In general, the main purpose of functioning of all financial markets is enabling an exchange of previously issued financial assets and providing borrowing and lending through sales of newly issued financial assets.
Previously issued stock shares are resold on the New York Stock Exchange, previously issued bonds are resold on the U.S. government bond market, and newly issued T-bills are sold on the U.S. Treasury bills auction. These are the examples of financial markets.
Besides there are financial institution, whose primary source of profits is through financial asset transactions. They are discount brokers, banks, insurance companies, and complex multi-function financial institutions such as Merrill Lynch.
The markets can be of four main structural types:
- Auction markets conducted through brokers;
- Over-the-counter (OTC) markets conducted through dealers;
- Organized Exchanges combine auction and OTC market features;
- Intermediation financial markets conducted through financial intermediaries.
Markets serve different types of customers, or operate in different parts of the country. So the major types of the markets are:
Real asset markets are those for such products as wheat, autos, real estate, computers, and machinery;
Financial asset markets deal with stocks, bonds, notes, mortgages, and other financial instruments;
Derivatives are claims, whose values depend on what happens to the value of some other asset. Futures and options are two important types of derivatives, and their values depend on what happens to the prices of other assets, say, GE stock, Japanese yen, or wheat.
Money markets are the markets for short-term, highly liquid debt securities. Capital markets are the markets for intermediate- or long-term debt and corporate stocks.
The New York and London money markets have long been the world's largest, but Tokyo is rising rapidly.
Mortgage markets deal with loans on residential, commercial, and industrial real estate, and on farmland, while consumer credit markets involve loans on autos and appliances, as well as loans for education, vacations, and so on.
Without efficient transfers of funds from people who are savers to firms and individuals, who need capital, the economy simply could not function effectively. Therefore, it is essential that financial markets function both quickly, and at a low cost.
