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Capital market and money market investopedia forex vest pocket kodak autographic

Capital market and money market investopedia forex

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The foreign exchange market also known as forex, FX, or the currencies market is an over-the-counter OTC global marketplace that determines the exchange rate for currencies around the world. Participants in these markets can buy, sell, exchange, and speculate on the relative exchange rates of various currency pairs.

Foreign exchange markets are made up of banks, forex dealers , commercial companies, central banks , investment management firms, hedge funds , retail forex dealers , and investors. The foreign exchange market—also called forex, FX, or currency market—was one of the original financial markets formed to bring structure to the burgeoning global economy.

In terms of trading volume, it is, by far, the largest financial market in the world. Aside from providing a venue for the buying, selling, exchanging, and speculation of currencies, the forex market also enables currency conversion for international trade settlements and investments.

Currencies are always traded in pairs, so the "value" of one of the currencies in that pair is relative to the value of the other. This determines how much of country A's currency country B can buy, and vice versa. Establishing this relationship price for the global markets is the main function of the foreign exchange market. This also greatly enhances liquidity in all other financial markets, which is key to overall stability.

The value of a country's currency depends on whether it is a "free float" or "fixed float. A fixed float is where a country's governing body sets its currency's relative value to other currencies, often by pegging it to some standard. Free-floating currencies include the U. One of the most unique features of the forex market is that it is comprised of a global network of financial centers that transact 24 hours a day, closing only on the weekends.

As one major forex hub closes, another hub in a different part of the world remains open for business. This increases the liquidity available in currency markets, which adds to its appeal as the largest asset class available to investors. The most liquid trading pairs are, in descending order of liquidity:. The leverage available in FX markets is one of the highest that traders and investors can find anywhere.

Leverage is a loan given to an investor by their broker. With this loan, investors are able to increase their trade size, which could translate to greater profitability. A word of caution, though: losses are also amplified. This is referred to as having a leverage.

There are some key factors that differentiate the forex market from others, like the stock market. Bank for International Settlements. Your Money. Some financial markets are small with little activity, and others, like the New York Stock Exchange NYSE , trade trillions of dollars of securities daily. The equities stock market is a financial market that enables investors to buy and sell shares of publicly traded companies.

The primary stock market is where new issues of stocks, called initial public offerings IPOs , are sold. Any subsequent trading of stocks occurs in the secondary market, where investors buy and sell securities that they already own. Prices of securities traded in the financial markets may not necessarily reflect their true intrinsic value. Perhaps the most ubiquitous of financial markets are stock markets.

These are venues where companies list their shares and they are bought and sold by traders and investors. Stock markets, or equities markets, are used by companies to raise capital via an initial public offering IPO , with shares subsequently traded among various buyers and sellers in what is known as a secondary market. Most trading in stocks is done via regulated exchanges, and these play an important role in the economy as both a gauge of the overall health in the economy as well as providing capital gains and dividend income to investors, including those with retirement accounts such as IRAs and k plans.

Typical participants in a stock market include both retail and institutional investors and traders, as well as market makers MMs and specialists who maintain liquidity and provide two-sided markets. Brokers are third parties that facilitate trades between buyers and sellers but who do not take an actual position in a stock. An over-the-counter OTC market is a decentralized market—meaning it does not have physical locations, and trading is conducted electronically—in which market participants trade securities directly between two parties without a broker.

While OTC markets may handle trading in certain stocks e. Certain derivatives markets, however, are exclusively OTC, and so make up an important segment of the financial markets. Broadly speaking, OTC markets and the transactions that occur on them are far less regulated, less liquid, and more opaque.

A bond is a security in which an investor loans money for a defined period at a pre-established interest rate. You may think of a bond as an agreement between the lender and borrower that contains the details of the loan and its payments.

Bonds are issued by corporations as well as by municipalities, states, and sovereign governments to finance projects and operations. The bond market sells securities such as notes and bills issued by the United States Treasury, for example. The bond market also is called the debt, credit, or fixed-income market. Typically the money markets trade in products with highly liquid short-term maturities of less than one year and are characterized by a high degree of safety and a relatively low return in interest.

At the wholesale level, the money markets involve large-volume trades between institutions and traders. At the retail level, they include money market mutual funds bought by individual investors and money market accounts opened by bank customers. Individuals may also invest in the money markets by buying short-term certificates of deposit CDs , municipal notes , or U. Treasury bills, among other examples. A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset like a security or set of assets like an index.

