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A Quick Guide to the Types of Financial Markets

January 03, 20243 min read

More than half of all Americans have less than $1,000 saved.

If you're one of those Americans, you might be thinking about investments as a way to jumpstart your savings and make the most of your money.

If you're looking to get started making investments, the first thing you need to do is choose which type of financial market you'll be investing within.

What are financial markets? Financial markets have the basic function of providing a space and a set of guidelines within which a certain type of investment is made. There are several different kinds, each with its own risk, potential return, guidelines, and more.

Keep reading to learn about the most common types of financial markets.

Capital Markets

In a capital market, institutions and individuals trade financial securities. Individuals invest in institutions and get a financial return as an incentive for their investment.

The two capital market examples are stocks and bonds.

Bonds are money that is loaned to a company at a fixed rate. The amount that the bond is worth is guaranteed to be returned to the investor after the bond period ends. A bond may also carry a small, set interest amount that often won't increase if the money isn't withdrawn immediately after the bond period ends.

Stocks also involve loaning money to a company. But while stocks carry a higher potential for return, they also carry a risk of loss.

You'll also need more money upfront if you really want to see a decent return on your investment. Luckily, stock loans can help with that.

If a company's value decreases, so does the value of a stock, with no guarantee that the investor will get back the same amount of money that they initially invested.

Money Markets

Another category of investing and financial markets are money markets.

These involve high liquidity trades with a very short maturation period, often as low as a year or even just a few days.

A few examples of money market trades are CDs, federal funds, and repurchase agreements.

While these trades are incredibly safe, that also means a low return on your investment compared to other global financial markets.

Cash or Spot Market

While buying stocks or money market investments are relatively straightforward, the cash or spot market is more complicated.

It involves paying cash for investments in items like contracts. This market is complicated and extremely risky. But if you know what you're doing, it can also be highly lucrative.

Forex Market

The largest and most liquid market in the world is one many new traders have never even heard of.

The Forex Market involves the trading of currencies. Unlike other markets, it's open 24/7, has no central marketplace, and anyone, anywhere can participate. The market also sees more than $407 billion in trade values each day.

Derivatives Market

Another complicated market to break into is the Derivatives Market. Examples of derivative trades include futures, options, and swaps.

Derivatives are more often used by Hedge Fund managers, professional investors, and institutions rather than individuals.

Understanding the Types of Financial Markets

Now that you know a few of the different types of financial markets, it's time to choose the right one for you.

If you're like most new investors, you'll choose stocks. If you need cash to get started, we can help. Contact us today to learn more about funding your investments through stock loans.

David

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