What are the Different Types of Financial Markets?

Financial markets are platforms where people buy and sell different types of financial instruments, such as:

• Shares
• Bonds
• Currencies
• Commodities
• Derivatives (options and futures)

These marketplaces perform three main functions: Match buyers with sellers, help in price discovery (based on demand and supply), and lastly move capital to more productive use ( utilised by businesses or government). 

Now, understand that there are different types of such financial or investment markets in India, such as the stock market, bond market, and derivatives. Each platform offers different assets to trade and follows its own set of trading rules. In this article, let’s get a complete overview of financial market types and understand how financial markets work together.

5 Major Types of Financial Markets (Based on Asset Traded)

Financial markets come in different forms, and each one has a specific purpose. Some deal with long-term funding instruments, some satisfy short-term monetary needs, and others deal with risk management or currency exchange. As a new investor, knowing these categories lets you understand:

• Where does your money go/ or is it invested?

and

• What role does each market play in the financial system?

For more clarity, check out the different types of financial markets below:

Type of Financial Market	Meaning	What Trades Here
Capital Market	It is the market to raise capital by issuing long-term funding instruments.	Shares (equity) Bonds (debt)
Money Market	A market for short-term borrowing and lending (usually for a few days to a few months).	Treasury bills Commercial paper Certificates of deposit
Derivatives Market	A market where financial contracts based on underlying assets are traded. These contracts are mostly used to manage risk or take positions on price movements.	Futures Options (Call and Put) Swaps
Foreign Exchange (Forex) Market	A global market where currencies are bought and sold.	USD, INR, EUR, and all other major global currencies.
Commodity Market	A market where raw materials and natural resources are traded.	Metals Energy Agricultural products

What are Primary and Secondary Financial Markets?

While there are five types of financial markets based on the asset traded, there are also two additional types based on “how that asset is traded”. These are the primary market and the secondary financial markets. 

Let’s learn about them and see where securities first enter the system and how they continue to trade afterwards:

Market Type	What Does It Mean?	How Does Trading Happen?
Primary Market	This is where a security is issued for the first time via IPOs or private placements. Companies and governments raise fresh money by offering shares or bonds directly to investors.	Funds are raised through public issues. Investors apply at a fixed price or a price band.
Secondary Market	This is where already issued securities are traded between investors (the issuer is not involved).  Prices move based on demand and supply.	After the issue closes, securities are allotted to investors and then listed on an exchange.  Trading in the secondary market begins only after listing.

How Do Financial Markets Work Together?

All the types of financial markets (based on the asset traded) are linked and interconnected with each other. A major change in one market can trigger a chain reaction across the entire financial system. Why? This happens because capital, interest rates, and risk all flow from one market to another.

To better understand this connection, let’s study an example:

• Let’s say a country’s currency loses value.
• As a result, imported items like fuel become costlier. 
• Now, higher fuel prices push inflation up. 
• To control rising inflation, the central bank may increase interest rates. 
• Higher interest rates change borrowing costs in the money market.
• When short-term rates increase, bond yields in the capital market also move up.
• These higher yields lead to a fall in the stock prices because borrowing becomes costlier for companies.

So, you can observe that every market affects the others. A change that began in the Forex market created a chain of effects across the money market, capital market, and equity markets.

Functions of Financial Markets in India

The core function of financial markets is “mobilisation of savings”. Markets collect savings from individuals and institutions and direct them to companies that need funds for expansion, new products, or operations. Along with this central role, financial markets also handle several other important functions:

1. Maintaining Liquidity

Financial markets allow investors to buy or sell securities on a regulated platform. This makes it easier to enter or exit investments without experiencing major price swings.

2. Risk Management

Tools like futures and options allow businesses and investors to protect themselves from several risks, such as currency fluctuations, interest rate changes, or commodity price shifts.

3. Price Discovery

Markets decide the “fair value” of shares, bonds, currencies, and commodities based on demand and supply. Additionally, with electronic trading systems, every order, trade, and price movement is recorded and visible online. 

To Conclude, Capital, Money, FOREX, Commodities, and Derivatives are Different Types of Financial Markets

So now you know that there are five major types of financial markets in India (based on the asset traded), which are:

• Capital market
• Money market
• Derivatives market
• Foreign exchange market
• Commodity market

Each one handles a different part of the financial system, but they all work together to mobile savings, set prices, manage risks, and support business growth. 

Besides, there are also two more platforms based on how the asset is traded, which are primary and secondary financial markets. While in the primary market, a security is issued for the first time, a secondary market is a place where already issued securities are bought and sold among investors.

If you are looking to invest in bonds by applying to NCD IPOs or through the secondary market, you may visit the GoldenPi platform. Here you will find a wide range of options, such as AAA-rated, government, or PSU bonds. Also, you can invest online without making in-person branch visits. 

Types of Financial Markets FAQs

1. Who regulates financial markets in India?

Financial markets in India are regulated by different authorities. SEBI oversees capital markets, commodities, and derivatives. Whereas the RBI regulates the money market and foreign exchange. 

2. Capital markets vs money markets: How do they differ?

Capital markets deal with long-term funding instruments like shares and bonds. In contrast, money markets handle short-term instruments like treasury bills and commercial paper. Be aware that capital markets support long-term investment, while money markets manage short-term cash needs.

3. How does trading happen in the secondary market?

In the secondary market, investors engage in exchange-based trading. Electronic systems match buy and sell orders instantly, and the trade settles through clearing corporations.

4. What is price discovery in financial markets?

Price discovery is the process through which the current price of an asset (shares, bonds, currencies, or commodities) is determined. This fair value is based on the market forces of demand and supply. Buyers place bids, sellers quote their prices, and the point where they meet becomes the market price.

Disclaimer:

This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.

Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.