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  5. Types of Financial Markets: Which Ones Are More Profitable?

Types of Financial Markets: Which Ones Are More Profitable?

Types of Financial Markets: Which Ones Are More Profitable?

Financial markets are the ones that make up the money market. They do not operate in isolation but are interconnected and intertwined with each other.

Forex market

The growth and volume of the forex market have been impressive in the past 40 years – from $5 billion in 1977 to over $5 trillion in 2017 and $6.6 trillion in 2022.

Financial derivatives markets

Derivatives are financial contracts linked to an underlying asset and are sometimes used to hedge against price changes. Binary options, futures, and CFDs are all examples of derivatives. Speculators can use these instruments to hedge against risk or to speculate for potential financial gain.

Commodity markets

The commodity market consists of hard commodities such as gold and oil and soft commodities such as agricultural and animal products. Investors and traders can participate in a deal without direct exposure to the commodity by buying its futures or CFDs.

Stock markets

Stock markets include the stock market and bonds (both public and private sector bonds). There is a primary market, where companies and governments issue new securities, and a secondary market, where previously issued stocks and bonds are traded.

Digital currency markets

Despite being a new market, Bitcoin and other cryptocurrencies have grabbed headlines in recent years due to their wildly volatile and high prices. Blockchain technology and mining system have caused an increase in interest in the cryptocurrency market. How this market will continue, how it will shape the digital financial market in general, and whether or not it can create more value for consumers and the financial system is still something that will be defined and further clarified in the next few years.

Important information about financial markets

  • It is a market, bank, or institution that facilitates the exchange of financial instruments and securities.
  • It may or may not have a physical location. Assets can be exchanged between parties over the phone or the Internet as well.
  • Some financial markets are very small, with very little activity, while some financial markets trade trillions of amounts of securities per day.

Advantages and disadvantages of financial markets

Here are some advantages and disadvantages of all types of financial markets.

First, the advantages:

  • It provides a platform for buyers and sellers to meet to trade assets. Trading prices are determined by market forces, i.e., supply and demand in the market. So it helps in determining the prices of securities.
  • It helps in mobilizing the savings of the investors as the investor can put his money to the most productive use.
  • For traders, the financial market platform provides potential buyers and sellers with their securities, which helps them save time and money in finding potential buyers and sellers.
  • In the financial market, investors can quickly sell their securities and convert them into cash, thus providing liquidity as tradable assets.

Second, the negatives:

  • The prices in the financial market may not indicate the actual intrinsic value of the stock due to some macroeconomic forces such as taxes etc.
  • Certain factors suddenly change the prices of securities. So there is risk involved when trading in the financial market. If negative news about the company comes out, its price may drop considerably, causing the person who owns its shares to lose.

Financial market institutions

Its members are various financial institutions that deal in short-term loans in the money market.  They include the following types of organizations:

Central Bank

The country’s central bank is the entire money market’s axis. It acts as the gatekeeper of the money market and increases or decreases the supply of money and credit in favor of stabilizing the economy. It does not enter into direct transactions. But the money market is controlled by bank rate differences and open market operations.

Commercial Banks

Commercial banks also deal in short-term loans, which they lend to businesses and commerce. They discount bills of exchange and treasury bills, lending from promissory notes, and through advances and overdrafts.

Non-bank financial intermediaries

Besides commercial banks, some non-bank financial intermediaries provide short-term loans to borrowers in the money market. Such financial intermediaries are savings banks, investment houses, insurance companies, provident funds, and other financial institutions.

Discount houses and invoice brokers

In developed financial markets, private firms act in the role of opponent. The primary function of discount houses is to discount bills on behalf of others. They, in turn, constitute the commercial banks and houses of acceptance. Along with discount houses, billing brokers in the money market act as an intermediary between borrowers and lenders by discounting bills of exchange at a nominal commission.

All these institutions that make up the money market do not operate in isolation but are interdependent and interdependent with each other.

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