Types of Financial Markets - Money Market, Capital Market, Currency Markets

Overview of financial markets: money markets, capital markets, and currency markets, including their functions and key transactions.

Key Takeaways

Financial markets facilitate trading of assets with different maturities and purposes.
Money markets focus on short-term debt instruments and interbank lending.
Capital markets include both debt and equity instruments with longer maturities.
Currency markets provide mechanisms for immediate and future currency exchange to manage risk and speculation.
Understanding the distinctions between these markets is crucial for grasping economic finance.

What the video covers

Financial markets are places where buyers and sellers trade financial assets.
Money markets deal with financial assets having maturity of one year or less, including short-term government and corporate bonds and interbank lending.
Capital markets involve trading financial assets with maturity greater than one year, including government bonds and shares.
Debt capital involves borrowing with interest payments, while equity capital represents ownership with dividend returns.
Capital markets have primary markets for new bond and share issues and secondary markets for trading existing securities.
Currency markets consist of spot markets for immediate currency exchange and futures markets for currency delivery at a future date.
Futures markets help importers and exporters hedge against exchange rate fluctuations and allow speculators to profit from currency movements.
Money markets are more liquid than capital markets due to shorter maturities.
Secondary capital markets enhance liquidity by allowing bonds and shares to be resold.
Currency futures markets encourage speculation and risk management in foreign exchange.

Chapters

What types of financial assets are traded in the money market?

Money markets trade financial assets with a maturity or payback date of one year or less, such as short-term government and corporate bonds and interbank loans.

How do debt capital and equity capital differ in capital markets?

Debt capital involves borrowing with interest payments and represents a liability for the issuer, while equity capital represents ownership in a business and returns dividends as a share of profits.

Why do businesses use currency futures markets?

Businesses use currency futures markets to hedge against exchange rate fluctuations, protecting themselves from potential losses due to currency value changes in the future.

Full Transcript — Download SRT & Markdown

Speaker A

Hi everybody. Let's, in this video, break down financial markets and look at three types of financial markets that exist in the economy. We've got money markets, capital markets, and currency markets. You need to know a bit about all three.

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Remember what a financial market is. It's any place where buyers and sellers meet to trade financial assets. What kind of assets are we talking about in money markets? Well, the buying and selling of financial assets here are financial

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assets which have a maturity or a payback date of a year or less. So, for example, government bonds or corporate bonds that have a maturity date of a year or less, so they pay back in a year or less, will be traded, bought, and sold

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in the money market. Any interbank lending that's taking place, so if commercial banks are lending to another commercial bank or a commercial bank is borrowing from another commercial bank, those transactions are often daily and therefore take place in the money market.

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So any IOUs, any assets with a payback date of a year or less will take place in money markets. Capital markets is a buying and selling of financial assets which have a payback date of greater than a year, so not quite as liquid. It

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has money market transactions and money market assets. At this stage, guys, I want to introduce the difference between debt capital and equity capital. Debt capital is any financial asset which pays back an interest rate. It is a form of borrowing for

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the issuer, all right, because an interest rate has to be paid back, whereas equity capital is different to that. If anybody has equity capital, they have a stake in the business. They have a share of the business, and the return is not an

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interest rate. The return is a dividend, a share of the profit. So debt capital is a form of borrowing for the issuer. Equity capital is not borrowing for the issuer. For the issuer, for debt capital, they pay interest. For equity capital,

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they pay back a dividend, a share of the profit, all right. So in the capital markets, what kind of debt capital are we talking about here? Well, the buying and selling of government bonds which have a maturity date of greater than a year,

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whereas for equity capital, we're talking about shares, all right. So these kinds of transactions will take place in capital markets: the buying and selling of longer-term government bonds, maybe three-year, five-year, 10-year government bonds, and the buying and selling of shares, for

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example. Right, there are two different types of capital markets. You've got the primary market, the new issue market, where brand new bonds will be issued, for example, through the Debt Management Office in the UK, for example, through an investment

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bank, um, for example, through an investment bank for shares as well, or a stock exchange for shares. If there are brand new shares or brand new bonds being issued, then those transactions will take place in the primary capital markets.

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But these bonds and shares could also be bought and sold. In that sense, they are also highly liquid, easy to convert to cash, not as liquid as money markets because these are short-term assets, but still highly liquid here because of the

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important secondary markets where new bonds and new shares can then be bought and sold again. That will take place in the secondary market, for example, again through an investment bank or through a stock exchange, for example. So in that sense, all these assets are

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also quite highly liquid but crucially have all got IOUs of greater than a year. We've also got currency markets. There are two different types of currency markets. You've got spot markets where you can buy currency at the current

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exchange rate and get it delivered to you right now, and you've also got futures markets where you can buy currency at the given exchange rate, but that currency is delivered to you at some time in the future. Why on earth would anybody want

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to engage in futures market transactions? Well, for example, if you're an importer and you're worried about a weak exchange rate six months' time, if you're importing raw materials when the exchange rate is weaker, that's a higher cost to you. So maybe you pre-op

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predicting that the exchange rate is going to get weaker in six months' time. What you might do is buy your currency now at the current exchange rate, let it get delivered to you in six months' time when the currency on the exchange rate

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weakens, and you are protected against that. Maybe you're a speculator. You're a gambler, and you think you can make money from exchange rate changes. You think that in six months' time the exchange rate is going to get stronger, so what

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you might do is buy your currency now at the current exchange rate, let that get delivered to you in six months' time when the exchange rate has got stronger, and set it, and you've made a big profit in

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doing so. So the futures market really is there to encourage speculation, for speculators to make a big, big amount of money. Gamble is essentially thinking that they know what's going to happen with the exchange rate, with swings in

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the exchange rate, trying to make money from it, but also, you know, importers, exporters that are trying to hedge against changes, changes in the exchange rate and protect themselves in that sense. So that covers the three different types

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of financial markets and different kinds of transactions that take place within them. Thank you so much for watching, guys. I'll see you all in the next video.

Topics:financial marketsmoney marketcapital marketcurrency marketdebt capitalequity capitalprimary marketsecondary marketspot marketfutures market

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