the structure of financial markets
the structure of financial markets,
types of financial instruments, and
types of financial intermediaries.
We will be mainly focusing on an overview of these three different aspects.
The financial markets can be categorized into two markets; -one is called debt markets and the other one is equity markets.
In the case of debt market, a debt market is mainly for the markets for bonds, loans, and mortgages, and there can be different types of debt instruments for short term and long term.
And the second market that is called equity markets, this is called markets for stocks. In the stock market, those who buy stocks they have the claims on the net income and assets of a business.
These two types of instruments, that is, the debt instrument and equity
instrument or the debt market and equity market, and you know that the debt market is mainly lending loan. Suppose you are depositing your money in a bank, or you are lending your money to a corporate, it all means that you are buying a bond, or you are buying government securities (government bonds). Government bonds are relatively less risky, and the return will also be very less. At the same time, equities are highly risky assets and the probability of return is high in equities.
In equity there is two types of market that the primary and secondary equity markets.
What is meant by primary markets and what is meant by secondary markets?
Primary markets means where the new issue of a security happens. Often, investment banks underwrite securities; that means, IPO- Initial Public Offerings. Where the transaction of initial public offering happens, we call it primary markets.
The secondary market means the stock exchange.Secondary market or stock markets where the transaction of an already issued security or the
already issued IPO happens. Here brokers and dealers are involved. In short, the stock market is a place where the transaction of an already issued security or equity happens.
Is there any relationship between primary and secondary markets ?
YES there is a high correlation relationship between secondary market and the performance , the stock price and the price of the IPO .
when the share of a company is performing better means the investors are more interested in that company , that means, there is more demand for the securities or the share of these companies , also more capital is moving to the stock markets and because of that you can also see that a companies can issue new IPOs.
So, in that way when the secondary market is performing better you can also see that primary market also will perform better and as a result economy you can see that there will be more capital flow or more investment in the economy. As a result, economy will be doing better and more investment in the economy means more production, more economic activity, more production of goods and services. In that way, the better performance of stock market is highly beneficial for the overall welfare of the economy . Another type of market is derivatives market .
The derivative markets include futures, options and Swaps .
we will discuss more about the derivatives markets in the later blog .
What is meant by money markets ?
Money markets deal in short term debt instruments, mostly less than 1 year. So, these are markets for highly liquid, very safe, and short-term transactions, and its mainly involved debt securities . that means, cash equivalence that can be interchangeable for money at short notice. And these are primarily used by governments and corporations to keep their cash flow steady, and investors to make a modest profit.
Banks are the important participants in the money markets . there are so many other participants including governments and corporations .
What is meant by Capital markets ?
Capital markets deal in long-term debt and equity instrument , that means, greater than 1 year . For all the transaction that involves for the instruments for debt and equity instruments more than 1 year, we are going to call them capital markets. It refers to entire stock and bond markets and companies that issue stock and long-term bonds do so for the purpose of raising money for their long-term operations through long term borrowings and long-term investment. For example, when a Company issue IPOs, it is part of Capital Market .
What is meant by a financial instrument ?
Financial market instruments is a written legal obligation of one party to transfer something of value, usually money, to another party at some future date under specified conditions. The examples of financial instruments are stocks, bonds, bank deposit, insurance policies etc .
Money market instruments –
Treasury bills –
Bank Deposits –
Commercial papers –