Trading financial markets and its instruments

A financial market is a place where buyers and sellers trade different financial assets. Main components of the financial market are money markets and capital markets. Different parties, including governments also use financial markets for borrowing and lending money and maintain an equilibrium in the market. For trading long-term assets, the capital market is used, and for trading short-term to medium-term assets, the money market is quite popular.

Money markets

For the corporate, government, and individual, the money market is the place for trading. In the money market, different financial instruments are traded, including deposits, loans, bills of exchange, and so on. This market helps to meet various functions to the government entities. Balancing the liquidity rate in the market is the main function of the money market.

Capital markets

Stock and bonds are the main elements of the capital market. The capital market helps different institutions with arranging capital for short-term and long-term. Capital market is usually riskier for the transaction than the money market.

There are many similarities and dissimilarities between the money market and capital market. Both markets provide necessary functions to the market. The main goal of this market is to provide adequate funding. Investors and traders choose different markets for different reasons. Those want to prefer high-risk investments, go to the capital market, and those who want to be on the safer side, go to the money market.

Different Financial Instruments

Different types of financial instruments are used for trading in the market. Financial instruments can be cash or derivatives. Some financial instruments are discussed below:

Cash instrument

The value of the cash instruments can be evaluated directly from the market. Cash instruments can be many kinds of. Most of the time, they are liquid in nature and readily transferable.

Derivative instruments

Derivative instruments can be two types of. One is the exchange-traded derivatives, and the other one is the over the counter derivatives. From the asset or interest rate, the derivative instruments derive their values.

Based on the asset class, the financial instruments can be classified into two ways. These are equity-based and debt-based.

Equity

Equity is basically the owner of the shareholder of a corporation. Stocks, shares, options, etc. are the components of equity.

Debt

Debts are different types of based on the maturity period. They can be long-term or short-term.

Long-term debt: Long-term debts are issued for more than one year. Bonds, loans, futures contract, interest rate swap, derivatives, etc. are issued for more than one year, and they are long-term debt.

Short term debt: Short-term debts are issued for less than one year. Bills issued by the government, deposits, certificate of deposits, short-term interest rate, etc. are the types of short-term debt. These debts are repayable within a few months, quarterly or in a year.

So, these are some instruments to form a financial market.