Financial Markets
What are the different types of Financial Markets and Financial Institutions?
Financial system is the barometer of growth of the economy. In layman terms, Financial System is a complex set of institutions that facilitates the transfer of money from the borrower to the lender. It provides an effective medium for transfer of money between two different parties.
So,what are the various methods of Financing?
- Direct Financing
- Indirect financing
Direct Finance: This is a method of financing wherein lenders and borrowers meet and exchange funds directly. Funds are transferred through the direct route. This can be through direct exchange of cash or securities which include stocks, bonds or foreign exchange.
Indirect Finance: Through this method, borrowers and lenders never exchange funds directly. This is always done through an intermediary like banks and non-banking financial companies (NBFC's). The lenders deposit money at these intermediaries while the borrowers borrow money from them.
Financial markets form the most comprehensive part of a Financial System. They facilitate the exchange of capital and serve as a mechanism for exchange of capital.
What are the various types of financial markets?
1) Capital Markets: This market consists of Stock markets/exchanges and bond markets which facilitates the trade of shares and bonds. Capital markets can be sub divided into two parts.
- Primary Market: They serve as markets for new issues where companies raise capital and are also known as IPO (initial public offer) markets.
- Secondary Markets: They serve as markets where trading in the new issues take place after they get listed. It serves as an exchange wherein new issues, after subsequent listing, can be traded. It provides liquidity to the existing participants in the financial markets.
2) Commodity Markets: This market facilitates trading in commodities like base metals, precious metals, food items, etc. Few commodities which are actively traded in the commodity markets are Gold, Silver, Crude, Pepper etc.
3) Money Markets: They serve as facilitators of short-term financing through debt and equity financing.
4) Over the Counter Market (OTC): This is that component of the market where trading occurs via a network of middlemen and dealers. It is an unregulated market and trading takes place as per pre-determined rules and regulations. It serves as a medium to trade in unlisted securities.
5) Foreign Exchange/Currency Markets: They serve as facilitators for trading in currencies of various countries.
Financial Institutions
Financial institutions is an integral part of the economy, with individuals and companies relying on financial institutions for various types transactions and investing. Financial institutions offer a wide range of products and services for individual and commercial clients. Some of the are listed below.
Commercial Banks
A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes business, personal, and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. It is the most widely accepted and used bank by the common people.
Investment Banks
Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure, financing and equity offerings, including initial public offerings (IPOs). They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions, and other corporate restructurings.
Insurance Companies
Among the most familiar non-bank financial institutions are insurance companies. Providing insurance, whether for individuals or corporations, is one of the oldest financial services. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.
Brokerage Firms
Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management and financial advisory services. They also provide access to investment products that may range from stocks and bonds all the way to lesser-known alternative investments, such as hedge funds and private equity investments
