What Are The Different Types Of Financial Markets – Shark! Welcome again. In the last few blogs we have discussed financial markets and their workings. We also learned why financial markets are regulated. In this blog we will discuss different types of financial markets.
Did you know that “financial markets” refer to markets used to raise funds for the long term (capital markets), short term (money markets) or both? Well, financial markets broadly refers to the market where securities are traded. These include stock market, bond market, foreign exchange market and derivative market. Let us understand these financial markets in detail.
What Are The Different Types Of Financial Markets
So, in conclusion, financial markets help to lower the unemployment rate because they provide many new job opportunities. It also provides a platform where participants like investors, borrowers irrespective of their size can get fair and proper treatment. They also provide access to capital for government agencies, corporations and individuals.
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Mention your details and our course advisor will contact you shortly, you want to keep your friend close and your enemies close. As an investor or trader, jumping into the market without knowing what these companies are doing is like jumping into a battlefield with a stick in hand.
Therefore, understanding the roles of each of these institutions will help you significantly as you mature as an investor, especially if you are a beginner.
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Investment banks buy, sell and issue stocks and bonds, guide mergers and acquisitions, conduct market research and provide asset management services.
They act as a bridge between people who want to invest their capital and people who need investments.
The front office consists of four divisions: Investment Banking Division, Sales and Trading Division, Asset Management Division and Research Division.
Front office refers to the departments that communicate directly with the customers and are fully responsible for making the company profitable.
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The image of investment bankers portrayed in movies usually refers to the front office. These are six figure monthly salary earners.
The back office is responsible for the operations of the investment bank as an entity and therefore includes IT, HR and other administrative teams.
The primary market is where securities are created, and the secondary market is where those securities are traded.
In the primary market, investment banks offer a variety of services, including issuing shares and bonds, leading an IPO, or leading an M&A.
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Teams are usually divided by divisions, but they can also be divided into specific teams depending on the contract they make.
Their day-to-day work includes company valuation, industry analysis, analysis of a company’s finances, preparation for presentations and financial modelling. (When I say financial modeling, I mean they use Excel. They don’t use very sophisticated statistical models in this department.)
When you think of Ivy League alumni working in finance, that usually means people in investment banking or sales and trading.
Plug trading refers to the type of trading we know where traders buy low and sell high.
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Flow trading refers to order flow where a customer places an order and the trading desk fills the order on behalf of the customer.
But with the global financial crisis in 2008, the Volcker Rule prohibited prop trading within investment banks.
As a result, most major banks eliminated their hedge funds, and former hedge funds at investment banks formed their own hedge funds.
What remains now is flow trading, but since flow trading refers to the filling of orders on behalf of the client, the process has recently been largely automated, especially with the advent of high-frequency trading.
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Along with this, their profit margins and commissions began to decrease, and the wholesale and retail industry shrank over time.
So, the remaining teams in this category are teams like high frequency trading teams, quant teams and OTC market traders. (OTC stands for over-the-counter, which is where custom products are bought and sold, as opposed to the standardized products we see in secondary markets.)
The surveys conducted by these companies are actually given as a token of gratitude to their clients for using their services and paying a commission.
Especially in Europe, laws are being introduced to distinguish between payments for commissions and payments for research material, and people don’t really want to pay for such services.
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It has become more technical using machine learning techniques of pattern recognition and is becoming more common on the buy side.
In the case of mutual funds, the fund’s capital comes from people or the general public.
Hedge funds and prop trading companies have no limits or restrictions in terms of the asset they choose to invest in.
Even in terms of trading / investment strategies used, mutual fund strategies are very limited and heavily regulated, hedge funds or prop trading companies have no restrictions on their strategies.
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The logic behind the strategies used by mutual funds is that mutual funds manage the capital of the general public, so they must be very careful about how they manage their funds.
Government regulations on mutual funds are basically ways to protect the public from potential losses.
In the case of hedge funds, the government recognizes that accredited investors with $3-4 million to invest may be aware of the potential risks and so their disclosure of information is relatively limited.
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Finally, in the case of plug trading companies, since they trade with their own money, they are not required to disclose any information.
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This is why stock trading companies use exclusive trading techniques and strategies that cannot be disclosed to the general public.
So they focus on gathering as many people as possible to take advantage of huge management fees.
Hedge funds charge 1-2% in management fees and 15-20% in incentives. It is also known as twenty two.
Lastly, plug trading companies take all the profits they make, so no advertising is required.
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Private equity is similar to hedge funds in terms of their nature, management fees and the way they receive incentives.
But unlike hedge funds, which typically invest and trade in the secondary market, private equity invests directly in a company. That is why it is called ‘private’ equity.
A good example is leveraged buyout funds. When private equity takes a large stake in a company, increases its profits and sells their shares at a higher price.
In movies, they are portrayed as bloodless and ruthless men who fire tens of thousands of workers to cut costs for a company.
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Similarly, there are venture capital funds that invest in early-stage startups and growth equity funds that invest in later-stage startups.
In mutual funds, when they have a fund that tracks an underlying index, it is called an index fund.
An index ETF is essentially the same thing, but the security is listed on an exchange, in smaller chunks, where individuals can buy and sell the ETF as a share.
For example, it is very difficult for an individual to invest in all 500 companies in the S&P 500 index.
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What the firms do is they buy the shares of all 500 companies on behalf of the client and create a basket of all the companies.
Therefore, the fund manager of an index ETF must mechanically buy and sell shares according to the index so that the ETF
Since the global financial crisis of 2008, quantitative easing has pushed market indexes higher over time, making passive index ETFs a more attractive option for investment.
A sovereign wealth fund is a government-owned investment fund that invests in financial assets and is managed by the government.
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A pension fund is a fund established with contributions from employers, trade unions or other organizations to provide retirement benefits to its employees or members.
There are also endowment funds, which are funds that invest money donated to them.
Funds managed by Harvard and Yale are known as super endowment funds because of their size and impressive returns.
A general portfolio of 60% stocks and 40% bonds will produce an annual return of 5.4%.
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Super endowment funds reached