Summary
Highlights
Financial markets exist to connect investors (lenders) who have money with borrowers (governments and companies) who need capital. Institutions like banks (e.g., HSBC, Goldman Sachs) act as intermediaries, facilitating these transactions and aspiring to make a profit.
Banks, as key players in financial markets, generate profit by charging borrowers a higher interest rate or cost (e.g., interest, dividends) than what they provide as a return to investors. This difference forms their profit margin, bringing investors and borrowers together.
Financial markets are broadly categorized into money markets and capital markets. Money markets handle short-term investments, typically up to 12 months, for governments and companies. Capital markets, on the other hand, deal with longer-term borrowing needs, often for several years.
Within capital markets, there are two primary types: equity markets and debt markets. Equity markets involve companies selling shares to investors to raise capital, bringing in new owners who expect dividends. Debt markets involve companies or governments borrowing money for the long term, often through the issuance of bonds, which are tradable debts.
Bonds represent tradable debt, allowing companies to raise capital without bringing in new owners. Instead, they borrow money and pay interest to bondholders. These bonds can be broken into smaller tradable units, making them easier for investors to buy and sell on the market.