Financial markets, which include capital and derivatives markets, are global marketplaces where small and large firms can raise capital and hedge against various risks. Stock and bond markets are examples of capital markets, whereas futures and options markets are examples of derivatives markets. Regulatory stock exchanges, over-the-counter markets for stocks that do not qualify for listing on the major exchanges, and bond markets for trading corporate and government bonds are all part of the capital markets. Capital markets are used by businesses to raise finance for a variety of operational and strategic purposes. Governments also use the capital markets to pay for services and operations by issuing short- and long-term bonds. Derivatives are financial products whose value is based on the value of other assets. Futures, forwards, options, and swaps are the four primary types of derivative contracts. The derivatives market is attractive to financial institutions because it allows them to provide risk protection at minimal upfront costs. It is speculative, transferring inherent risks to a third party. Capital markets, on the other hand, are characterised by trade risks that are clearly defined between the stock issuer and the equity holder.

Prachi Garg

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