The financial market is a place where investors and traders buy and sell assets. There are many types of financial instruments such as bonds, shares, and derivatives. Financial markets are important in the world economy because they help the flow of funds and investments.
Money markets deal with short-term funds, while capital markets deal with long-term funds. Banks and other financial institutions participate in both money and capital markets.
Both money and capital markets are characterized by a three-tier structure. Lenders and borrowers are individual, legal, and national levels. Large companies can make short-term surplus funds available to the market. This allows lenders to generate more capital.
Investors are individuals and long-term investors. They can trade in the derivatives market for hedging purposes.
Intermediaries are companies that facilitate the transactions between buyers and sellers. They may be banks, investment firms, or insurance companies. These companies can also act as both buyers and sellers at the same time. In addition, they can also provide the necessary facilitating to other financial institutions.
The money market is co-terminus with the entire economy. A quick communication system is needed to transfer money from one sector to another. It is important because it prevents regional scarcity of funds.
In the capital market, companies can raise funds by issuing shares. The capital market is divided into two segments: the primary and the secondary markets. Traders can invest in a company’s shares by purchasing them on an exchange.