What are financial markets?

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”Financial markets” is a generic term for all areas in which the buying and selling of financial instruments such as stocks, bonds, derivatives and fund shares takes place. Financial markets can be divided into national and international financial markets. On the primary market, securities are bought at the time of issue. This raising of capital is handled by a select few participants, such as banks, insurance companies and large mutual funds. The securities are then auctioned and allocated in the secondary markets. This is also where the investor resells. Supply and demand in these secondary markets determine the price. In a nutshell: stocks, bonds and investment units are initially issued on the primary market, while resale takes place on the secondary market.

For a long time, the financial markets have ceased to be physical locations, but rather computer platforms known as “trading places”. This is where the offers to buy and sell intersect. Deutsche Börse AG is the German company based in Frankfurt am Main that is responsible for the operation of trading platforms, participant networks and exchange settlement systems, and also own the Frankfurt Stock Exchange under public law, and is the publisher of the DAX index and numerous other stock indices. The majority of all stock trading on German stock exchanges is carried out via the XETRA trading venue. This is an electronic trading platform used by the Frankfurt Stock Exchange (FSE), the name of which is an abbreviation of eXchange Electronic TRAding.

However, depending on the subject of the financial contracts traded, one can also differentiate between money, credit and capital markets, without forgetting the foreign exchange market and the so-called OTC market.

In the money market, the supply and demand for money come together between banks and non-banks. In short, money markets have the critical roles of financing trade and industry, investing profitably, enhancing the self-sufficiency of commercial banks, and providing liquidity to central bank policy. The money market typically trades in products (money market papers) with highly liquid, short-term maturities (up to two years). This is also characterised by a high level of security and a relatively low interest yield. The money market rate is based on the interest rate at which the money is traded by the central banks.

The credit market mainly consists of banks that borrow money from the central bank or pool savings. This money is then lent to companies in the form of loans. The banks can therefore also resell their future claims from these loans to financial investors (for example for securitisation). The capital market can be distinguished from the money market in that it is characterised by long-term borrowing or investments. On the organised capital market, longer-term transactions are carried out with the involvement of credit institutions and capital collection agencies. Long-term financial instruments (with a term of at least 2 years) are used on the capital market. However, there’s no clear separation of the time limits between money and capital markets. The organised capital market is subject to state supervision and the stock exchange is the most typical form of it. The non-organised capital market, on the other hand, affects credit relationships between companies and between companies and private households.

The foreign exchange market is the market where participants can buy, sell, exchange and speculate about currencies. The foreign exchange market handles more than $5 trillion in daily transactions. This is more than the sum of the futures- and stock markets. The foreign exchange market, also known as the forex market, is decentralised and made up of a global network of computers and brokers from around the world. The players in the forex market are banks, trading companies, central banks, investment management firms, hedge funds, and forex retail brokers and investors. Since cash is the most liquid capital, the foreign exchange market stands out as the most liquid market in the world.

Then, there are a number of transactions between market participants that aren’t carried out via the stock exchange, such as OTC trading, better known as telephone trading. Even though trading is mostly done electronically, the term "telephone trading” is still widely used today. “OTC” refers to “over the counter”. The OTC markets (over-the-counter markets) are characterised by the fact that financial instruments can also be traded though them that don’t need tomeet the relevant requirements on regulated markets. These are markets whose trading takes place outside of the official stock exchange circles.

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