who can either be corporations or individual buyers. Companies can sell the shares on their own or engage the services of stockbrokers.

b) Bond markets: When organizations need large-scale financing, they may resort to bonds. Bonds are borrowing instruments which generate a fixed interest rate after a predefined period. Different types of bonds include treasury bonds, corporate bonds, and municipal bonds.

Commodity Markets: This is where companies trade in natural resources such as oil, corn or gold, for short-term financing

Money Markets: Money market instruments are also referred to us ‘paper’. They entail trading of financial instruments which are highly liquid and have short-term maturity dates. The maturity dates of papers could be as short as a few hours but not more than one year.

Derivatives Markets: These are markets that facilitate the trading of financial instruments like futures contracts or options which are derived from other forms of assets like stocks, bonds, commodities, and market index price

Futures Markets: A futures market is one where participants agree to buy or sell an asset at a future date at an agreed-upon price.

Insurance Markets: Insurance markets are a means of protection against financial loss or any other uncertain loss. Insurance companies compensate to the insured party in case of occurrence of the insured loss.

Foreign Exchange Markets: Forex markets deal with the buying and selling of foreign currencies.

  • Mortgage Markets: They are classified as primary and secondary mortgage markets. In a primary mortgage market, mortgage brokers, commercial banks, and credit unions give out mortgage loans needed to acquire property. A secondary mortgage market involves the buying and selling of existing home loans, which have been bundled together and traded as mortgage-backed securities.

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