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What Are Financial Markets? The Ultimate Guide for Beginners

What are financial markets?

Financial Markets are markets in which traders buy and sell financial assets. Assets such as securities, gold, stocks, commodities, etc. are traded in these markets. Trading prices in these markets are determined by the supply and demand process.

When it comes to financial markets, most people only think of the stock market. While there are different financial markets with different goals that most people are not familiar with. Markets such as commodity exchanges, gold markets, housing markets, etc. are examples of these. In this article, we introduce some of these markets.

 

Financial market functions

One of the functions of financial markets is the Price Discovery process. That is, according to the information available in the market and based on the price of supply and demand, the price of securities is determined.

Financial markets lead to the transfer of surplus and unused money from small and large investors to sectors of industries and services that are prone to growth and have a comparative advantage over other industries. This market also allows risk to be shared between applicants and fund holders.

 

Financial market classified

Financial markets can be classified into four categories based on financial rights, the maturity of the traded instruments, the organizational structure, and the timing of their assignment.

 

Financial markets based on financial rights

Financial markets are divided into two categories based on financial rights:

 

Debt market

A debt market is a market in which fixed assets or debt instruments such as bonds are traded.

 

Stock market

It is a market in which investors exchange stocks.

 

Financial markets based on the maturity of the traded instrument

Markets are divided into money and capital markets based on the maturity of tradable instruments.

 

Money Market

A money market is a market in which securities are traded with a maturity of less than one year. In this market, the speed of liquidity is very high. The interest rate in the money market is proportional to the duration of holding the securities. That is, the longer the securities are held, the higher the interest rate.

 

Capital Market

In the capital market, securities with a maturity of more than one year are traded. Bonds such as long-term bonds and stocks are among the traded securities in this market. In general, this market facilitates the management and allocation of economic resources.

The capital market has placed tradable instruments in terms of their life cycle in two different markets.

 

1. Primary Market

The primary market is the market in which securities are first traded. In general, it can be said that capital formation takes place in the primary market.

 

2. Secondary Market

After securities are first traded (such as initial public offerings) in the primary market, they enter the secondary market. The secondary market allows securities that were previously traded in the primary market to be re-tradable and their holders do not have to worry about buying or selling securities. The stock market is an example of an organized secondary market.

The secondary market can also exist in the following ways.

 

2.1 Auction Market

In this market, buyers and sellers or their brokers trade directly with each other. Trading in this market takes place when the highest price offered to buy the stock is equal to the lowest price at which a person is willing to sell his stock.

 

2.2 Broker Market

If there are not enough buyers and sellers in the auction market, traders turn to a broker.

 

2.3 Dealer Market

There are people in the market who are willing to accept the risk of price fluctuations. These people take advantage of price changes in the market. Oscillators can be considered market participants.

 

 

Financial markets based on organizational structure

Official markets

The stock exchange is an organized official market that includes tangible physical facilities. Strict rules and conditions apply to companies that go public. These companies are examined in terms of liquidity, information transparency, etc.

 

Over The Counter

The over-the-counter (OTC) market is a market in which securities are traded on companies that are not listed on the exchange. This market does not have a physical location and there are easier conditions to enter it than the official markets.

 

Third Market

Includes all OTC markets. In this market, all securities listed on the stock exchange are traded off-exchange. Large organizations and institutions investing in this market usually trade in securities.

 

Fourth Market

In the fourth market, there are usually organizations that intend to do very large transactions. In this market, in order not to pay a fee, the parties usually trade directly without the intervention of the broker.

 

 

Financial markets based on divestiture time

In this part, the market can be divided into two categories in terms of the time of assignment: futures market and cash market.

 

Futures market

It is a market in which derivatives are traded. Derivatives are contracts in which the holder is required or authorized to buy or sell the asset at a specified date in the future.

 

Cash market (Spot market)

It is a market in which as soon as a transaction is made, all financial transactions take place at the same time. That is, immediately after payment by the buyer, ownership of the goods or securities is transferred to the buyer.

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