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2 FM&ITypes - Types of Financial Markets Intermediaries...

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Types of Financial Markets & Intermediaries Types of Financial Markets Financial markets can be subdivided by multiple criteria. Markets can be divided into primary and secondary markets dependent on whether the security is originally issued (primary) or seasoned (secondary). They can be divided into debt (bond, financial intermediary loans, etc.) and equity (stocks, etc.) markets. Markets can be divided according to whether the security trades a financial asset (e.g., a stock or a bond) or a contingent claim on a financial asset (i.e., a derivative security). Or markets can be defined by the type of securities or assets sold (e.g., money, capital, mortgage, foreign exchange, etc.). The typical demarcation is to divide financial markets into money markets and capital markets . Money markets trade financial instruments that are short-term, liquid, and low- risk securities. Capital markets, in contrast, include longer-term and riskier securities. Capital market instruments are much more diverse than those of the money markets. In the following subdivision, markets are divided into three markets: The Money Market , Capital Markets , and Derivative Markets . We will discuss the first and last of these financial markets in significant detail throughout the course of this semester. The latter two were more fully developed in Finance 421. You will utilize your knowledge from Finance 421 to develop hedging strategies for financial intermediaries this semester. Here the intent is to provide a simple broad overview. The Money Market This market can be broadly defined as the market designed to channel temporary surpluses of cash into temporary loans of funds that have one year or less to maturity. Principal functions of this market are to finance the working capital needs of corporations and to provide governments with short-term funds in lieu of tax collections. Further, the money market also meets other needs such as supplying funds for speculative buying of securities and commodities. However, these functions are all one-sided (fund demand). The money market provides an investment outlet for individuals and corporations holding surplus cash for short periods of time that wish to earn at least some return on these temporarily idle funds (fund supply). The essential function of the money market is to bring these two groups into contact to make borrowing and lending possible. Capital Markets The capital markets are designed to finance long-term investments by corporations, governments and households. Financial instruments in the capital markets have original maturities of more than one year. These markets are further divided into The Fixed- Income Capital Market and The Equity Capital Market .
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The Fixed-Income Capital Market The term “fixed-income” is given to securities because most of these instruments promise either a fixed stream of income or a stream of income determined by a specified formula.
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