1. What are Financial Markets?

Financial markets refer broadly to any marketplace where the trading of securities occurs,
including the stock market, bond market, forex market, and derivatives market, among others.
Financial markets are vital to the smooth operation of capitalist economies. When financial
markets fail, economic disruption including recession and unemployment can result.

2. Benefits of Financial Market.

Financial marketing is a very important economical process, here are some of its advantages:

 Financial markets help inactive mobilization of the savings of various consumers and investors
effectively. People can choose to spend their savings on such markets and can hope to see
future profitable returns.
 Financial markets have created a workplace for many traders and brokers. They now can find
buyers for their respective securities. These markets have helped save the money and time of
these traders as they don’t have to go out searching for a potential buyer or seller.
 Through financial markets, financial assets have attained liquidity. Traders can sell their assets
for cash at any given point if they choose to.
 These markets have provided buyers, traders, brokers, and other institutions a common
ground to meet and trade with each other. The market forces are capable enough to determine
the prices for trading and hence such markets are self-sustainable.

3. How Financial Markets Stimulate Savings and Borrowings?

Financial markets can give an opportunity for you to invest money in shares (also known as
equities) to build up money for the future.

Over a long period of time, this can often provide a better return than opening a savings
account at your bank. But buying shares can be risky. It is important to remember that the
value of any investment can go down as well as up, and getting good returns in the past does
not always mean they’ll be good in the future.

Financial markets also allow people to take out insurance. Insurance companies need to use
financial markets to make sure you will receive a pay-out if you have an accident, such as
losing or damaging your mobile phone.

Financial markets enable lenders such as banks to borrow money. They make loans to people
who want to borrow – whether that’s attending university with a student loan, say, or buying a
house with a mortgage.

4. Classification of Financial Markets

Stock Markets
Perhaps the most ubiquitous of financial markets are stock markets. These are venues where
companies list their shares and they are bought and sold by traders and investors. Stock
markets, or equities markets, are used by companies to raise capital via an initial public
offering (IPO), with shares subsequently traded among various buyers and sellers in what is
known as a secondary market.
Typical participants in a stock market include (both retail and institutional) investors and
traders, as well as 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 between two parties 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, and so they make up an important segment of the financial
markets. Broadly speaking, OTC markets and the transactions that occur on them are far less
regulated, less liquid, and more opaque.

Bond Markets
A bond is a security in which an investor loans money for a defined period at a pre-established
interest rate. You may think of a bond as an agreement between the lender and borrower that
contains the details of the loan and its payments. Bonds are issued by corporations as well as
by municipalities, states, and sovereign governments to finance projects and operations. The
bond market sells securities such as notes and bills issued by the United States Treasury, for
example. The bond market also is called the debt, credit, or fixed-income market.

Money Markets
Typically the money markets trade in products with highly liquid short-term maturities (of less
than one year) and are characterized by a high degree of safety and a relatively low return in
interest. At the wholesale level, the money markets involve large-volume trades between
institutions and traders. At the retail level, they include money market mutual funds bought by
individual investors and money market accounts opened by bank customers. Individuals may
also invest in the money markets by buying short-term certificates of deposit (CDs), municipal
notes, or U.S. Treasury bills, among other examples.

Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an agreed-
upon underlying financial asset (like a security) or set of assets (like an index). Derivatives are
secondary securities whose value is solely derived from the value of the primary security that
they are linked to. In and of itself a derivative is worthless. 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 the market in which 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 currency market handles
more than $6.6 trillion in daily transactions, which is more than the futures and equity markets
combined.

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.

Cryptocurrency Markets
The past several years have seen the introduction and rise of cryptocurrencies such as Bitcoin
and Ethereum, decentralized digital assets that are based on blockchain technology. Today,
thousands of cryptocurrency tokens are available and trade globally across a patchwork of
independent online crypto exchanges. These exchanges host digital wallets for traders to swap
one cryptocurrency for another, or for fiat monies such as dollars or euros.

Because the majority of crypto exchanges are centralized platforms, users are susceptible to
hacks or fraud. Decentralized exchanges are also available that operate without any central
authority. These exchanges allow direct peer-to-peer (P2P) trading of digital currencies without
the need for an actual exchange authority to facilitate the transactions. Futures and options
trading are also available on major cryptocurrencies.

5. What is Financial Instruments and Money Market Instruments?

The money market refers to trading in very short-term debt investments. At the wholesale
level, it involves large-volume trades between institutions and traders. At the retail level, it
includes money market mutual funds bought by individual investors and money market
accounts opened by bank customers.

Types of Money Market Instruments

Money Market Funds
The wholesale money market is limited to companies and financial institutions that lend and
borrow in amounts ranging from $5 million to well over $1 billion per transaction.
Money Market Accounts
Money market accounts are a type of savings account. They pay interest, but some issuers
offer account holders limited rights to occasionally withdraw money or write checks against the
account. (Withdrawals are limited by federal regulations. If they are exceeded, the bank
promptly converts it to a checking account.) Banks typically calculate interest on a money
market account on a daily basis and make a monthly credit to the account.
Certificates of Deposit (CDs)
Most certificates of deposit (CDs) are not strictly money market funds because they are sold
with terms of up to 10 years. However, CDs with terms as short as three months to six months
are available.
 Commercial Paper
The commercial paper market is for buying and selling unsecured loans for corporations in
need of a short-term cash infusion. Only highly creditworthy companies participate, so the risks
are low.
Banker's Acceptances
The banker's acceptance is a short-term loan that is guaranteed by a bank. Used extensively
in foreign trade, a banker's acceptance is like a post-dated check and serves as a guarantee
that an importer can pay for the goods. There is a secondary market for buying and selling
banker's acceptances at a discount.
Eurodollars
Eurodollars are dollar-denominated deposits held in foreign banks, and are thus, not subject to
Federal Reserve regulations. Very large deposits of eurodollars are held in banks in the
Cayman Islands and the Bahamas. Money market funds, foreign banks, and large corporations
invest in them because they pay a slightly higher interest rate than U.S. government debt.
Repos
The repo, or repurchase agreement (repo), is part of the overnight lending money market.
Treasury bills or other government securities are sold to another party with an agreement to
repurchase them at a set price on a set date.

