Classification of financial markets

From CEOpedia | Management online

Classification of financial markets with regard to type of instrument traded we can distinguish:

  • securities market - stock exchange the market we can buy and sell in stocks, bonds, shares and other securities
  • debt market - involved in the trading of debt instruments for example corporate bonds and government also deal with the trading of packaged loan products that are sold to investors
  • equity market - the trading of debt instruments: corporate bonds and others
  • money market - sell and buy of securities of short-term dates, of one year or less for example treasury bills and commercial papers
  • stock market - relates to the assemblage of markets and exchanges where the systematic operations of selling, buying and issuance of shares of openly held companies occur
  • derivatives market - is for offshoot, financial implement for example options or futures contracts, which are derived from different molds of assets
  • commodity market - trades in primary economic sector preferably than manufactured products; soft merchandise are agronomical products such as wheat, cocoa, coffee, vegetables and sugar, hard commodities are mined for ecxample oil and gold
  • long-term/short-term loans market - one-time, short-term or long-term loan whereby the lender ensures the borrower with a certain amount of currency, national or foreign for a term not exceeding one year or exceeding one years. Full repayment of nominal and interest due to the lender must be paid at the end of the facility period
  • government papers market - debt securities that are spend or guaranteed by a supreme government, this is paper as the least risky debt securities in country and will offer investors the lowest efficiency liken with debt of a like maturity published by other entities in that nation
  • interbank market - segment of the money market in which the banking establishment are the pages and interbank deposits in the national and foreign currency and the short-term financial instruments are transacted

With regard to area of activities we can distinguish:

Functions Financial Markets

Financial markets take many different forms and operate in various ways. But all of them, whether very well organised or highly informal.

  • Price setting - the value of an ounce of gold or a part of stock is no more and no less, than what someone is eager to pay to own it. Markets ensure price discovery, a way to establish the comparative values of different items, based up on the prices at which person is willing to buy and dispose them.
  • Asset valuation - market prices offer the best way to constitute the price of a company or of the company's assets or property. This is essential not only to those buying and selling firms, but also to controllers. An insurer, for sample, may look strong if it values the securities it possess at the prices it paid for them years ago, but the important question for thinking its solvency is what prices those securities could be sold for if it required cash to pay claims now.
  • Arbitrage in countries with weakly developed financial markets, merchandise and values may trade at very different prices in miscellaneous locations. As businessmans in financial markets sample to profit from these discrepancies, prices move towards a homogeneous level, making the entire economy more effective
  • Raising capital - company often need funds to build new facilities, exchange machinery or broaden their business in other ways. Bonds, shares and another types of financial instruments make this passable. The financial markets are also an important origin of capital for person who wish to buy houses or cars, or even to make credit-card purchases
  • Commercial transactions - as well as long-term capital, the financial markets ensure the grease that creates many commercial transactions possible. This allow such things as getting up payment for the sale of a product abroad and providing working capital so that a company can pay employees if payments from customers run late
  • Investing - the stock, bond and money markets ensure an occasion to earn a return on funds that are not required immediately and to collect assets that will provide an revenue in future
  • Risk management - options and other derivatives contracts can ensure protection against many knds of risk, such as the prospect that a foreign currency will lose price against the national currency before an export remittance is received. They also enable the markets to attach a price to risk, allowing companys and person to trade risks so they can reduce their exposition to some while retaining exposition to others (Levinson M. 2014, p. 2-3).

Examples of Classification of financial markets

  1. Money Market: This is a financial market where short-term debt instruments such as Treasury bills, commercial paper, and certificates of deposit are traded. Money market instruments typically have maturities of fewer than one year and are used by businesses and individuals to raise short-term capital. Examples of money market instruments include Treasury bills, commercial paper, and certificates of deposit.
  2. Capital Market: This is a financial market where long-term debt instruments and equity securities are traded. Capital market instruments typically have maturities of more than one year and are used by businesses and individuals to raise capital for growth and expansion. Examples of capital market instruments include corporate bonds, government bonds, and stocks.
  3. Derivatives Market: This is a financial market where derivatives such as futures, options, and swaps are traded. Derivatives are financial contracts whose values are derived from the values of underlying assets. Examples of derivatives include futures, options, and swaps.
  4. Foreign Exchange Market: This is a financial market where currencies are traded. The foreign exchange market is the largest financial market in the world and is used by businesses and individuals to buy and sell currencies for profit. Examples of currencies traded in the foreign exchange market include the U.S. dollar, euro, Japanese yen, and British pound.

Advantages of Classification of financial markets

Classifying financial markets according to the type of instrument traded has several advantages. These include:

  • Increased access to information and a better understanding of the different financial instruments, allowing for more informed investment decisions.
  • Easier comparison of different markets and instruments, allowing investors to make more informed decisions about where to invest their money.
  • Greater transparency and oversight, allowing for better regulation of the markets.
  • Increased liquidity, allowing for more efficient price discovery and more efficient trading.
  • Reduced transaction costs due to the increased competition and specialization of the markets.
  • Reduced risk due to the increased diversification of investments across different markets and instruments.

Limitations of Classification of financial markets

Classification of financial markets with regard to type of instrument traded can include several different categories such as stocks, bonds, derivatives and commodities. However, these distinctions are not always clear-cut and there are some limitations to this classification system. These limitations include:

  • The overlap between different types of instruments. For example, derivatives can be based on stocks, bonds, commodities and other assets, and derivatives themselves can be traded on the market.
  • Complexity of financial products. Many financial instruments are made up of a combination of different types of instruments, making it difficult to classify them as belonging to one particular type.
  • Financial instruments can also be categorized by their purpose, such as those used for hedging, speculation or investments.
  • The emergence of new types of financial instruments that defy traditional categorization. For example, cryptocurrency, which is a digital asset based on blockchain technology, does not fit into any existing financial market classification.
  • The dynamic nature of financial markets, which can cause instruments that were once classified in one category to be redefined and categorized differently over time.

Other approaches related to Classification of financial markets

Financial markets can be classified in a variety of ways, depending on the type of instrument traded. The following are some of the approaches used to classify financial markets:

  • Money Markets: These markets are used to transact in highly liquid and short-term debt instruments such as Treasury bills, certificates of deposit, and commercial paper.
  • Capital Markets: Capital markets are used to trade in longer-term debt and equity instruments such as corporate bonds, stocks, mutual funds, and derivatives.
  • Commodity Markets: These markets are used to trade in physical commodities such as metals, agricultural products, and energy.
  • Derivatives Markets: Derivatives markets are used to trade in financial instruments such as futures, options, and swaps.
  • Foreign Exchange Markets: These markets are used to trade in foreign currencies.

In summary, financial markets can be classified based on the type of instrument traded, including money markets, capital markets, commodity markets, derivatives markets, and foreign exchange markets.


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References

Author: Paulina Pietroń