Markets that make up the financial system (part 2)

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Markets that make up the financial system (part 2)

In editorial 1, I wrote: A financial system includes three very important pieces in the “puzzle”.  …….. The system includes a range of financial institutions, a range of financial instruments and various markets that allow the free flow of funds.

In editorial 2, I covered the various financial institutions categories.

In editorial 3, I covered the range of financial instruments.

In editorial 4, I covered how markets make up the financial system (to be continued)

In financial markets, efficiency may be derived from the existence of two different markets.  These are the primary and secondary markets.

The primary market occurs when a business, a government or and individual issues financial instruments in the money markets and capital markets. When a company issues brand new shares (ordinary) to raise equity funding for a proposed project, it is doing it through the primary market.  When a government sells new bonds, it is done through the primary market.

The secondary market is where people may buy or sell shares through an exchange and is considered a transaction that the company is not involved in. It is a transaction between the original holder of an asset and other buyers.

The wholesale markets pertain to transactions between institutional investors and borrowers. The retail markets comprise transactions primarily of individuals and small to medium sized businesses. Transactions are usually done through financial intermediaries.

Within the debt and equity markets, the two main market classifications are the money markets and the capital markets. The money markets and the capital markets include a number of submarkets. Other markets, such as the foreign exchange market and the derivatives market, also form part of the financial markets.

Money market transactions involve wholesale short term to maturity securities of less than 12 months. Medium to long term-maturity transactions are referred to as capital market transactions.