6. The Role of Financial Instruments.

a. Financial instruments act as a means of payment (like money).
i. Employees take stock options as payment for working.
b. Financial instruments act as stores of value (like money).
i. Financial instruments generate increases in wealth that are larger than from
holding money.
ii. Financial instruments can be used to transfer purchasing power into the future.
c. Financial instruments allow for the transfer of risk (unlike money).
i. Futures and insurance contracts allows one person to transfer risk to another.

7. Banker’s Acceptance and the Flow of Funds.

 The banker's acceptance is a form of payment that is guaranteed by a bank rather than
an individual account holder.
 The bank guarantees payment at a later time.
 BAs are most frequently used in international trade to finalize transactions with relatively
little risk to either party.
 Banker's acceptances are traded at a discount in the secondary money markets.
 Thus, unlike a post-dated check, BAs can be investments that are traded, generally at a
discounted price (similar to Treasury bills).
8. Certificates of Assignment
Certificates of assignment – an agreement that transfers the right of the seller over a security
infavor of the buyer; the underlying security carries a promise to pay a certain sum of money
on afixed date just like in a promissory note; the underlying security is like a collateral to
thecertificate.
9. Capital Market Instruments.
Capital markets refer to the venues where funds are exchanged between suppliers and those
who seek capital for their own use.

Are Capital Markets the Same as Financial Markets?

While there is a great deal of overlap at times, there are some fundamental distinctions
between these two terms. Financial markets encompass a broad range of venues where
people and organizations exchange assets, securities, and contracts with one another, and are
often secondary markets. Capital markets, on the other hand, are used primarily to raise
funding, usually for a firm, to be used in operations, or for growth.

10. Stock Market Transactions.

Types of Stock Market Transactions

IPO
An initial public offering (IPO), or stock market launch, is a type of public offering where shares
of stock in a company are sold to the general public, on a securities exchange, for the first
time. Through this process, a private company transforms into a public company. Initial public
offerings are used by companies to raise expansion capital, monetize the investments of early
private investors, and become publicly traded enterprises.

A company selling shares is never required to repay the capital to its public investors. After the
IPO, when shares are traded freely in the open market, money passes between public
investors.

When a company lists its securities on a public exchange, the money paid by the investing
public for the newly issued shares goes directly to the company (primary offering) as well as to
any early private investors who opt to sell all or a portion of their holdings (secondary offering)
as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of
potential investors to provide itself with capital for future growth, repayment of debt, or working
capital.

Although an IPO offers many advantages, there are also significant disadvantages. Chief
among these are the costs associated with the process, and the requirement to disclose
certain information that could prove helpful to competitors, or create difficulties with vendors.
Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy
document known as a prospectus.

Most companies undertaking an IPO do so with the assistance of an investment banking firm
acting in the capacity of an underwriter. Underwriters provide a valuable service, which
includes help with correctly assessing the value of shares (share price), and establishing a
public market for shares (initial sale).
Secondary Market Offering
A secondary market offering, according to the U.S. Financial Industry Regulatory Authority
(FINRA), is a registered offering of a large block of a security that has been previously issued
to the public. The blocks being offered may have been held by large investors or institutions,
and proceeds of the sale go to those holders, not the issuing company. This is also sometimes
called secondary distribution.

A secondary offering is not dilutive to existing shareholders, since no new shares are created.
The proceeds from the sale of the securities do not benefit the issuing company in any way.
The offered shares are privately held by shareholders of the issuing company, which may be
directors or other insiders (such as venture capitalists) who may be looking to diversify their
holdings. Usually, however, the increase in available shares allows more institutions to take
non-trivial positions in the issuing company which may benefit the trading liquidity of the
issuing company's shares.

Transactions on Secondary Market

After the initial issuance, investors can purchase from other investors in the secondary market.
In the secondary market, securities are sold by and transferred from one investor or speculator
to another. It is therefore important that the secondary market be highly liquid. As a general
rule, the greater the number of investors that participate in a given marketplace, and the
greater the centralization of that marketplace, the more liquid the market.

Private Placement
Private placement (or non-public offering) is a funding round of securities which are sold not
through a public offering, but rather through a private offering, mostly to a small number of
chosen investors. "Private placement" usually refers to the non-public offering of shares in a
public company (since, of course, any offering of shares in a private company is and can only
be a private offering).

Stock Repurchase
Stock repurchase (or share buyback) is the reacquisition by a company of its own stock. In
some countries, including the U.S. and the UK, a corporation can repurchase its own stock by
distributing cash to existing shareholders in exchange for a fraction of the company's
outstanding equity; that is, cash is exchanged for a reduction in the number of shares
outstanding. The company either retires the repurchased shares or keeps them as treasury
stock, available for re-issuance.

Companies making profits typically have two uses for those profits. Firstly, some part of profits
can be distributed to shareholders in the form of dividends or stock repurchases. The
remainder, termed stockholder's equity, are kept inside the company and used for investing in
the future of the company. If companies can reinvest most of their retained earnings profitably,
then they may do so. However, sometimes companies may find that some or all of their
retained earnings cannot be reinvested to produce acceptable returns.