FINANCIAL MARKETS Things you wouldn't eat, such as cotton and lumber.

Prepared By Desiree Elaine A. Cedeno

The energy category includes crude oil, natural gas, and heating oil.
Financial Market Metal category include mined commodities, such as gold, copper, silver, and platinum
A financial market is a market in which people and entities can trade financial securities, commodities
and other fungible assets at prices that are determined by pure supply and demand principles. Markets
TYPES OF FINANCIAL MARKET
work by placing the two counterparts, buyers and sellers, at one place so they can find each other
 Capital Market
easily, thus facilitating the deal between them.  Money Market
FINANCIAL SECURITIES  Foreign Exchange Market
1. STOCKS  Commodities Market
2. BONDS  Derivative Market
3. DERIVATIVES
4. COMMODITIES
1. Capital Market
FINANCIAL SECURITIES The capital market aids raising of capital on a long-term basis, generally over 1 year. It consists of a
primary and a secondary market and can be divided into two main subgroups – Bond market and Stock
1. Stocks
- allow you to own a portion of a public corporation. The owners sell control of the company to market.
stockholders to gain additional funds to grow the company. The stockholders can resell the shares on
Stock Market (Equity) -The Stock market provides financing by sharing the ownership of a company
the stock market. through stocks issuing and trading.

2. Bond is a fixed income instrument that represents a loan made by an investor to a borrower
(typically corporate or governmental).
Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
The Issuers of Bonds
-Governments (at all levels) and corporations commonly use bonds in order to borrow money.
Governments need to fund roads, schools, dams or other infrastructure.  Secondary Market - The so-called “aftermarket” is the place where investors purchase previously
3. Derivative is a financial contract that derives its value from an underlying asset. The buyer agrees to
purchase the asset on a specific date at a specific price. 
4. Commodities are physical assets ranging from wheat to gold to oil. 
Three major categories:
Agricultural commodities include:
Things you drink, such as sugar, cocoa, coffee, and orange juice. These are called the softs
markets.
Grains, such as wheat, soybeans, soybean oil, rice, oats, and corn.
Animals that become food, such as live cattle and pork (called lean hogs).
Bond Market (Debt) - The bond market offers opportunities for companies and the government to
secure money to finance a project or investment. In a bond market, investors buy bonds from a
company, and the company returns the amount of the bonds within an agreed period, plus interest.
Primary Market - The so-called “new issue market”, is where securities such as shares and bonds are
being created and traded for the first time without using any intermediary such as an exchange in the
process. 
issued securities such as stocks, bonds, futures and options from other investors, rather from issuing
companies themselves. 
2. Money Market
Money markets trade in products with highly liquid short-term maturities (of less than one year) and
are characterized by a high degree of safety and a relatively low return in interest. At the wholesale
level, the money markets involve large-volume trades between institutions and traders. At the retail
level, they include money market mutual funds bought by individual investors and money market
accounts opened by bank customers.

The money market enables economic units to manage their liquidity positions through lending and
borrowing short-term loans, generally under 1 year. It facilitates the interaction between individuals
and institutions with temporary surpluses of funds and their counterparts who are experiencing a
temporary shortage of funds.
3. Foreign Exchange Market
Is the market in which participants can buy, sell, exchange, and speculate on currencies. As such, the
forex market is the most liquid market in the world, as cash is the most liquid of assets.
The forex market is made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors. 
4. Derivatives Market
It facilitates the trading in financial instruments such as futures contracts and options used to help
control financial risk. The instruments derive their value mostly from the value of an underlying asset
that can come in many forms – stocks, bonds, commodities, currencies or mortgages.  used to hedge or speculate on the price of the underlying asset.
Types of Derivatives Contract
1. Futures
Futures contracts are standardized contracts that allow the holder of the contract to buy or sell the
respective underlying asset at an agreed price on a specific date.
The parties involved in a futures contract not only possess the right but also are under the obligation, to
carry out the contract as agreed. The contracts are standardized, meaning they are traded on the
exchange market.
2. Forwards contracts
Are similar to futures contracts in the sense that the holder of the contract possess not only the right
but is also under the obligation to carry out the contract as agreed. However, forwards contracts are
over the counter products, which means they are not regulated and are not bound by specific trading
rules and regulations.
Since such contracts are unstandardized, they are traded over the counter and not on the exchange
market. As the contracts are not bound by a regulatory body’s rules and regulations, they are
customizable to suit the requirements of both parties involved.
3.  Swaps
Swaps are derivative contracts that involve two holders, or parties to the contract, to exchange
financial obligations. Interest rate swaps are the most common swaps contracts entered into by
investors.
Swaps are not traded on the exchange market. They are traded over the counter, because of the need
for swaps contracts to be customizable to suit the needs and requirements of both parties involved.
4. Options
An options contract is similar to a futures contract in that it is an agreement between two parties to buy
or sell an asset at a predetermined future date for a specific price. The key difference between options
and futures is that, with an option, the buyer is not obliged to exercise their agreement to buy or sell. It
is an opportunity only, not an obligation—futures are obligations. As with futures, options may be
5. Commodities Market
The commodities market is where traders and investors buy and sell natural resources or commodities
such as corn, oil, meat, and gold. A specific market is created for such resources because their price is
unpredictable. There is a commodities futures market wherein the price of items that are to be
delivered at a given future time is already identified and sealed today.
Functions of Financial Markets
1.Financial markets create an open and regulated system for companies to acquire large amounts of
capital. This is done through the stock and bond markets.
2. Markets also allow these businesses to offset risk. They do this with commodities, foreign
exchange futures contracts, and other derivatives.
3. Since the markets are public, they provide an open and transparent way to set prices on everything
traded. They reflect all available knowledge about everything traded. This reduces the cost of
obtaining information because it's already incorporated into the price.
4. The sheer size of the financial markets provides liquidity. In other words, sellers can unload
assets whenever they need to raise cash.

5. Companies don't have to go far to find a buyer or someone willing to sell.