Financial markets are vital in facilitating the operation of industrial economies by offering assets and creating liquidity for entrepreneurs and businesses. These markets help sellers and buyers to trade the financial instruments they have.
Understanding the structure of the financial market and how participants act together is crucial as it can suggest traders’ innovative investment opportunities, minimize risks and help reduce costs.
You can’t become an expert in trading if you don’t know its basics. If you are willing to learn the structure of the financial market and its functions, invest 10 minutes of your free time and keep reading!
The Structure of the Financial Market
Each international and national market makes up the global financial exchange. It integrates banks, insurance/pension/currency funds, and other financial institutions that contribute to accumulating and redistributing money.
The financial market is a complex system. Luckily, today you can find a lot of information about it on any leading financial information portal.
The structure of the financial market is multilayered, with five economic segments. Below we describe each.
Forex (Foreign Exchange Market) or Currency Market
Forex is a market where the currency and its equivalents are the subjects of the interaction among its participants. You can also use derivative instruments as trading instruments, where according to the form, the payment may be non-cash or cash. Derivatives market include:
- Forward Contracts (also known as forwards)
- Currency Futures
- Currency Options
- Currency Rate Swaps
- Currency ETFs, etc.
The credit market includes a redistribution of extra funds from traders who hold them to traders who don’t have those additional funds. Compared to the investment market, the credit market features a three-tier structure, which is more complex.
Here is the credit market structure and the three levels:
- Commercial banks and the central bank: The central bank has a role of a regulator, and when it comes to loans, the central bank supports banks, controls the money supply facing some short-term issues, keeps the banking system liquidity, and covers the potential cash gaps and cracks.
- Commercial banks with their customers
- Credit relationships between the involved legal entities
- Insurance Market
The insurance market is a separate segment because insurance companies belong to the group of leading investors worldwide. Providing different types of insurance services, insurance companies accumulate capital that they invest in metal, deposits and the stock market for a pre-set period.
The investment market is a unique system built on free competition and partnerships between those participating in the investment activity. This market offers to invest money in a vast spectrum of assets for successful earnings for a certain period thanks to dividend payments or increased asset prices. This type of market can show as a capital investment, too.
Stock Market: Securities
The stock market covers complex relations between the financial market contributors regarding the issuance and revenue of company shares and other securities. You can trade financial instruments on stock exchanges through a broker or over-the-counter (OTC). However, you may trade just listed assets that match specific requirements. The most popular assets include:
- ETF securities
Functions of the Financial Market
Today’s modern urbane society highly values the financial market. Its target is to mobilize capital, hand it out between industries, regulate and support the reproduction process and increase the overall economic system efficiency.
Critical functions of the modern financial market implemented by its participants cover:
- Facilitate efficient bonds between each participant in the financial market, from individual investors to private entities and giant institutional investors.
- Regulate and supervise the processes in the financial system, such as the development of legal provisions, licensing, regulation of the money fund, and taking control of conventional rules by participants in the market.
- Organize the capital, share it to be used professionally, and create additional value.
- Reducing risks, such as fraud prevention.
- Ensure crystal clear pricing and minimize price manipulation.
- Provide necessary information.
- Provide market liquidity.
- Guarantee privacy as well as transparency of the transactions.
The financial market activities depend on national banks’ obligations to regulate currency rates and set and control interest rates. Currency and stock financial markets, and commercial banks, are tightly connected with the growth of the financial resources market. The most attractive financial market segment turns out to be the securities market regarding asset profitability.
Getting familiar with the structure of the financial market and its function won’t make you an expert in trading overnight, but it can help you make your first steps safely. After gaining experience in the general financial market, you can start learning more about what each of the five types offers and maybe dive into a trading exchange.