What is a financial market?

Financial markets refer to any marketplace where securities such as stocks, bonds, currencies, and derivatives are traded. Financial markets are essential for the functioning of capitalist economies.

Understanding the financial markets

Financial markets are essential for the efficient functioning of economies as they help allocate resources and create liquidity for businesses and entrepreneurs. The markets simplify the process for buyers and sellers to exchange financial assets, creating opportunities for businesses to grow and for individuals to invest.

Financial markets create securities products that offer returns for those with excess funds (investors/lenders) while providing access to capital for those needing additional money (borrowers).

The stock market is one type of financial market, where people buy and sell financial instruments, including equities, bonds, currencies, and derivatives. These markets depend on transparency to ensure that prices are set efficiently and accurately, with the goal of fair trading and market stability.

While some financial markets are small with little activity, others, such as the New York Stock Exchange (NYSE), trade trillions of dollars’ worth of securities every day. The stock market enables investors to buy and sell shares of publicly traded companies.

Types of financial markets

Financial markets come in various forms, each focusing on specific types of instruments.

Stock markets

Stock markets are among the most well-known financial markets. These markets provide a platform where companies list their shares, which are then bought and sold by traders and investors. Stock markets, also known as equities markets, are used by companies to raise capital and allow investors to seek returns.

Stocks may be traded on listed exchanges, such as the New York Stock Exchange (NYSE), Nasdaq, or in the over-the-counter (OTC) market. Most stock trading takes place via regulated exchanges, which play an important economic role by allowing money to flow through the economy.

The main participants in a stock market include retail and institutional investors, traders, market makers, and specialists who play key roles in maintaining liquidity and creating two-sided markets. Brokers act as intermediaries, facilitating trades between buyers and sellers but without taking an actual position in a stock.

Over-the-counter markets

Over-the-counter (OTC) markets are decentralised markets, which means they do not have physical locations, and trading is conducted electronically. In OTC markets, market participants trade securities directly, without a broker.

OTC markets handle trading in certain stocks (e.g., smaller or riskier companies that do not meet the listing criteria of exchanges), but most stock trading is done via exchanges.

Certain derivatives markets operate exclusively OTC. These markets are generally less regulated, less liquid, and less transparent compared to exchange-based markets. Transactions in OTC markets often lack the transparency of regulated exchanges.

Bond markets

The bond market is a financial market where investors buy and sell bonds, which are a type of security in which an investor loans money for a defined period at a pre-established interest rate.

Basically, a bond acts as an agreement between the lender and borrower, outlining the loan details and repayment terms.

Bonds are issued by various entities, including corporations, municipalities, states, and sovereign governments to fund projects and operations.

For example, the bond market sells securities like notes and bills issued by the United States Treasury. It is also commonly called the debt, credit, or fixed-income market.

Money markets

Money markets trade in products with highly liquid, short-term financial instruments with maturities of less than one year. These markets are known for their high level of safety and offer lower interest return compared to other markets.

At the wholesale level, money markets involve large-volume trades between institutions and traders. At the retail level, they include money market mutual funds for individual investors and money market accounts offered by banks to their customers.

Individuals can also participate in the money markets by purchasing instruments such as short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills.

Derivatives markets

A derivative is a financial contract between two or more parties, with its value tied to an underlying financial asset, such as a security or set of assets (like an index).

Rather than directly trading stocks, the derivatives market trades in futures and options contracts and other complex financial products that derive their value from underlying instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks.

Futures markets

Futures markets are where futures contracts are listed and traded. Unlike forward contracts, which are traded over-the-counter (OTC), futures markets operate with standardised contract specifications, are regulated, and rely on clearing houses to ensure trades are settled and confirmed.

Options markets

Exchanges like the Chicago Board Options Exchange (Cboe) list and regulate options contracts.

These markets provide trading opportunities across asset classes, including equities, fixed-income securities, commodities, and so on.

Forex market

The forex (foreign exchange) market is the global marketplace where participants buy, sell, hedge, and speculate on currency exchange rates. It is the most liquid financial market in the world, as cash is the most liquid asset.

The forex market handles over $7.5 trillion in daily transactions, more than the combined volume of futures and equity markets.

Like OTC markets, the forex market is also decentralised, relying on a global network of computers and brokers. Key participants include banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers and individual investors.

Commodities markets

Commodities markets are places where producers and consumers exchange physical commodities, including agricultural products (e.g. corn, livestock, soybeans), energy resources (e.g. oil, natural gas, carbon credits), precious metals (e.g. gold, silver, platinum), and “soft” commodities like cotton, coffee, and sugar. These are known as spot commodity markets, where physical goods are exchanged directly for money.

However, the majority of commodities trading takes place in derivatives markets that use spot commodities as the underlying assets.

Forwards, futures, and options on commodities are exchanged both over-the-counter (OTC) and on major listed exchanges worldwide, such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).

Cryptocurrency markets

Thousands of cryptocurrency tokens are available and traded globally across a network of independent online crypto exchanges. These exchanges host digital wallets for traders to swap one cryptocurrency for another or for fiat currencies such as dollars or euros.

While most crypto exchanges are centralised, leaving users vulnerable to hacks and fraudulent activity, decentralised exchanges offer a secure alternative by operating without a central authority.

These exchanges allow direct peer-to-peer (P2P) trading without the need for an intermediary to facilitate transactions. In addition, futures and options trading are available on major cryptocurrencies.

In summary

Financial markets are essential for driving economic growth and stability by providing liquidity, capital, and opportunities for participation.

Without financial markets, efficient allocation of capital would not be possible, and economic activity such as commerce and trade, investments, and growth opportunities would be significantly reduced.

Many participants make markets an essential part of the economy—companies rely on stock and bond markets to raise capital from investors, while speculators trade across various asset classes to profit from future price movements.

At the same time, hedgers use derivatives markets to manage risks, and arbitrageurs capitalise on mispricings or market anomalies. Brokers often act as intermediaries, connecting buyers and sellers while earning a commission or fee for their services.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.