Classification of key financial markets.
A distinction should be made between public and private equity. Shares in a publicly traded company are generally bought and sold between agents on the open market. By contrast, private equity is not freely tradable; the ownership of a company is tightly held, and the current owners do not allow public purchases or sales of equity to change the situation.
Although the general growth of public equity globally has encouraged the development of stock markets in some nations where historically companies were privately owned, there has also been a growth in private ownership in nations where historically companies were public. A number of private equity funds purchase public companies and take them ‘private’ once they have a controlling interest. They hope to manage the business more successfully than currently, and may then look to crystallize their gains by ‘floating’ the company once more by selling interests in the public market at a new, higher price.
A bond is a debt security issued for a period of more than one year with the purpose of raising capital for the issuer. When a investor buys a bond, the investor (bondholder) becomes a creditor of the issuer and has priority over a shareholder in the event of liquidation. However, the bondholder does not acquire any form of ownership rights.
- Short-Term Debt Securities
The different types of short-term debt securities are treasury bills, certificates of deposit(CDs), commercial paper(CP) and bankers acceptances(BAs).
- Interbank Deposits and Syndicated loans
Although debt can be raised through securities such as bonds and bills, the traditional source of money for many agents has been through their banks. In the interbank markets, agents can borrow and lend money for short periods of time (as short as overnight) at a single pre-agreed interest rate. Syndicate of banks can borrow large amount of money for as long as 10 years through a term loan and split among many different members.
- Foreign Exchange
The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as “forex” and occasionally as “FX.”
There are extensive markets that facilitate trading in primary commodities. These may be markets for investment commodities, such as precious metals (there has always been a substantial market in gold), or markets devoted to consumption products such as agricultural goods, oil products, or base metals. Sometimes the distinction is unclear; silver prices are related not merely to demand for silver as a precious metal, but also to the demand for silver as an industrial product.
- Securitized Assets
The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.
Mortgage-backed securities are a perfect example of securitization. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage’s inherent risk of default and then sell those smaller pieces to investors.
A derivative instrument derives its value from the market levels of observed simple assets or transactions. Derivatives can be broadly categorized into forwards, futures, options and swaps.