Types of Financial Markets

Stocks

The market that is most familiar to the average investor is the stock market. This market allows investors to buy and sell shares of ownership in publicly traded companies. Money is made in this market in two main ways: through capital gains, in which the value of each share increases in value, or through dividends, in which companies pass on income to investors.

Bonds

The debt market is used by governments, companies, and financial intermediaries to issue debt instruments to raise capital. The debt issuers then make regular payments to debt holders in the form of coupon payments and, once the debt matures, pay back the principal on the debt. The most common type of financial instruments issued in this market are bonds, bills, notes, and certificates of deposit.

Foreign Exchange (Forex)

The forex market allows investors to speculate on changes in the exchange rates between currencies. Investors will purchase one currency by selling another in the hope that the currency they purchased goes up in value compared to the one they sold.

Physical Assets

The investment in physical assets is essentially the purchase of assets such as metals, jewelry, real estate, cattle, and much more. In this market, investors hope that the price for which they can sell an asset is more than what they paid for it. The risks and costs associated with this type of investment will differ with each type of physical asset.

Derivatives

The last major type of investment is an expansion of all of the above types of markets. Derivatives are securities that derive their value from an underlying asset such as a stock, interest rate, currency, or physical asset. Investors in these types of securities can purchase either the right or obligation to purchase or sell it. As the value of the underlying asset changes, the value of the derivative changes as well. The major types of derivatives are options, futures, or forwards.