Financial markets play a vital role in facilitating the smooth operation of capitalist economies by allocating resources and creating liquidity for businesses and entrepreneurs. The markets make it easy for buyers and sellers to trade their financial holdings. Financial markets create securities products that provide a return for those with excess funds (investors/lenders) and make these funds available to those needing additional money (borrowers). The stock market is just one type of financial market. Financial markets are created when people buy and sell financial instruments, including equities, bonds, currencies, and derivatives. Financial markets rely heavily on informational transparency to ensure that the markets set prices that are efficient and appropriate
Types of Financial Markets
There are several different types of markets. Each one focuses on the types and classes of instruments available on it.
Stock Markets
Perhaps the most ubiquitous of financial markets are stock markets. These are venues where companies list their shares, which are bought and sold by traders and investors. Stock markets, or equities markets, are used by companies to raise capital and by investors to search for returns. Stocks may be traded on listed exchanges, such as the New York Stock Exchange (NYSE), Nasdaq, or the over-the-counter (OTC) market. Most stock trading is done via regulated exchanges, which plays an important economic role because it is another way for money to flow through the economy. Typical participants in a stock market include (both retail and institutional) investors, traders, market makers (MMs), and specialists who maintain liquidity and provide two-sided markets. Brokers are third parties that facilitate trades between buyers and sellers but who do not take an actual position in a stock.
Over-the-Counter Markets
An over-the-counter (OTC) market is a decentralized market—meaning it does not have physical locations, and trading is conducted electronically—in which market participants trade securities directly (meaning without a broker). While OTC markets may handle trading in certain stocks (e.g., smaller or riskier companies that do not meet the listing criteria of exchanges), most stock trading is done via exchanges. Certain derivatives markets, however, are exclusively OTC, making up an essential segment of the financial markets. Broadly speaking, OTC markets and the transactions that occur in them are far less regulated, less liquid, and more opaque.
Bond Markets
A bond is a security in which an investor loans money for a defined period at a pre-established interest rate. You may think of a bond as an agreement between the lender and borrower containing the loan's details and its payments. Bonds are issued by corporations as well as by municipalities, states, and sovereign governments to finance projects and operations. For example, the bond market sells securities such as notes and bills issued by the United States Treasury. The bond market is also called the debt, credit, or fixed-income market.
Money Markets
Typically, the money markets trade in products with highly liquid short-term maturities (less than one year) and are characterized by a high degree of safety and a relatively lower interest return than other markets. At the wholesale level, the money markets involve large-volume trades between institutions and traders. At the retail level, they include money market mutual funds
bought by individual investors and money market accounts opened by bank customers. Individuals may also invest in the money markets by purchasing short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills, among other examples.
Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Rather than trading stocks directly, a derivatives market trades in futures and options contracts and other advanced financial products that derive their value from underlying instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks. Futures markets are where futures contracts are listed and traded. Unlike forwards, which trade OTC, futures markets utilize standardized contract specifications, are well-regulated, and use clearinghouses to settle and confirm trades. Options markets, such as the Chicago Board Options Exchange (Cboe), similarly list and regulate options contracts. Both futures and options exchanges may list contracts on various asset classes, such as equities, fixed-income securities, commodities, and so on.
Forex Market
The forex (foreign exchange) market is where participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs. The forex market is the most liquid market in the world, as cash is the most liquid of assets. The currency market handles more than $7.5 trillion in daily transactions, more than the futures and equity markets combined.1 As with the OTC markets, the forex market is also decentralized and consists of a global network of computers and brokers worldwide. The forex market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.
Commodities Markets
Commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products (e.g., corn, livestock, soybeans), energy products (oil, gas, carbon credits), precious metals (gold, silver, platinum), or "soft" commodities (such as cotton, coffee, and sugar). These are known as spot commodity markets, where physical goods are exchanged for money.
Research Analysts
Research analysts tend to be more data crunchers than financial analysts. Research analysts
can also be used in determining an investment's valuation or the value of an asset. These analysts can work on market research to spot trends but can also work as equity analysts to prepare reports for buy or sell recommendations. Research analysts tend to focus more on mathematical models to produce objective answers about historical data. A research analyst can take a series of inputs, and calculate the most efficient way to maximize output. Research analysts are used to help improve a company's operations through advanced mathematical and analytical methods. These analysts help businesses investigate and solve complex problems, and allow the companies to make better business decisions. A subset of research analysts is the market research analyst, who breaks down what consumer data says about a product, service, or the market. Market research analysts often examine the potential market for a product's success.
They interpret client data and customer trends with the goal of helping companies understand what consumers are buying, at what price, and what they're not buying. Also, market research analysts are employed in the investment industry to analyze the overall financial market trends for equity and bond markets. As a result, the role can require a great deal of statistical knowledge, computer skills, and a solid understanding of economics.
