Question

1. In class we learnt about the broad classifications of financial markets. How will you explain any three of these classifications to your friends in history department?

Answer 1

Hi,

I would start by explaining the concept of a financial market. A financial market in simple terms is a market place where buying and selling of financial assets take place such as bonds, shares and commodities. Here the buyers are retail investors like you and me, large institutions like big companies, pension companies, Governments etc. Three basic classification of the following would be :-

1. Equity markets - Equity markets is a market place as the name suggests where the investors in buy some ownership of the company for some amount of money and in return they get ownership known as a share.

2. Debt markets - Debt markets is related to the loan component. Here investors give loan to the companies, goverment etc and the loan taker promises to return the amount with the the interest set after a period specified. The instruments which represent this loan is called a bond.

3. Derivatives market/ futures market - futures market is related to instruments called derivatives. In derivatives you decide today the price of a financial instrument to be paid in future for a particular quantity and at a particular price. Many participants use this as instruments of betting and bet on the rise and fall of underlying instrument. Also many instrument use it for hedging so that the price of an important raw material is fixed in future so that it doesn't effects the revenues or profitability.

I hope this helps

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