There are a number of financial markets that suit specific needs to different investors.
A capital market is one in which individuals and institutions trade financial securities. Institutions in the public and private sectors have the ability to buy & sell securities on the capital markets in order to raise funds. Capital markets comprise of both the primary and secondary markets.
Governments and corporations require capital to finance their operations and to undertake longer term investments. An organization can raise money through the sale of securities – stocks and bonds in the company’s name. These are bought and sold, speculatively, in capital markets.
Stock markets allow investors to buy and sell shares in publicly listed companies. By doing this. they provide companies with access to capital from investors. With a percentage of ownership by means of purchasing “shares”, opens the investor to the potential of gains based on the company’s performance, both in appreciating stock prices and possible, dividend payouts.
This market can be split into two main sections: the primary market and the secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market.
A bond is a debt investment in which an investor loans money to a corporate or government body, which borrows the funds for a specific period of time at a fixed interest rate. Bonds are used by companies, governments and corporations to produce liquidity for further advancement. Bonds can be bought and sold by investors. Also referred to as the debt, credit or fixed-income market, it is huge in comparison to the stock markets. The main categories of bonds are corporate bonds Treasury bonds, notes and bills, which are also known as “Treasuries,” or in the U.K. “Gilts”
Is the market where, financial instruments with high liquidity and very short maturities are speculated. It is used by investors as a means for borrowing and lending for short time periods, from several days up to a year. Money market securities consist of negotiable certificates of deposit, bankers acceptances, U.S. Treasury bills, commercial paper, Eurodollars, federal funds and repurchase agreements. Money market investments are also called cash investments because of their short maturities.
The money market is used by a wide variety of investors, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to hold finance in the short term. The money market is typically seen as a safer place to put money due the highly liquid nature of the securities and short maturities. Money market securities offer significantly lower returns than most other securities because of their “safe nature”. Risk can still play its part, including the risk of default on securities such as commercial paper.
Cash or Spot Market
Investing in the cash or “spot” market is highly sophisticated, with opportunities for both big losses and big gains. In the cash market, goods are sold for cash and are delivered immediately. By the same token, contracts bought and sold on the spot market are immediately effective. Prices are settled in cash “on the spot” at current market prices. This is notably different from other markets, in which trades are determined at forward prices.
The cash market is dynamic and fast moving, and generally unsuitable for novice investors. The cash markets tend to be monopolised by institutional market players such as hedge funds, and corporate investors. The products traded require access to extremely detailed information, reports and a high level of macroeconomic analysis and investing abilities.
The value is derived from its underlying asset or assets in the market (CFDs). A derivative is a contract, but in this case the contract price is determined by the underlying market price of the core asset. The derivatives market adds a further layer of complexity and is therefore not recommended for inexperienced investors. However, it can be used as part of a risk management or portfolio diversification.
Examples of the most common derivatives are forwards, futures, options, swaps and contracts-for-difference (CFDs) in an “over the counter” (no central exchange) market. Professional investors, institutions and hedge fund managers use to varying degrees, they also play a significant role in private investing, particularly with the Internet revolution.
Forex and the Inter-bank Market
The inter-bank market is the financial system and trading of currencies among banks and financial institutions, including retail investors and smaller trading parties. Some inter-bank trading is performed by banks on behalf of large customers, most inter-bank trading takes place from the banks’ own accounts.
The Forex market is where currencies are traded. It is the largest, most liquid market in the world with an average traded value that exceeds $3.9 trillion per day and includes all of the currencies in the world. The Forex is the largest market in the world in terms of the total cash value traded, and any person, firm or government can participate.
As with the Derivatives, it is an OTC market with no central marketplace for exchange. The Forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial institutions.
Primary Markets vs. Secondary Markets
A primary market issues new securities on an exchange. Corporations and governments obtain financing through debt or equity based securities. Primary markets, also known as “new issue markets,” are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors, I.P.O.s (initial public offerings).
The primary markets are where investors have their first chance to participate in a new IPO. The issuing company or group receives remuneration from the sale, which is then, generally, used to fund operations or expand the business.
The secondary market is where investors purchase securities or assets from other investors, rather than from issuing companies, they start trading in the secondary market on the NYSE, NASDAQ etc. depending on the particular market they are related to, for listing and trading.
The secondary market is where higher volatility of exchange trading occurs on a daily basis. Primary markets can see increased volatility over secondary markets because it is difficult to accurately gauge investor demand for a new security until several days of trading have occurred. In the primary market, prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security.
Penny Stocks Market
The over-the-counter (OTC) market is a type of secondary market also referred to as a dealer market. The term “over-the-counter” refers to stocks that are not trading on a stock exchange such as the NASDAQ, NYSE or AMEX. This generally means that the stock trades either on the OTC or bulletin OTCBB (pink sheets). Neither of these networks is an actual exchange, OTC and OTCBB, pink sheet companies have fewer regulations to comply with than those that trade shares on an actual exchange. Most securities that trade this way are penny stocks or are from very small companies that could be considered very high risk investments.