Chapter 2 What are Financial Markets?
Financial markets serve as crucial platforms for buying and selling various financial instruments. Let's explore each market in more detail:
1) Stock Markets:
Stock markets, also known as equity markets, are where shares of publicly traded companies are bought and sold. These markets provide a means for companies to raise capital by issuing shares to investors. When you buy a stock, you become a shareholder and have a claim on the company's assets and earnings. Stock markets offer opportunities for investors to profit through capital appreciation (when stock prices rise) and dividends (payments distributed by the company to shareholders).
Stock markets are usually organized as exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ, where buyers and sellers trade stocks through intermediaries called brokers. In addition to individual investors, institutional investors like mutual funds, pension funds, and hedge funds are active participants in stock markets.
2) Bond Markets:
Bond markets, also known as fixed-income markets, deal with the buying and selling of bonds. Bonds are debt instruments where an investor loans money to an entity, typically a government or corporation, for a fixed period. In return, the issuer pays regular interest (coupon payments) to the bondholder and returns the principal amount at maturity.
Bond markets serve multiple purposes. Governments issue bonds to finance public projects and fund budget deficits. Companies issue corporate bonds to raise capital for expansions or acquisitions. Investors in bond markets seek steady income streams and relatively lower-risk investments compared to stocks. Bonds vary in terms of maturity, credit rating, and coupon rate, offering investors a range of options based on their risk appetite.
Bond markets can be organized as exchanges or over-the-counter (OTC) markets. OTC markets involve direct transactions between buyers and sellers without a centralized exchange. Government bond markets, such as the U.S. Treasury market, are highly liquid and attract global investors seeking safe-haven assets.
3) Forex (Foreign Exchange) Markets:
Forex markets are decentralized markets where participants trade currencies. In these markets, one currency is exchanged for another at an agreed-upon exchange rate. Forex trading operates 24/7 across different time zones, providing constant opportunities for traders.
Forex markets are vital for international trade and investments. They enable businesses to convert one currency into another, facilitating cross-border transactions. Speculators and investors engage in forex trading to profit from fluctuations in currency exchange rates.
The primary participants in forex markets are commercial banks, central banks, institutional investors, multinational corporations, and individual traders. Major currency pairs, such as EUR/USD (Euro/U.S. Dollar) and GBP/JPY (British Pound/Japanese Yen), attract significant trading volumes. Forex trading occurs predominantly in the OTC market, facilitated by electronic trading platforms.
4) Commodity Markets:
Commodity markets facilitate the buying and selling of raw materials or primary goods. Commodities can be categorized into energy products (crude oil, natural gas), agricultural products (wheat, corn, coffee), precious metals (gold, silver), industrial metals (copper, aluminum), and more.
Commodity markets serve multiple purposes for different participants. Producers, such as farmers or mining companies, use these markets to sell their products. Consumers, such as manufacturers, rely on commodity markets to secure necessary raw materials. Additionally, speculators trade commodities to profit from price fluctuations.