Derivatives are secondary securities whose value is solely derived from the value of the primary security that they are linked to. In and of itself a derivative is worthless. Rather than trading stocks directly, a derivatives market trades in futures and options contracts, and other advanced financial products, that derive their value from underlying instruments like bonds, commodities, currencies, interest rates, market indexes, and stocks.

Futures markets are where futures contracts are listed and traded. Unlike forwards, which trade OTC, futures markets utilize standardized contract specifications, are well-regulated, and utilize clearinghouses to settle and confirm trades. Both futures and options exchanges may list contracts on various asset classes, such as equities, fixed-income securities, commodities, and so on. The forex foreign exchange market is the market in which participants can buy, sell, hedge, and speculate on the exchange rates between currency pairs.

The forex market is the most liquid market in the world, as cash is the most liquid of assets. As with the OTC markets, the forex market is also decentralized and consists of a global network of computers and brokers from around the world. The forex market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors.

Commodities markets are venues where producers and consumers meet to exchange physical commodities such as agricultural products e. These are known as spot commodity markets, where physical goods are exchanged for money. The bulk of trading in these commodities, however, takes place on derivatives markets that utilize spot commodities as the underlying assets. The past several years have seen the introduction and rise of cryptocurrencies such as Bitcoin and Ethereum , decentralized digital assets that are based on blockchain technology.

Today, thousands of cryptocurrency tokens are available and trade globally across a patchwork of independent online crypto exchanges. These exchanges host digital wallets for traders to swap one cryptocurrency for another, or for fiat monies such as dollars or euros. Because the majority of crypto exchanges are centralized platforms, users are susceptible to hacks or fraud.

Decentralized exchanges are also available that operate without any central authority. These exchanges allow direct peer-to-peer P2P trading of digital currencies without the need for an actual exchange authority to facilitate the transactions. Futures and options trading are also available on major cryptocurrencies. The above sections make clear that the "financial markets" are broad in scope and scale.

To give two more concrete examples, we will consider the role of stock markets in bringing a company to IPO, and the role of the OTC derivatives market in the financial crisis. When a company establishes itself, it will need access to capital from investors.

As the company grows it often finds itself in need of access to much larger amounts of capital than it can get from ongoing operations or a traditional bank loan. Firms can raise this size of capital by selling shares to the public through an initial public offering IPO. This changes the status of the company from a "private" firm whose shares are held by a few shareholders to a publicly-traded company whose shares will be subsequently held by numerous members of the general public.

The IPO also offers early investors in the company an opportunity to cash out part of their stake, often reaping very handsome rewards in the process. Initially, the price of the IPO is usually set by the underwriters through their pre-marketing process.

Once the company's shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value and the supply and demand for those shares at any moment in time. While the financial crisis was caused and made worse by several factors, one factor that has been widely identified is the market for mortgage-backed securities MBS.

These are a type of OTC derivatives where cash flows from individual mortgages are bundled, sliced up, and sold to investors. The crisis was the result of a sequence of events, each with its own trigger and culminating in the near-collapse of the banking system. It has been argued that the seeds of the crisis were sown as far back as the s with the Community Development Act, which required banks to loosen their credit requirements for lower-income consumers, creating a market for subprime mortgages.

The amount of subprime mortgage debt, which was guaranteed by Freddie Mac and Fannie Mae , continued to expand into the early s, when the Federal Reserve Board began to cut interest rates drastically to avoid a recession. The combination of loose credit requirements and cheap money spurred a housing boom, which drove speculation, pushing up housing prices and creating a real estate bubble.

In the meantime, the investment banks, looking for easy profits in the wake of the dotcom bust and the recession, created a type of MBS called collateralized debt obligations CDOs from the mortgages purchased on the secondary market. Because subprime mortgages were bundled with prime mortgages, there was no way for investors to understand the risks associated with the product.

When the market for CDOs began to heat up, the housing bubble that had been building for several years had finally burst. As housing prices fell, subprime borrowers began to default on loans that were worth more than their homes, accelerating the decline in prices. When investors realized the MBS and CDOs were worthless due to the toxic debt they represented, they attempted to unload the obligations.

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Financial Market Video Investopedia

The money market is the short term lending system while the capital market is the trade in stocks and bonds. The forex market is the most liquid market in the world, as cash is the most liquid of assets. The currency market handles more than $ trillion in daily. The capital market is dedicated to the sale and purchase of long-term debt and equity instruments. The term ".