Read the introductory content and then try this interactive 'File Away' activity on the three main types of financial market.
PRE-ACTIVITY READING
There are three main types of financial markets for you to understand: money markets, capital markets, and foreign exchange (FOREX) markets.
Money markets
Markets that provide short-term financing (borrowing and lending) for households and individuals. This form of financing tends to have maturity dates (deadline for repayment) of up to one year.
Examples:
- Inter-bank lending: when banks lend to each other for a short period (overnight to a week) to balance their books as some may lack liquidity at the end of a trading day. Global banks lend to each other based on the London Interbank Offered Rate (LIBOR) which is the benchmark interest rate for such loans.
- Treasury Bills: the UK government issues Treasury Bills to borrow for short periods to finance its budget deficits. These bills tend to have a maturity of 1, 3 or 6 months.
Capital markets
Markets that provide medium to longer term financing for businesses and governments (maturity dates over one year). Bonds and shares are issued in primary capital markets and the existing assets are then traded on secondary markets.
Examples:
- EPIC Games, the makers of Fortnite, raised $1.53 billion in funding by issuing shares to venture capital firms in August 2020 (equity financing)
- The UK Government issues medium- to long-term bonds, such as 10-year or 20-year bonds, to finance government spending.
Foreign exchange (FOREX) markets
Markets where currencies are traded. Currencies can either be traded now in spot markets or on an agreed future date at an agreed price in forward markets. There is a high level of speculation in FOREX markets – this is where investors try to make money from changes in currency prices.
Test your knowledge with this 'File Away' activity below. Good luck!
