Question

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

Money Market

Capital Market

Bond Market

Mortgage Market

Stock Market

Foreign Exchange Market

Derivative Security Market

Answer 1

MONEY MARKET- Money market is a market where financial instruments with short term maturity and high liquidity are traded. Some of the money market instruments include bill of exchange, commercial papers, certificate of deposits, treasury bills etc. Major participants in money markets are commercial banks, central government, state government, insurance companies etc.

CAPITAL MARKET- A market where both equity and debt instruments like preference shares, equity shares, debentures, bonds etc are bought and sold is termed as capital market. Capital market instruments include equity shares, preference shares, debentures, bonds etc. Corporations, institutions, investment bankers, public accounting firms etc are the major players in capital market.

BOND MARKET- A market where debt securities are traded is termed as bond market. Bond market instruments include debentures, bonds, fixed deposits, commercial papers etc. Major players in bond market are traders, institutional investors, governments etc.

MORTGAGE MARKET- Mortgage market can be divided into primary and secondary mortgage market. In primary mortgage market borrower can obtain a mortgage loan form lender. In secondary mortgage market mortgage loans are bought and sold by various entities. Banks, mortgage brokers, mortgage bankers, credit unions etc are the major players in the mortgage market. Instruments traded in mortgage market includes conventional mortgage, deed of trust, credit line, reverse mortgage etc.

STOCK MARKET- Stock market is a place where shares of public listed companies are bought and sold. Various instruments traded in stock market are bonds, mutual funds, derivative instruments, commodities etc. Insurance companies, pension funds, index funds, mutual funds, retail investors etc are the major players in stock market.

FOREIGN EXCHANGE MARKET- A market where traders buy and sell currencies are termed as foreign exchange market. Major players in foreign exchange markets are forex dealers, banks, hedge funds, central bank, investment management firms etc. EUR/USD, USD/JPY, GBP/USD etc are traded in forex market.

DERIVATIVE SECURITY MARKET- Derivative market is the financial market for derivatives, financial instruments like options or future contracts, the value of which is derived from the underlying assets. Forwards, futures, options and swaps are the major derivative instruments. Margin traders, hedgers, arbitrageurs, and speculators are the major players in derivative markets.