Types of Financial Markets

There are several different types of markets. Each one focuses on the types and classes of
instruments available on it.

Stock Markets

A stock market is a financial marketplace that connects buyers and sellers of stocks/shares. The stock
market is where investors buy and sell shares of companies.

These are venues/places where companies list their shares, which are bought and sold by traders
and investors. Stock markets, or equities markets, are used by companies to raise capital and by
investors to search for returns.

Stocks may be traded on listed exchanges, such as the New York Stock Exchange (NYSE), and the
over-the-counter (OTC) market. Most stock trading is done via regulated exchanges, which plays an
important economic role because it is another way for money to flow through the economy.

Typical participants in a stock market include (both retail and institutional) investors, traders, market
makers (MMs), and specialists who maintain liquidity and provide two-sided markets. Brokers are
third parties that facilitate trades between buyers and sellers but who do not take an actual position
in a stock.

Over-the-Counter Markets

An over-the-counter (OTC) market is a decentralized market—meaning it does not have physical

locations, and trading is conducted electronically—in which market participants trade securities
directly (meaning without a broker).

While OTC markets may handle trading in certain stocks (e.g., smaller or riskier companies that do
not meet the listing criteria of exchanges), most stock trading is done via exchanges.

Certain derivatives markets, however, are exclusively OTC, making up an essential segment of the
financial markets. Broadly speaking, OTC markets and the transactions that occur in them are far less
regulated, and less liquid.

Bond Markets

A bond is a security in which an investor loans money for a defined period at a pre-established
interest rate. The bond is an agreement between the lender and borrower containing the loan's
details and its payments.

Bonds are issued by corporations as well as by states, and sovereign governments to finance projects
and operations.

For example, the bond market sells securities such as notes and bills issued by the Government
Treasury. The bond market is also called the debt, credit, or fixed-income market.

Money Markets

A money market is a financial market that involves the trading of short-term debt investments, such
as commercial paper, Treasury bills, and certificates of deposit. It's a place where businesses,
governments, and financial institutions can quickly obtain funding for their short-term needs. It
provides a platform for borrowers and investors to meet their short-term liquidity needs.
Key characteristics:

1. Short-term focus: Maturities range from overnight to one year.

2. Low risk: Instruments are typically backed by high-quality collateral or guarantees.

3. High liquidity: Easy to buy and sell securities quickly.

Derivatives Markets The term “derivative” refers to a type of financial contract between two or more
parties whose value is dependent on an underlying asset, a group of assets, or a benchmark..

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.

Forex Market

The forex (foreign exchange) market is where 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 forex market is also decentralized and consists of a global network of computers and brokers
worldwide. The forex market is made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors.

Commodities Markets

Commodities markets are venues where producers and consumers meet to exchange physical
commodities such as agricultural products (e.g., corn, livestock, soybeans), energy products (oil, gas,
carbon credits), precious metals (gold, silver, platinum), or "soft" commodities (such as cotton,
coffee, and sugar). These are known as spot commodity markets, where physical goods are
exchanged for money.