3. Financial Markets

•  Types Of Financial Markets

There are basically two types of markets - 

1. Primary Market
2. Secondary Market 

1. Primary Market

Primary market is one where new financial instruments are issued for the first time. They provide a

standard institutionalized process to raise money.

2.  Secondary Markets

Secondary Market is a place where primary market instruments, once issued, are bought and sold.

Some of the financial markets are:

•  Stock Markets
•  Bond Markets
•  Derivatives Markets
•  Money Markets
•  Forex Markets
•  Commodity Markets

1. Stock Markets

Stock markets are a place where organized trading of stocks is done through exchanges. Stock markets

are most commonly known among all financial markets because of the large participation of ‘retail

investors’ i.e. common people who invest from their own savings.

Stock exchanges provide a system that accepts orders from both buyers and sellers for shares that are

traded on a particular exchange. Exchanges then follow a mechanism to automatically match these

orders based on the ‘quoted price’, ‘time when the order was placed’, ‘order quantity’ and the ‘order type’.

A successful match of a buy order with a sell order is known as a trade. As in any other market the price

of the stock depends on the demand and supply of the stock.

The modern stock markets are basically the stock exchanges like the London stock exchange (UK), New

York stock exchange (USA), Euronext (Europe) National Stock Exchange (India) etc.

2. Bond Markets

Bond markets, as the name implies are financial markets where bonds and other debt instruments are

issued and traded. Government bonds constitute the major bulk of the bonds issued and traded in these

markets. The different bonds traded in the bonds market are treasury bonds (Government bonds with

maturity>10 years), treasury bills (maturity < 1 year) and treasury notes (1-10 years), municipal bonds

(Bonds issued by local Government and Government bodies) and corporate bonds (Bonds issued by

companies).

3. Derivatives Markets

Derivatives markets are one in which trading can be done in derivative instruments like futures and

options. A futures contract is a type of derivative instrument, or financial contract, in which two parties

agree to transact a set of financial instruments or physical commodities for future delivery at a particular

price. An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying

asset at a specific price on or before a certain date.

In recent years, the market for financial derivatives has grown tremendously in terms of variety of

instruments available, their complexity and also turnover. In the class of equity derivatives, futures and

options on stock indices have gained more popularity than on individual stocks, especially among

institutional investors, who are major users of index-linked derivatives. Even small investors find these

useful, due to the high correlation of popular indexes with various portfolios and ease of use. The lower

costs associated with index derivatives vis-à-vis derivative products based on individual securities is

another reason for their growing use. Some of the exchanges that offer trading in derivative instruments

are Chicago Board Options Exchange (CBOE) and London International Financial Futures and Options

Exchange (LIFFE).

4. Money Markets

A money market is a market for short-term debt instruments such as negotiable certificates of deposit,

Treasury bills, commercial paper, repos (repurchase agreements), bankers’ acceptances, etc.

Instruments that are traded in money markets are typically of a short maturity (from as less as 1-7 days to

less than a year.

5. Forex Markets

A forex market is not what may be termed as a securities market but it is an important financial market

nevertheless, accounting for extremely large financial transactions in terms of volume and value.