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A financial market allows for intermediation of capital between households & firms. Broadly a financial market performs the following functions:

  • Determines the price of a transaction.
  • Provides liquidity by transferring ownership of assets from one agent to the other.
  • Performs measurement & management of asset price risk.

There are various types of financial markets doing specialised tasks. The types of financial markets can be seen today are:

1. Capital Markets: Consists of primary markets & secondary markets. Newly issued bonds & stocks are exchanged in the primary market & already existing bonds & stocks are exchanged in the secondary market. Bond market provides financing through issuance & trading of bonds whereas shares are traded in stock markets.

2. Money Market: Facilitates short term debt financing & capital.

3. Derivative markets: Provides instruments for controlling financial risks.

4. Foreign Exchange Markets: Facilitates trading of foreign exchanges.

5. Commodity Markets: Facilitates trading in commodities.

For instance various investment houses provide asset management services, hedge fund management services etc. Insurance companies provide insurance on various aspects of individual life as well as business houses.

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