Financial markets today facilitate the effective transfer of wealth from individuals with excess resources to those in urgent need of them. Formally speaking, financial markets offer avenues for allocating savings to investments. These offer a range of resources to savers and ways for investors to raise capital, separating the processes of saving and investing. The economy’s capacity to invest and save, respectively, limits savers and investors rather than their personal capacities. As a result, the financial markets support economic growth to the degree that it is reliant on investment and savings rates.
There are two main parts to the financial markets today:
Money Market
The market where lenders and borrowers trade short-term funds to meet their liquidity needs is known as the “money market.” Money market assets are typically financial claims with high marketability, maturities under a year, and low default risk.
Capital Market
Investments in money that are either direct/indirect representations of capital are traded on the capital market. It encompasses all lending and borrowing activities, whether or not a negotiable instrument of finance has been created, and it is more expansive than the securities market.
The complex network of organizations and systems that pool and make available to individuals, businesses, and the government intermediate- and long-term funds is known as the capital market. The transfer of securities that are already in circulation is also included in the capital market.
Securities Market
As opposed to this, the securities market refers to the marketplace for financial instruments, claims, and obligations that are easily and frequently transferable through sales.
The stock (secondary) and new issues (primary) markets are the two interconnected and inseparable segments of the securities market.
The channel for the sale fresh securities is the primary market. The primary market is where the securities are sold by the issuer in order to raise money for investments or to pay off debt.
Securities previously issued are traded on the secondary market. When evaluating risk and return, holders of securities can respond to charges by modifying their holdings through the secondary market. They also meet their funding needs by selling securities for cash.
The price signals produced in the secondary market, which encompass every detail about the issuer and his company, including related risk, assist the primary marketplace in allocating funds.
Two more components make up this secondary market.
The spot market is the first, where securities are exchanged for prompt delivery and payment.
The forward market is the alternative, where securities are exchanged for payment and delivery at a later date. Options and Futures Markets (Derivatives Markets) are two more divisions of this forward market.
Securities for restricted future delivery are traded in the futures market by broker in Saudi Arabia, while two different kinds of alternatives are traded in the options market.
The distinction between financial derivatives and commodities
Whether the underlying is a financial asset or a commodity, the fundamental idea behind a derivative contract is always the same. Nonetheless, commodity derivative markets have a few characteristics that are highly unique. The majority of financial derivatives contracts are settled in cash. Financial assets are not large and do not require specialized storage facilities, even in the event of a physical settlement. Physical resolution in commodity derivatives necessitates warehousing because of the bulky nature of the underlying assets. Similarly, in terms of the financial foundation, the idea of different asset quality is nonexistent.
On the other hand, when it comes to commodities, a contract’s underlying asset quality can differ significantly. This becomes a crucial problem to handle. These problems are briefly examined.
The Physical Settlement
The real distribution of the underlying commodity to the trader in South Africa, usually at a warehouse that has been accredited, is known as physical settlement. If the seller wants to deliver, they must bring the goods to the specified warehouse, and if the buyer wants to accept delivery, they must go to the specified warehouse and retrieve the goods. This might seem straightforward, but the actual payment of supplies is a complicated procedure.
Warehousing: One of the primary distinctions between commodity and financial derivatives is the requirement for storage. All positions are money settled for the majority of financial derivatives that are traded on exchanges. The difference in prices between when the contract was signed and when it was closed must be paid in cash.
The quality of the underlying assets is a determining factor in the writing of a derivatives contract. Since the physical attribute is absent in derivatives for the financial markets today, quality variation is not a problem. It is crucial to consider the worth of the asset that underlies it when it is a commodity. The quality of the products that are offered in the market may vary quite a bit.
