Understanding the field of finance: Part II

In the first part, we have seen what the financial market is and what money market is! This article focuses on the capital market along with forex and interbank markets.

What is Capital Market?

A capital market is considered to be one of the major spots for retail investors, institutions, and corporations to make buy or sell transactions of financial securities. The functions of the capital market can be divided into three parts.

Here, trading and investing are done in the secondary market whereas capital can be raised by a company by opting for Initial Public Offering (IPO) in the primary market.

The capital market has two major segments, which are as follow.

• Stock market: Stock market consists of various financial activities such as investing and trading stocks. There are different indexes in the stock market through which shares of various companies are being traded by investors and institutions. Major indexes in the world are Nifty and Sensex (India), Dow Jones, S&P 500 Index, Nasdaq (U.S), Nikkei (Japan), Hang Seng (Hong Kong), etc.

The stock market is further classified into two categories.

1. Primary Market- When a company wants to go public for raising fund, it opts for IPO that is being offered to retail investors in the primary market.
2. Secondary Market- When a company is already listed, investors trade shares of such company through indexes in the secondary market.

• Bonds: Bonds are mainly issued for the purpose of funding a certain project. Bonds are largely issued by corporate companies, Governments, municipalities, etc. to meet their financial requirements. Bonds can be traded in the debt market also known as a fixed-income market.

Bonds are a liability for the institutions as they are obliged to pay the amount of bonds to the investors in the future. In other words, bonds are the loans given to companies by investors on which they gain a certain rate of interest. Bonds come with a specific maturity and helps institutions raise the required capital.

What is Forex and Interbank market?

Forex market is used to trade currencies of various countries. It includes all the currencies of the world, which makes it the largest market in the world. The liquidity advantage makes it more lucrative for investors. Large investment banks, Governments, companies and corporations, retail investors and big broking firms are Forex market participants.

With internet penetrating to the core of the globe, Forex trading has become easily accessible for investors. In addition to that, Forex market provides services 24*7 to its customers for five days in a week starting from 5 p.m. EST on Sunday to 4 p.m. EST on Friday, which also reflects high demand of currencies.

Unlike other markets, the Forex market is not centralized which means that there is no central ledger that keeps the record of all the transactions. The trading is not done from just one financial center but is spread over its centers situated in London, New York, Hong Kong, Singapore, Paris, and more.

The key functions of the Forex market are trading and exchanging currencies of different countries at a specific and prevalent exchange rate. This exchange rate majorly depends on the financial stability and demand and supply of that particular country’s currency. For example, the exchange rate of U.S dollar keeps on strengthening as it’s backed by strong economic statistics and the demand for dollar in other countries.

The Interbank Market:

Unlike the Forex market, the interbank market consists of the largest banks and institutions of the world and does not include retails or individual investors. These banks work as Market Makers (The ones who decides the price) and uses interbank market for speculation as well for trading purposes. These large banks include investment banks such as J.P. Morgan, Deutsche Bank, HSBC, City Corp, and more.

The minimum amount to indulge in an interbank transaction is the U.S $5 million which prohibits retail investors to indulge into it. In short, as the name suggests; an interbank market is a place to trade high volume of currencies between banks and financial institutions. A specific Trading department is established for running this activity in these institutions.

Devanshee Dave