Types of Financial Markets

1. Money Markets
Typically the money markets trade in products with highly liquid short-term maturities (of less
than one year) and are characterized by a high degree of safety and a relatively low return in
interest. At the wholesale level, the money markets involve large-volume trades between
institutions and traders. At the retail level, they include money market mutual funds bought by
individual investors and money market accounts opened by bank customers. Individuals may
also invest in the money markets by buying short-term certificates of deposit (CDs), municipal
notes, or U.S. Treasury bills, among other examples.

2. Capital Market
A marketer including all institutions, organisations, and instruments providing medium and
long-term funds is known as a Capital Market. A capital market does not include institutions
and instruments providing finance for a short term, i.e., up to one year. Some of the common
instruments of a capital market are debentures, shares, bonds, public deposits, mutual funds,
etc. An ideal capital market is one which allocates capital productively, provides sufficient
information to the investors, facilitates economic growth, where finance is available to the
traders at a reasonable cost, and where the market operations are fair, free, competitive, and
transparent.

A capital market is of two types, namely, Primary Market and Secondary Market.

3. Primary Market: A market in which the securities are sold for the first time is known
as a Primary Market. It means that under the primary market, new securities are
issued from the company. Another name for the primary market is New Issue
Market. This market contributes directly to the capital formation of a company, as the
company directly goes to investors and uses the funds for investment in machines, land,
building, equipment, etc.

4. Secondary Market: A market in which the sale and purchase of newly issued
securities and second-hand securities are made is known as a Secondary Market. In
this market, a company does not directly issue its securities to the investors. Instead, the
existing investors of the company sell the securities to other investors. The investor
who wants to sell the securities and the one who wants to purchase meet each other in
the secondary market, and exchange the securities for cash takes place with the help of
an intermediary called a broker.

5. Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an agreed-upon
underlying financial asset (like a security) or set of assets (like an index). Derivatives are
secondary securities whose value is solely derived from the value of the primary security that
they are linked to. In and of itself a derivative is worthless. Rather than trading stocks directly, a
derivatives market trades in futures and options contracts, and other advanced financial
products, that derive their value from underlying instruments like bonds, commodities,
currencies, interest rates, market indexes, and stocks.

6. Forex Market
The forex (foreign exchange) market is the market in which participants can buy, sell, hedge,
and speculate on the exchange rates between currency pairs. The forex market is the most liquid
market in the world, as cash is the most liquid of assets. The currency market handles more than
$6.6 trillion in daily transactions, which is more than the futures and equity markets combined.1

As with the OTC markets, the forex market is also decentralized and consists of a global
network of computers and brokers from around the world. The forex market is made up of
banks, commercial companies, central banks, investment management firms, hedge funds, and
retail forex brokers and investors.

7. Credit Market

Credit market refers to the market through which companies and governments issue debt to
investors, such as investment-grade bonds, junk bonds, and short-term commercial paper.
Sometimes called the debt market, the credit market also includes debt offerings, such as notes
and securitized obligations, including collateralized debt obligations (CDOs), mortgage-backed
securities, and credit default swaps (CDS).

8. Auction Market

An auction market is a market where the price is determined by the highest price the buyer is
willing to pay (bids), and the lowest price the seller is willing to take (offers). Bids and offers are
matched for a trade to occur.

Auction markets are an efficient way to connect buyers and sellers. The New York Stock
Exchange (NYSE) is an example of an auction market. Trades on the exchange will be executed
when an offer and bid is matched – think of it as an agreed-upon price between the buyer and
seller. While negotiations are made in OTC markets, no negotiations are made in auction
markets.