What are the 7 types of financial markets?

Financial markets are key to understand for traders. They are the proverbial place that hosts all of their activity and dictates the environment they trade in.

Financial markets are markets that match buyers and sellers to promote financial activity. Here, financial assets, like forex, CFDs, stocks, bonds, commodities and more are traded. Many of them are quite well-known and are a part of most traders’ and investors’ daily routines. However, there are also some more obscure ones that mostly remain out of reach.

These other market types usually exist so that companies and entities can execute financial processes more easily. A trader, then, may think that these are borderline useless for them.

However, financial markets are interlocked, and what’s happening in one often affects others to at least some degree.

For traders, understanding the different types of financial markets, even those that don’t seem relevant to their primary interest can open up new trading opportunities, broaden understanding, and help spot trading lines before others. In this article, the seven types of financial markets and their relation to trading will be explained.

1. Stock Markets

Stocks, globally, are likely the most well-known financial market. They are easy to understand, straightforward, and often depicted in various media. As such, people, even non-traders, somewhat intuitively grasp how it works. Stock traders purchase and sell shares of a company to try and achieve profits.

But why would companies enter the stock market? It increases cost, makes regulation more strict, spreads control over a larger number of people, and adds a bunch more conditions that don’t really seem in line with how a company would like to function.

The answer is fairly simple, however. It becomes much easier to raise capital. Additionally, going public adds brand credibility and makes companies more visible.

As for the market itself, it operates via exchanges, the most famous ones being the US-based New York Stock Exchange and Nasdaq. These are centralised platforms that host buyers and sellers and ensure that transparency, efficiency, and integrity are present in the trading process.

In some fringe cases, stocks can also be traded over-the-counter (OTC). However, these aren’t really interesting to retail traders, since it’s usually penny stock purchases, and isn’t widely available regardless.

The stock financial market has a lot of participants, including, of course, traders and investors. On top of that, it’s commonly accessed by institutions like pension funds, mutual funds, hedge funds, and banks. Finally, market makers also participate, creating positions on both sides to ensure the markets remain liquid.

Most stock trading for retail traders is done via brokers, who provide trading services and connect buyers and sellers but don’t take positions themselves.

2. Over-the-counter (OTC) markets

This type of financial markets is more decentralised. It doesn’t go through a particular exchange, making the entire market network-based and electronic. In general, this means that market participants can trade with each other directly rather than going through institutions. It’s important to know that OTC markets aren’t a type of instrument, but a method of trading instead.

Most notably for traders, forex and CFDs are mostly traded OTC. This means that over-the-counter markets house quite a large number of modern traders, often without them knowing it.

Of course, a trader is unlikely to contact another trader and go through the process that way. Brokers remain valuable intermediaries in the trading process.

For forex and CFD brokers, there are two main methods of operation for brokers: Dealing Desk and STP/ECN. In the first case, the broker acts as a counterparty to the trader and wins when they lose and vice versa. In STP/ECN networks, it simply routes traders to external liquidity providers.

3. Bonds markets

Bonds are essentially long-term loans that traders give to institutions, these loans are called principals. The institution that borrows the funds agrees to pay back the loan at a certain date (can be upwards of 30 years in the future), called the maturity, and to make coupon payments (pay interest) regularly.

This allows the borrowers to gain disposable capital while the lenders (traders) have a steady cash flow. Generally, when interest rates go up, bond prices go down, and vice versa.

Bonds can be purchased through some brokers or directly from institutions. In the latter case, there may be some limitations on who can and cannot purchase them, mostly surrounding the location.

Generally, traders use bonds to diversify their portfolios and to create a relatively safe income stream. Additionally, bonds can be used to speculate on interest rate shifts.

4. Money markets

Money markets are financial markets fairly similar to bonds in that they both operate on debt instruments. However, while bonds last extremely long periods, money markets deal with assets with maturities of under a year. This makes money markets more secure, while also offering less return.

Money market instruments are also different. Some of the more common ones are treasury bills, certificates of deposit, and commercial paper.

For retail traders, money markets are seldom available, as they are more often used by institutions. However, some brokerages, funds, and even banks offer access to these markets. The most common use case for retail traders is parking cash in investing downtimes.

5. Derivatives markets

Derivatives are markets that base their value on an underlying asset. Most notably for traders, CFDs are a derivative market. However, other important instrument types, like futures and options, also fall under this category.

These financial markets can be traded either via an exchange or OTC. Usually, they have a specific case that makes them more useful than spot markets for their respective assets in certain situations. For example, it’s easier to leverage CFDs, and futures and options can be used for hedging.

6. Forex markets

The forex market is the largest and most liquid in the world, and it’s where currencies are exchanged for one another. It’s a decentralised market without a single authority, instead hinging on various institutions like central banks.

Forex trading is immensely important for companies and institutions that operate internationally. However, it’s also a very popular market for retail traders due to its high liquidity, volume, constant movement, and 24/5 uptime.

It’s important to note that most traders don’t access the forex market directly, but rather as a derivative on the OTC market. In that regard, forex is fairly similar to CFDs.

For most traders, it’s fairly easy to access forex trading. Many brokers worldwide offer forex services, so accessing them is just a matter of opening an account. However, due to its decentralised nature, it’s important for forex traders to do their due diligence and pick a safe broker.

7. Commodities markets

Commodities are financial markets where physical goods are exchanged for money. In trading, the three most common commodity groups are metals, energies, and agricultures.

Metals are divided into precious (gold, silver, platinum), and base (copper, nickel, zinc). Both have industrial uses, but the former are also coveted for their rarity and historical significance as a status symbol. Gold in particular is considered a safe haven asset, often rising in times of economic uncertainty.

Energies like oil and gas are used universally in various industries. Prices of these assets can often be used to estimate the health of the economy. Generally, when industries are thriving, energy demand rises.

Finally, agricultural commodities are farm goods like livestock and crops. In commodities markets, these assets are often purchased for their intrinsic value and actually delivered. However, traders mostly use them as derivatives like CFDs to speculate on the farming sector.

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