A financial market is simply a marketplace where individuals trade derivatives and financial securities at low transaction fees. Some of these securities include bonds and stocks, precious metals, and other raw materials, that are calling underlying commodities in the financial markets. Financial markets also include such financial instruments as bank deposits and certificates of deposits, mortgage-backed securities, forward contracts, and swap agreements. The key to understanding financial markets is to understand how the commodity market, currency exchange, and interest rate market work.
The Financial Market – Financial markets include finance companies, including banks, investment firms, and brokers. Finance companies trade financial products like bonds, stocks, mutual funds, corporate bonds, and certificates of deposits (CDs). Financial markets also include foreign exchange and insurance, merchant banking, and money market trading, mortgage, equities, derivatives, and more. The buying and selling of derivatives depend on the current value of the derivatives, the price of underlying securities, and the risk-premium for each derivative. Financial market participants include corporations, central banks, governments, brokers, banks, hedge funds, and other investors.
Share Trading – The sale and purchase of securities on the market consist of buying shares from investors. Some people invest on their own, but others buy shares and then sell shares for a profit. Share traders usually buy and sell shares from companies or other entities. The profits come from the dividends that companies pay. Other types of transactions in financial markets include short sales, in which the seller sells shares of stock for less than he bought them, and long sales, in which the seller keeps the stock for a year or longer.
Futures Trading – Financial markets also deal with the purchase and sale of financial securities on the future date. In this type of transaction, people make purchase decisions based on the future prices of these securities. For example, if you plan to invest in shares of a certain company, when you purchase the shares now, and when the future date comes, sell them to possible buyers. Another type of transactions in financial markets is commodity trading, such as buying and selling agricultural products such as food, milk, fruits, and other similar items. It also involves the purchase and sale of forex and bond products.
Cash Sales – One type of transaction in financial markets is the sale or transfer of cash to another party. This is done for a variety of reasons, the most common of which is for tax reasons. It is very important to understand all the key terms when dealing with cash sales. Cash refers to real property, equities, certificates of deposit (CDs), mutual funds, and other assets. All transactions involving cash require knowledge of certain key terms. Key terms include buyer\’s equity, debenture financing, business bridge loan, commercial lines of credit, certificate of interest, credit default swap, depository receipts, skip trace, mortgage banking system, negative amortization, and other types of financing arrangements.
Money Market and Bonds – These are two of the most traded financial instruments in financial markets. The money market is the term used to refer to the accounts receivable and inventory loans, while bonds refer to treasury bills, original issue discount, municipal bonds, corporate bonds, and sovereign bonds. There are various types of bonds depending on their country of origin and their maturity dates. Various financial markets also include foreign exchange (forex) and interest rate derivatives.