Types of Markets
In the field of economics, in the general terms, ‘market’ is essentially a conglomeration of sellers and buyers of certain goods and services and also the transactions between them. On the basic front, universally a market is any place where buyers and sellers meet to trade. However, these days the term ‘market’ is mostly used to designate the ‘exchanges’ that trade in financial securities and other financial instruments. These markets are of various types, major types of which are explained below.
These are the markets for securities where governments and companies (business enterprises) can raise long term funds. The money in this market is provided for periods that are generally longer than a year. The capital market further includes the stock and the bond markets.
- Stock Markets – The stock markets provide financing by issuing common stock or shares and hence subsequently enables trading.
- Bond Markets – The Bond Markets provide financing by issuing bonds and hence subsequently enables trading.
These are the markets where commodities and contracts based on them are traded. The commodities can range from the agricultural products (wheat, sugar, corn, etc) to raw materials (metals, oils, etc.). the contracts can include spot prices, forward contracts, future contracts, options on futures, etc. There are also other sophisticated contracts which may include factors such as interest rates, swaps, environmental instruments, or ocean freight contracts.
The investment markets are geared towards the trading (buying and selling) of derivatives. Derivatives are essentially securities or other financial instruments like future contracts or options that get their value or at least part of their value from other assets (securities) that are called underliers. Derivatives markets can be distinguished into two distinct parts. Derivatives can be purchased and sold in the form of ‘futures’ or ‘over the counter offerings’.
Money market in general terms in the market where banks and other financial institutions trade, borrow and lend financial instruments like federal funds, Treasury bills, banker acceptances, short lived mortgage, commercial paper, Certificates of Deposits, etc. These financial assets or instruments are involved in short-term trading, borrowing and lending with original maturities with time frames of one year or shorter. The global financial system is provided liquidity funding owing to these markets.
Known as Foreign Exchange Market, this is the market where nation’s currencies are traded for other currencies. The Forex, as it is popularly known is what determines the relative values of different currencies. The primary purpose of this market is to assist international trade and investment by allowing businesses to convert currencies.
There are also, other types of markets such as the precision markets where the goods exchanged are dependent on the occurrences of certain events.