Financial markets are here so that the issuers and investor may be able to buy and sell assets for their goal of building capital and accumulate wealth and growth. The main economic functions that financial markets play include the creation of regulated system for allocating newly gained capital, trading existing assets, and handling financial risks.
Understanding the opportunities of investing in different markets is crucial for finance professionals as they work toward building capital and spurring economic development for individuals and organizations.
Capital Markets
Capital markets are made up of primary and secondary markets where users can buy and sell equity securities, better known as stocks, and debt securities, better known as bonds.
Primary markets are where companies and governments sell newly issued securities to buyers, while secondary markets consist of previously issued stocks and bonds, which compose the majority of trading in the capital markets.
Companies use these markets as a means for raising capital by conducting initial public offerings, issuing bonds, and other securities. Individual investors aim to earn interest or dividends on their investments by investing in stocks and bonds in the capital market.
This way, investments in capital markets are good for economic growth as businesses are able to hire more people, grow their businesses, and put the new products and services on the markets.
Derivatives Market
Derivatives are securities with prices that are derived or dependent upon the value of an underlying asset. Derivatives can be traded over-the-counter (OTC) or on an exchange. They are used by investors to hedge against the fluctuations in exchange rates, interest rates, commodity prices, and credit value.
Derivative transactions displace risks from entities that are unable or unwilling to manage risks to those that are more suitable to do so. Investors take advantage of this to protect themselves against detrimental changes in the values of their assets and liabilities.
Foreign Exchange Markets
The foreign exchange, or forex, market enables investors to buy, sell, and speculate on foreign currencies based on expectations of exchange rate fluctuations. Businesses, banks, hedge funds, investment management firms, and individual investors take part in the forex market.
The forex market is the biggest asset market in the world. Investors find the forex market appealing because of the massive trading volume, which means large numbers of investors trade currencies daily. This in turn gives buyers and sellers with high liquidity.
Because of the different time zones in the world, the forex market is open 24 hours a day for five days each week. This gives investors more chances to capitalize on their investments.
Commodities Market
Commodities are raw or primary products categorized as either hard commodities, which consist of natural resources that need to be mined or extracted, such as gold or oil, or soft commodities, which are made up of agricultural or livestock products.
Investors take part in the commodity market either buying stock in a company in an industry that relies on the price of commodities or by purchasing ETFs, mutual funds, or index funds.