Business

Classification of the financial market

You probably know of the various types of financial markets, but I am not entirely sure if you know how the various financial markets can be classified. Financial markets are very broad and just mentioning the various types in existence is usually not enough to make readers grasp fully what they mean. As such, I am going to further dissect financial markets into various classification so that you have an easier time. I will lay bare the various categories into which financial markets can be classified.

Classification by nature of assets

The first classification of the financial markets is by the type of assets that traders trade in. Under this classification, we have several sub-categories with the major ones being stock market, bond market, commodities market, and derivatives market. The stock market is for trading a company’s shares after its initial public offering. The bond market is meant for governments and companies to raise money for their projects. Investors buy bonds offered by governments and companies so that the latter can pay the amounts of the bonds at a later date as agreed with interest. The commodities market allows buyers and sellers to trade in natural resources such as meat, gold, and oil. Lastly, the derivative market is where traders trade in contracts or derivatives that have value that is based on the asset being traded.

By nature of claim

The second category of financial markets is based on the nature of the claim. Under this category, we have two sub-categories and that is the equity market and the debt market. This is essentially the market for residual claims and it allows traders to deal in equity instruments such as stocks.

The second category is the debt market where investors sell and buy fixed claims or debt instruments. These include bonds and debentures.

By maturity of claim

Another way of categorizing financial markets is by the maturity of the claim. Under this category, we have two sub-categories, that is, the money market and the capital market. The money market refers to the financial market where investors trade in securities that reach their maturation within a period of one year. Assets that are available for trading in the money market include certificate of deposits, commercial paper, and treasury bills among many others.

A capital market works in the same as the money market with the main difference being in the duration of maturation of the assets. In the capital market, assets that investors trade in last between medium and long term to mature. The capital sub-category has two other sub-classes below it and that is primary market and secondary market or the stock market.

By organizational structure

Under this category, financial markets can be classified into two sub-categories, that is, exchange traded market and over-the-counter market. In exchange traded market the market is centralized and governed by set regulations. On the other hand, over-the-counter market has customized procedures and decentralized organization. The presence of fewer regulations in this market makes it to be preferred more by smaller organizations. Check out markets.com to learn more about what I mean here.

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