Question

Explain and give an example of the following financial markets, make sure to include who participates in each market:

Stock Market

Foreign Exchange Market

Derivative Security Market

Answer 1

Financial market is a market place where buyers and sellers trade financial instruments. It consists of primary market where new issues of securities are first offered and another is secondary market which deals with the trading of securities. These instruments include

1. Stocks- Shares of ownership of a corporation

2. Bonds - Treasury bonds, corporate bonds and municipal bonds

3. Derivatives - financial instruments derive their value based on underlying assets such as stocks. These derivatives are future, options swaps etc,

4. Foreign exchange -Global market in which currencies are bought and sold.

5. Commodities- oil, gold etc

Stock market - It is a market place where trading of stocks takes place. Stock or shares represents the ownership intrest in a particular company. The participants of stock market are:

1. Banks

2. Insurance companies

3. Mutual funds

4. Traders

5. Hedge funds

5. Brokers

Foreign exchange market- It is a market place where currencies are bought and sold at determined prices over the counter. Main participants of foreign exchange market are

1. Banks

2. Commercial companies

3. Investment banks

4. Hedge funds

5. Brokers

6. Investors

Derivative security market- Derivatives aare the financial instruments that are derive from the value of an underlying asset such as stocks, currencies, commodities. Dervative market is a market place where trading of future and option contracts of an underlying asset takes place. Derivative market consists of

1. Future

2. Options- Call and put

3. Swaps

main participants of derivative markets are speculators, hedgers and arbitragers.

Speculators takes a high level of risk for profit.

Arbitragers are the traders who involves in risk free profits.

Hedgers takes less risk in the markets.