What Are Financial Markets? and 2 Other FAQs of Investors

Written by Jacob on October 28, 2020. Posted in News.

What are financial markets? The financial markets are where people buy and sell assets. These assets are in the form of equities, bonds, currencies, and derivatives.

Markets follow rules that cover pricing, trading regulations, and fees.

The world’s stock exchanges are the most well-known markets. There are 60 of them trading with a total worth of $69 trillion dollars!

But any market where equities, bonds, currencies, and derivatives trade is a financial market.

Stock and Bond Markets

A publicly-traded company means investors buy and sell shares in the company. This means the company answers to the shareholders.

You can buy stock in public companies such as Google, Amazon, and Microsoft. As the company succeeds, the cost of the shares rises. You can own your shares for years or buy and sell them in a short period of time.

The New York Stock Exchange (NYSE) is one of the most famous stock exchanges.

If you own certain types of stock, you can even get a cash loan against the stock value. This is a stock loan.

When you invest in bonds, you’re loaning money for a set period of time at a pre-determined rate of interest. It’s common for governments to issue bonds. Corporations can also issue bonds.

When the period of time comes due, you can cash in the bonds.

Money Markets

These markets are for short-term trading, a year or less. Because of the high liquidity and nature of the securities, the money market is a safe market. There are some risks, though, including potential defaults.

Derivatives

Derivatives are a complicated market. If you’re an inexperienced trader, avoid the derivatives markets. Derivatives are contracts, and their prices are determined by the market price of the main assets.

If you’ve heard someone discuss “futures,” they’re talking about derivatives.

Forex Markets

Currencies trade on the forex market. Because cash is the most liquid asset, forex markets are the most liquid markets. Due to the Internet, anyone can trade on the forex market at any time of the day or any day of the week.

The interbank market is where currencies trade between financial institutions and banks only.

What Are Primary Versus Secondary Markets?

The primary market is where a company sells shares for the first time. New securities are issued on an exchange from the primary market. Investment banks set the price range. The stocks are then sold straight to the investors.

When you buy and sell shares from other investors on the stock exchange, you’re in the secondary market. You’re buying and selling from anyone who owns shares instead of from the actual companies.

What’s the Over-the-Counter (OTC) Market?

This market is also a secondary market. It’s for stocks not traded on a major stock exchange like the NYSE. Instead, these stocks are traded on networks that provide pricing information.

They’re known as pink sheets, such as the over-the-counter bulletin board (OTCBB). There are fewer regulations for the OTCBB than for the NYSE. Much smaller companies are traded on the pink sheets.