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Financial Markets: Types & Characteristics

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  • 0:00 Financial Markets
  • 0:30 Short- & Long-Term…
  • 1:24 Capital & Money Markets
  • 2:51 Primary & Secondary…
  • 3:27 Primary & Secondary…
  • 4:08 Lesson Summary
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Lesson Transcript
Instructor: Darlisha Oliver
Have you ever wanted to start a business? How would you get the money to start your business? Financial markets can be used to generate capital for new and existing organizations. Short-term and long-term assets are traded on the financial market to raise money over short and long periods of time.

Financial Markets

Suppose you're at the supermarket doing a little grocery shopping. You want to purchase grapes from the produce section of the grocery store and two cans of green beans from the canned goods aisle where the non-perishable goods are located. To better understand financial markets, we'll discuss the aspects of two segments of the financial market with the idea of grocery shopping in mind. The term financial market refers to the place where short-term and long-term financial assets are bought and sold.

Short- & Long-Term Financial Assets

Short-term and long-term financial assets are also referred to as securities. Now let's say you go to the produce section of the grocery store to shop for grapes. The grapes in the produce section are considered perishable food items because they expire much faster than non-perishable food items. Short-term securities are financial assets that the purchaser or investor intends to hold for a period of one year or less or that will mature, or expire, in one year or less. Think about short-term financial assets as you would fresh fruit at the supermarket.

Long-term securities are financial assets that the investor intends to hold for a period greater than one year. The two cans of greens beans you're shopping for should come to mind when you think of long-term financial assets. The green beans don't expire as quickly as the grapes, as they are non-perishable food items with a much longer shelf life.

Capital & Money Markets

The financial market has two segments: the capital market and the money market. Using our grocery store analogy, think about the aisles where the non-perishable items are located as the capital market, and the produce section as the money market. The capital market is a financial market where buyers and sellers trade long-term securities, such as stocks and bonds. Organizations such as businesses and government agencies sell long-term securities in order to raise the money needed to finance their day-to-day operations.

The money market consists of buyers and sellers who purchase and sell short-term securities, such as certificates of deposit, commercial paper, and U.S. treasury bills. These securities are traded as a means of short-term borrowing and lending. Money market securities are also referred to as cash investments. Organizations sell short-term securities as a means of raising money in the short run. An individual or business may choose to invest in a security available in the money market because these securities are safer and easier to quickly convert into cash when needed.

The capital market and the money market have both a primary market and a secondary market. When you think about the primary market, imagine the transactions that took place when the grocery store purchased the green beans from the manufacturer and bought the grapes from the farmer that produced them. The secondary market is where consumers like you and me purchase the grapes and green beans from the grocery store.

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