Types of Financial Markets Flashcards
What are the 3 Financial Markets?
- Money Markets
- Capital Markets
- Currency Markets
What are Money Markets?
Markets for short-term loan finance.
Trades assets which have a maturity date of a year or less. i.e. gov’t/corporate bonds and interbank lending.
What are the Capital Markets?
Markets for medium to long-term loan finance.
Trade assets which have a pay back date of greater than a year, i.e. bonds and shares (Debt and Equity capital).
What is Debt Capital?
Borrowed funds which must be repaid at a later date. Creditors reciever interest from debtors as a reward for risk.
What is Equity Capital?
Funds paid into a business in return for a stake in the business. Creditors recieve dividends as a reward for their investment.
What are the 2 types of Capital Markets?
- Primary
- Secondary
What are the Primary Markets?
New issue market: where new stocks, shares and bonds are issued for the purpose of financing needs (asset class maturity < 1 year).
What are the Secondary Markets?
Where existing shares and bonds are traded via the stock markers, i.e. LSE or NYSE.
What are Currency Markets?
The markets where currency is bought and sold: it is the largest financial market with $5.3 trillion traded daily worldwide.
What are the 2 types of currency market?
- Spot
- Forward
What is the difference between Spot and Forward markets?
Spot = buy currency at the given exchange rate and have it delivered to you right now.
Forward = buy currency at the given exchange rate and have it delivered to you at a sepcific time in the future,
Why do financial institutions engage forward markets?
- Speculators may think the exchange rate is going to get stronger in 6 months time, so buy the currency now and have it delivered in 6 months time.
- When the exchange rate is stronger 6 months later, they will then sell their currency for a profit.
