Financial markets refer generally to any market where the buying and selling of securities take place. Some examples of financial markets include the stock market, the bond market,and the commodities market. Financial markets can be further broken down into capital markets, money markets, primary markets,and secondary markets.
Let's take a closer look at three of the most common types of financial markets.
Stock Market
The stock market is where shares of publicly traded companies are bought, sold, and issued. It is a collection of several exchanges where companies choose to list their stocks.
The most prominent exchanges in the U.S. are the New York Stock Exchange (NYSE) and the Nasdaq. The NYSE is the largest stock exchange in the world and boasts some of the oldest publicly traded U.S. companies. The Nasdaq, meanwhile, includes the biggest names in technology such as Apple, Alphabet, and Microsoft.
The U.S. stock market—as represented by the S&P 500—has returned an average of about 11% over the past 50 years.
Other large exchanges around the world include the Tokyo Stock Exchange (Japan), Shanghai Stock Exchange (China), and the London Stock Exchange (England).
The stock market is considered a capital market because it provides long-term financing for companies.
Bond Market
The bond marketrefers broadly to the marketplace where investors buy and sell debt securities. Bonds are typically traded, but notes and bills are also exchanged.
Both governments and companies issue debt for a variety of reasons such as reducing overall debt, funding growth projects, or simply helping maintain day-to-day operations.
The bond market can be further segmented into two categories: the primary market and the secondary market. New debt is created on the primary market where bond issuers raise capital directly from bond buyers. The secondary market is where investors trade previously issued debt securities.
Individual investors typically participate in the bond market through retail brokers.
While stock market news dominates financial headlines, the bond market is actually bigger in terms of value. Based on reporting for 2020, the total value of the global bond market was about $123.5 trillion versus $105.8 trillion of the global equity market.
Commodities Market
The commodities market refers to the marketplace where investors buy, sell, and trade raw products such as oil, gold, or corn. Major commodity exchanges in the U.S. are the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Intercontinental Exchange (ICE).
Hard commodities are natural resources that are mined, such as gold and oil. Soft commodities are typically agricultural, including corn and livestock.
Commodity markets can include physical trading. But these days, the vast majority of commodities trading is done through the use of financial derivatives. Derivatives allow investors to profit from commodities without having to physically possess them.
Retail investors usually don't have direct access to commodities markets. But average individual investors can still gain exposure to commodities through stocks, bonds, and ETFs.
