All About Financial Markets: Components, Key Segments, Activities & Key Functions

Financial markets are a podium where buyers and sellers engage in the sale and purchase of financial products such as securities, commodities, and currencies. Stocks, bonds, and their derivatives are considered to be securities whereas commodities may include such items as valuable metals and agricultural goods, just but to mention a few.

One of the roles of financial markets is to set prices for the trade of securities, commodities, and currencies globally. Additionally, they help companies raise funds required for their smooth running and in order meet their financial obligations.

People trade financial securities, commodities, and value at low transaction costs and at prices that reflect supply and demand in financial markets. Securities include stocks and bonds, and commodities include precious metals or agricultural products.

What are the Components of Financial Markets?

What are the Components of Financial Markets

Financial markets are broken down into various components based on the asset that is traded and the length of financing offered:

• Capital Markets: Capital markets are concerned with raising capital for entities through issuing equity stock or long-term debt. Let us explore some of the elements of capital markets.

a) Stock markets: They are markets that companies leverage to raise capital by creating shares. The shares are sold to external investors, who can either be corporations or individual buyers. Companies can sell the shares on their own or engage the services of stockbrokers.

b) Bond markets: When organizations need large-scale financing, they may resort to bonds. Bonds are borrowing instruments which generate a fixed interest rate after a predefined period. Different types of bonds include treasury bonds, corporate bonds, and municipal bonds.

• Commodity Markets: This is where companies trade in natural resources such as oil, corn or gold, for short-term financing
• Money Markets: Money market instruments are also referred to us 'paper'. They entail trading of financial instruments which are highly liquid and have short-term maturity dates. The maturity dates of papers could be as short as a few hours but not more than one year.
• Derivatives Markets: These are markets that facilitate the trading of financial instruments like futures contracts or options which are derived from other forms of assets like stocks, bonds, commodities, and market index price
• Futures Markets: A futures market is one where participants agree to buy or sell an asset at a future date at an agreed-upon price.
• Insurance Markets: Insurance markets are a means of protection against financial loss or any other uncertain loss. Insurance companies compensate to the insured party in case of occurrence of the insured loss.
• Foreign Exchange Markets: Forex markets deal with the buying and selling of foreign currencies.
• Mortgage Markets: They are classified as primary and secondary mortgage markets. In a primary mortgage market, mortgage brokers, commercial banks, and credit unions give out mortgage loans needed to acquire property. A secondary mortgage market involves the buying and selling of existing home loans, which have been bundled together and traded as mortgage-backed securities.

What are the Key Segments of Financial Markets?

Also referred to as the market players, key market segments perform different functions in the financial market. They form the pillar of financial markets.

Market players control the prices of securities and commodities and provide checks and balances needed for proper functioning of financial markets.

What are the Key Segments of Financial Markets

• Buy-side: The buyers are the demand-creators of financial markets. Buyers can be private investors, mutual and pension funds, corporate and insurance companies, among others. Buyers actively participate in predicting the prices of securities and commodities.

Speculative or hedge buyers buy with the hope that the value of the commodity will go up so that they can later sell it a higher price and make profits. The mutual funds are a pool of money that has been funded by owners or shareholders of different holdings and managed by professionals.

The pension funds, receive money from employees and individuals with the aim of covering for their retirement. Unlike mutual companies, pension funds are accessible upon the retirement of an individual.

Managers of both mutual funds and pension funds buy bonds and shares with the intention of generating interest for their investors. Other buyers include shareholders buying into a share issue and foreign currency bureaus.

• Sell-side: The sell-side creates the supply function of the market. They place and promote securities and commodities in the financial markets. Sellers include individuals, corporate and representatives, also known as agents.

Some investment banks provide their customers; mostly account owners, information about available securities and also issuer stocks and bonds on behalf of the selling companies.

A stockbroker is a middleman in the financial markets. The stockbroker can either be a company or an individual who purchases or buys stock and securities on behalf of another person. The advantage of engaging a stockbroker is that he is fully conversant with the news in the market can make the right decision at the right time and with a high degree of accuracy.

Stockbrokers represent both the individual and retail brokers, and their reward is the commission, paid by both the buyers and the sellers. Companies are also essential selling players. Blue-chip companies issue shares to the public as a way of funding the company. Other securities sold by companies include debentures which yield interest to the buyers and rights shares.

• Market infrastructure: In order for the financial money markets to perform, they need a platform. Various institutions act as the platform and are therefore regarded as market infrastructure. Examples of such institutions are the Capital Market Authorities which hosts both the buyers and sellers of the markets. The institutions are also used by regulators to streamline the activities of the market makers.

Intermediary banks also play a critical role in providing infrastructure, especially in trading on the foreign currencies.

• Regulators: Regulators are tasked with the duty of making sure that the market is balanced. In most countries, regulators are the Central bank. The regulator for the US Government, for instance, is the Federal Reserve System. Regulators also control the supply of a country’s currency and the interest rates to avoid inflation.

What are the Financial Markets Activities?

In the financial markets, various activities are responsible for the smooth running of the markets. These include;

What are the Financial Markets Activities

• Primary and new issue: Primary issue means offering to the public securities that have not previously traded on the market. These can be in form of new stock, bond or debentures. An example of a primary issue is when privately owned companies goes public and introduce their shares to the market.

• Trade: Trade happens when a willing buyer meets a willing seller. In the financial markets, this mostly occurs in the broker's office or in the national exchange of that particular country. The price is determined by the demand and supply law. The economic and political situations of a country also play an essential role in determining the prices of securities. A rise of interest rates, for instance, can cause a demand rise of bonds issued then.

• Clearing: This entails all the activities that take place from the time a payment commitment is made to the point it is approved. The regulatory bodies are responsible for making sure that the instruments used are authentic and duly authorized by the right persons.

• Settlement: When the buyer and the seller agree on the price of the commodity, a contractual obligation is formed. To complete the contract, the seller exchanges the product with the buyer for the agreed value. This is referred to us settlement. When dealing with securities, settlement is fast because most of the time is digitalized.

• Investment research: Before investing in a security, an investor needs as much information as possible about the investment. Audit organizations carry out such audits and provide the report to the interested parties. Such statements help the investors to choose whether to invest and also determine the optimal investment portfolio.

• Investment management: Most of the times, investors lack the knowledge or the time to manage their interests. They, therefore, engage proficient administrators who manage investments either as stand-alone or portfolios with a promise to generate benefits. Real estate managers are a good example of investment managers.

• Securities lending: Did you know that securities can be used as guarantee? When you want to guarantee your loan using your stock or bond as security, you provide a security ownership certificate to the lender who keeps it until you repay your loan. Nowadays, stock certificates are digital. For one to be able to borrow on the stock, you provide the digital identification which is locked, with your permission, and later released for trading when you pay your loan.

What are the Key Functions in Financial Markets?

The Financial market has a pivotal role in energy and utility industry. An equity investment that is high yielding with utility stocks is subjected to interest rate risk. Due to this, higher interest rates mean increased capital cost for utility companies.

The main key functions include:

• Front office: Front office is directly involved with serving customers. It is tasked with carrying out trade and order management, researching in investment and advisory, and customer service. Furthermore, it analyzes prices and conducts business and market development.

• The Back Office: This is mandated to core functions that are processing trade, clearing, settlement, and accounting. It also gives reports on the findings after payment.

• Risk management: Risk management guarantees that bank's activities can proceed in a risk controlled environment by streamlining risk factor exposure in assets and securities. Moreover, it controls finances, manages risks both credit, market and operational, and provides information on security and privacy.

What are the Key Functions in Financial Markets