CLASSIFICATION OF FINANCIAL

MARKETS
Jaikumaar E K J
❖The financial market is a marketplace where the creation and trading of financial assets, including
shares, bonds, debentures, commodities, etc., is held. Financial markets are intermediaries between
fund seekers (generally businesses, government, etc.) and fund providers (typically investors,
households, etc.). It mobilizes funds between them, helping allocate the country’s limited
resources. The financial markets can be classified into four categories: –
✓ By Nature of Claim
✓ By Maturity of Claim
✓ By the Timing of Delivery
✓ By Organizational Structure
 BY NATURE OF CLAIM

❖Markets are categorized by the type of claim the investors have on the entity’s assets in which they
have made the investments. There are broadly two kinds of claims, i.e., fixed and residual. Based
on the nature of the claim, there are two kinds of markets, viz.
Debt Market
❖A debt market is when debt instruments such as debentures, bonds, etc., are traded between
investors. Such instruments have fixed claims, i.e., their share in the entity’s assets is restricted to a
certain amount. In addition, these instruments generally carry a coupon rate, commonly known as
interest, which remains fixed over some time.
Equity Market
❖In this market, equity instruments are traded. As the name suggests, equity refers to the owner’s
capital in the business. It thus has a residual claim, implying that whatever is left in the industry
after paying off the fixed liabilities belongs to the equity shareholders, irrespective of the face
value of their shares.
 BY MATURITY OF CLAIM

❖While investing, time plays an important role as the amount of investment depends on the time
horizon of the acquisition. The time also affects the risk profile of an investment. An investment
with a lower time carries a lower risk than an investment with a higher period.
❖There are two types of market-based on the maturity of claim: –
Money Market
❖The Money market is for short-term funds, where the investors who intend to invest for not longer
than a year enter into a transaction. This market deals with monetary assets such as treasury
bills, commercial paper, and certificates of deposits. The maturity period for all these instruments
does not exceed a year.
❖Since these instruments have a low maturity period, they carry a lower risk and a reasonable rate of
return for the investors, generally in interest.
Capital Market
❖The capital market is when instruments with medium- and long-term maturity are traded. It is the
market where the maximum interchange of money happens. It helps companies access money
through equity capital, preference share capital, etc. It also provides investors access to invest in
the company’s equity share capital and be a party to the profits earned by the company.
This market has two verticals:
✓ Primary Market – Primary market refers to the market where the company lists security for the
first time or the already listed company issues fresh security. It involves the company and
the shareholders transacting with each other. In addition, the company receives the amount paid by
shareholders for the primary issue. For the primary market, there are two major types of products,
viz. Initial Public Offer (IPO) or Further Public Offer (FPO).
✓ Secondary Market – Once a company gets the security listed, the deposit becomes available to be
traded over the exchange between the investors. The market that facilitates such trading is
the secondary market or the stock market.
❖In other words, it is an organized market where securities trading occurs between investors.
Investors could be individuals, merchant bankers, etc. Transactions of the secondary market do not
impact the company’s cash flow position; as such, the receipts or payments for such exchanges are
settled amongst investors without the company being involved.
 BY TIMING OF DELIVERY

❖In addition to the above-discussed factors, such as time horizon, nature of the claim, etc., another
factor has distinguished the markets into two parts, i.e., timing of delivery of the security. This
concept generally prevails in the secondary market or stock market. Depending on the timing of
delivery, there are two types of markets:
Cash Market
❖In this market, transactions are settled in real-time. Therefore, it requires the total amount of
investment to be paid by the investors, either through their funds or borrowed capital, generally
known as margin, which is allowed on the present holdings in the account.
Futures Market
❖In this market, the settlement or delivery of security or commodity occurs later. Therefore,
transactions in such markets are generally cash-settled instead of settled delivery. For trading in
the futures market. Rather, a margin going up to a certain percentage of the asset amount is
sufficient to trade in the asset.
 BY ORGANIZATIONAL STRUCTURE
Markets are also categorized based on the market structure, i.e., how transactions are conducted. There are
two types of the markets, based on organizational structure: –
✓ Exchange-Traded Market
❖An exchange-traded market is a centralized market that works on pre-established and standardized
procedures. In this market, the buyer and seller do not know each other. Transactions are entered with the
help of intermediaries, who are required to ensure the settlement of the transactions between buyers and
sellers. There are standard products that are traded in such a market. Therefore, they cannot need specific
or customized products.
✓ Over-the-Counter Market
❖This decentralized market allows customers to trade customized products based on their requirements.
❖In these cases, buyers and sellers interact with each other. Generally, over-the-counter market
transactions involve hedging foreign currency exposure, exposure to commodities, etc. These
transactions occur over-the-counter as different companies have different maturity dates for debt, which
generally does not coincide with the settlement dates of exchange-traded contracts.
❖Over time, financial markets have gained importance in fulfilling the capital requirements for companies
and providing investment avenues to the investors in the country. Financial markets offer transparent
pricing, high liquidity, and investor protection from frauds and malpractices.