What are the types of money markets

Financial market

The financial market is the totality of all markets on which capital is traded.

Definition of the financial market - what is it?

The financial market is the totality of all markets on which both the supply and the demand for financial resources confront each other. The financial resources can for example be currencies, securities or raw materials. The financial market is divided into the money market, the capital market, the foreign exchange market and the credit market. In addition, a distinction is made between the national, international and foreign financial markets.

The money market

The money market is that part of the financial market on which short-term money market papers are traded. These include, for example, overnight and time deposits and investments with a maximum term of one year. The main players in the money market include banks, insurance companies and mutual funds, with the central bank being the main player. This is because this affects the supply and demand of money, for example by providing additional money.

The capital market

In the capital market, however, medium to long-term money and securities transactions are traded that have a term of at least one year. In addition, stock corporations use the capital market for borrowing or capital increases. Ideally, the capital market balances the demand and supply of products so that they match as closely as possible.

The capital market is again divided into the unorganized and the organized capital market, whereby the unorganized capital market is also called the gray capital market. It is characterized by the fact that it is not regulated by the state. The organized capital market, which is regulated by the state and in which capital transactions take place with the participation of stock exchanges and banks, include the stock market and the bond market. There is also the black capital market, which, however, is illegal.

The functions of the capital market

The capital market has the following functions:

  • Market balancing: Market equalization is the core function of the capital market, with which the maximum match between supply and demand for money transactions and securities is to be created.
  • Allocation function: The allocation function, also known as the steering function, is intended to ensure that the capital is ideally directed into the investment with the highest return.
  • Function protection: This task ensures that the investors and providers of capital are provided with sufficient information for decision-making.
  • Individual protection: Individual protection protects investors from giving preference to other investors when it comes to obtaining information about issuers.
  • Transformation functions: The capital market also has various transformation functions, such as Set transformation, which is about making investments both on time and in appropriate amounts. There is also the Maturity transformationwhich aligns the deadlines between investors and providers. In addition, with the Lot size transformation several investors are brought together on one capital market.

The credit market

The credit market is the part of the financial market where credit agreements are offered and demanded. The main difference to the other sub-markets is that the credit market is not standardized. This means that the contracts can be agreed individually between both contracting parties, as long as the assigned regulations and laws are complied with.

The foreign exchange market

Different currencies are traded or exchanged on the foreign exchange market. Foreign currencies are bank balances with foreign credit institutions or securities denominated in foreign currency, checks. Of the various financial sub-markets, the foreign exchange market is the strongest in terms of turnover and, at the same time, the largest financial market in the world. The participants in the foreign exchange market are usually credit institutions and mostly central banks, large corporations and foreign exchange brokers.