In financial markets, people trade financial securities, commodities, and instruments at prices that reflect supply and demand. There are two types of Financial Markets – the primary market and the secondary market. All well developed financial markets have standardized financial instruments.
Financial Instruments are assets (claim) for people who hold them and liabilities (obligation) for the issuer. Ex: Securities such as bonds, stocks, bank loans are a tradable financial instrument.
Types of Financial Markets
1. Primary Financial Markets
Primary financial markets focus on newly issued financial assets. In this type of market, securities are newly created. A financial asset is an intangible asset that derives value because of a contractual claim. Examples of primary markets include bank deposits, bonds, and stocks. Financial assets are usually more liquid than tangible assets, such as land or real estate.
For instance, Initial Public Offering (IPO) is an offering of the primary market where a private company decides to sell stocks to the public for the first time. An important point to remember here is that in the primary market, the buyer directly purchases securities from the issuer.
The primary market is also known as the New Issue Market (NIM) as it is the market for issuing long-term equity capital. Since the companies issue securities directly to the investors, it is responsible for issuing the security certificates too. The creation of new securities facilitates growth within the economy.
2. Secondary Financial Markets
Secondary financial markets involve the buying and selling of previously issued financial assets. Examples of secondary markets include stock markets, which have less than 1% new issues. Day to day stock trading takes place in the secondary financial market. Smaller investors have a better chance of buying and selling securities since they more often than not are unable to participate in IPOs.
National Stock Exchange (NSE) and New York Stock Exchange (NYSE) are some popular stock exchanges. Majority of the trade happens between investors without any involvement with the company that issued the securities in the primary market.