Assets Markets: What they are, Where they Live, How they Reproduce [Part 2]

Em Português: Mercados de Ativos: O que são, onde vivem, como se reproduzem [Parte 2]

On the last chapter I gave a simple explanation of how an asset market works, but did you know that the Capital Market where stock trading is held is just one of the many types of Financial Markets that exist in the world?

Theoretically, any "commodity" can be bought and sold in an Asset Market, provided that it is within the specifications and rules established in each of these markets.

The main Financial Asset Markets that exist in today's world are the following:

Capital Markets

Securities are traded on the capital markets. Basically the securities are the shares of companies and debt securities.

Stocks of companies are well known. They are securities that give ownership of a share of the value of the company, in other words, those who hold ownership of a stock are effectively partners of the company, and acquire some rights such as participation and voting in corporate assemblies, and the right to part of the profits generated by the company (dividends).

Bonds securities refer to a "loan register" in which companies or governments can go to the market and "take out a loan" direct from investors at pre-defined rates of interest and terms. Unlike traditional loans, bonds securities can be traded between investors, where an investor can "buy" the right to receive a debt from another investor.

In general, unit prices of bond securities are much less volatile than Stock shares.

The operation of each exchange follows specific laws of each country, and its internal regulations.

The capital markets is still divided internally into two sections:

Primary markets, where the first negotiations of stocks and bonds occur. It is in this market for example that companies make the initial public offerings (IPOs) to raise funds for the development of business activities. Here stocks and bonds are purchased directly from government/companies.

Secondary markets are where the direct exchanges of ownership occur, and where the large trading volume occurs. This is the open market, where investors buy and sell stocks and bonds. In this market, the company/government agency no longer receives anything relative to the value of the shares, only the investors that carry out the negotiations.

Here is a list of the 20 largest securities trading exchanges in the world.

Money Market

This is the market where instruments that allow short-term loans (days, and at most one year) are traded.

Securities issued and traded in this market generally have a low risk and a low return, and are usually used by banks and governments to manage their short-term capital needs.

Most of the participants in this market are large corporations, financial institutions and governments, but it is completely accessible to small investors, usually through banks and financial institutions.

There are no specific institutions that control and regulate this market, as in the capital market, but an informal network of banks, brokers, companies and financial institutions.

An example of securities traded on the money market are Certificates of Deposit (CDs).

Spot Market

In spot markets, all transactions are settled as they occur. A wide variety of assets are traded in this way, including the purchase and sale done in the Capital Markets.

However, spot markets are not restricted to these assets alone. For example, commodities and currencies can also be traded in spot markets. Assets traded on Futures Markets, usually have a counterpart being traded on the spot markets.

Another example of a spot market is the crypto-coins, which are traded in various exchanges around the world.

These transactions usually take place on the exchanges, but can also be carried out in Over-the-counter markets, where buyer and seller negotiate directly without the interference of a third-party centralizer (exchanges), and may even occur based on non-standardized rules.

Derivatives Markets

As the name suggests, in the derivatives market, contracts are traded that are based on some existing asset. The price of these contracts is directly linked to the price of the asset on which it is based.

In general, negotiations take place on exchanges, with each exchange having its own derivative.

The most common Derivatives markets are Forward Markets, Futures Markets, Options, Contract for Diferrence (CFDs) and Swaps.

It is important to know that in the Derivatives Markets, there is no direct negotiation of the asset, that is, the ownership of the asset does not change. There is only one contract between the negotiating parties that establish who should pay what on the expiration date of the contract.

A great advantage of this type of market is the possibility of "betting" on the fall of the price of an asset, called "Short", where the investor / trader can make profits when the market is down.

It is in this market that most of the day-trades are found.

In this type of market it is also possible to conduct leveraged negotiations, which would act as a short-term temporary loan with validity while the trading operation is open. The use of leverage can bring very large profits, but also considerably increase the risk of operations.

Forex and Interbank Market

Forex is an exclusively interbank market, where international banks conduct currency trading between them. Negotiations occur directly between banks, and there is no centralized stock exchange for such transactions.

Meanwhile, these deals take place on a large interbank network, where banks, financial institutions and brokerages are connected, forming a large, relatively decentralized market.

Although trading in this market occurs only among large institutions, due to the growth of the Internet, it has become possible for small investors to participate in this market through brokers, which are directly connected to the Internet. Forex network and offer leverage for customers to participate in the market.

In this market it is extremely important to choose which broker you will use, since these brokers are located in various parts of the world, and each one follows the specific regulations of their countries.

There is a very large history of brokerage firms applying scams and withholding all the money from their clients.

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References: Investopedia, Think Finance, Infomoney, Portal do Investidor.