Types Of Financial Markets

Financial markets can be classified according to various criteria. The following are the most common:

1. Classification according to the transferred assets

Money Market: In these markets it is traded with financial assets that have a high liquidity and a maturity that is usually in the short term. These are assets whose maturity is usually less than one year.

Capital Markets : In this type of market, it is traded with assets that have a longer maturity, usually in the medium to long term. They are assets necessary for the execution of various investment processes. Capital markets are divided into the following types:

Stock markets: These markets provide financing to companies through the issuance of shares, at the same time allowing the exchange of shares through purchase and sale transactions.

Bond markets: These markets provide financing through the issuance of bonds, at the same time allowing the exchange of these through transactions.

2. Classification according to its structure

According to their structure, markets can be classified as follows:

Organized markets: A classic example of this type of market is the New York Stock Exchange that brings buyers and sellers of stock together in one place.

Over the Counter: These are markets in which the trading of financial instruments is carried out directly between the two parties (buyer and seller) without any intermediation. The biggest example of the Over the Counter market is the foreign exchange market, which is totally decentralized and where transactions are carried out directly between the participants.

3. Classification according to the negotiation phase of the financial assets

According to their negotiation phase, the markets are classified into two basic types:

Primary Markets: These are the markets where the financial assets are created and in which these are issued directly by the issuer.

Secondary type markets: In these markets, the exchange of existing assets is carried out and has already been issued in advance. They generally allow investors holding financial assets to sell those that were already issued in a primary market or that had already been traded on a secondary market (which they currently hold). Secondary markets also allow you to buy financial assets freely.

4. Classification according to the type of financial asset that trading

There are currently many types of assets that can be traded in financial markets, some of which are particularly complex. The main markets for the number of financial instruments they offer and the volume of regular trading are as follows:

Foreign exchange market (FOREX): It is a global market, the largest in the world in which foreign exchange is exchanged, especially those belonging to the most powerful economies. Every day transactions are made for billions of dollars in this market, whose volume far exceeds that of any other.

Commodity markets: They specialize in the trading of commodities, especially commodities such as petroleum, metals, agricultural products and many others. This type of market also has an extremely high trading volume.

Financial derivative market: These are markets that offer various specialized instruments for the management of financial risk. An example of a financial derivatives market is as follows:

Futures Markets: These are the markets that are traded with Futures Contracts based on a wide variety of assets, from raw materials such as gold and silver to financial instruments such as currency pairs. A Futures contract may be defined as an agreement that obliges both contracting parties to purchase or sell a certain number of securities or assets (also called underlying assets) at a price established in advance and at a future date determined in contract.

Forwards Markets: These types of markets specialize in standardized Forwards contracts that are used to trade all types of products at a future date. Among the most common instruments used with Forwards contracts are currencies, metals and various fixed income instruments.

Stock markets: As the name implies, these markets allow the issuance and conduct of negotiations for the purchase and sale of shares of companies that decided to become public and obtain financing through the sale of shares.

Insurance markets: Their function is to allow the distribution of various risks. Basically in these markets trade in instruments such as insurance contracts.

With respect to theories about how financial markets work, there are a number of approaches that have become popular and have their followers. In some cases these theories affirm that the movements of the market can be predicted whereas others affirm the opposite. Next we will explain one of these approaches known as Random Walk Theory.