Financial markets involve various types of market transactions, including open market transactions where company insiders buy or sell company stock, monetary policy market transactions where organizations like the Federal Reserve trade government securities, and capital market transactions that cover mergers and acquisitions. Company executives have a responsibility to prevent insider trading, while financial institutions may focus on specific segments of the corporate markets.
Financial markets are a place where not only countless securities are traded, but also where multiple different types of market transactions take place, some more public than others. An open market transaction, for example, is one in which a company insider, that is, someone close to that entity’s operations, buys or sells company stock. Other market transactions may apply to sell shares or debt in the capital markets or complete a merger or acquisition. In addition, the governing body that sets monetary policy in a country, such as the Federal Reserve (Fed) in the United States, participates in open market operations.
Company executives who are close to the decision-making process in a publicly traded company, where stocks and possibly debt or bonds trade among investors, have responsibilities to shareholders and the public. Chief among those duties is to prevent insider trading, an illegal practice of trading stocks and profits based on information not yet available to the public. In developed countries like the United States, corporate professionals must file a document with the regulatory body, such as the Securities and Exchange Commission, before buying or selling company shares. The executive can then trade the shares at a price equal to or similar to what the security is trading on the public markets, and such deals are open market transactions.
Monetary policy market transactions occur when an organization such as the Federal Reserve makes changes to interest rates, primarily the rate that financial institutions charge each other to borrow money, known as the federal funds target rate. The Federal Reserve is authorized to trade government securities or government debt through open market operations just like public investors. However, when the Fed makes a trade, the impact is more dramatic. To maintain healthy monetary policy, the Federal Reserve uses market transactions and buys these securities when the Federal Reserve funds rate falls while selling debt when the Federal Reserve funds rate rises.
Capital market transactions cover a multitude of businesses that can be executed in the financial markets, including mergers and acquisitions. Certain financial institutions focus on doing business in specific segments of the corporate markets, such as mid-business, also known as mid-market transactions. If a midsize company is looking to make an acquisition in the financial markets, a financial firm, such as an investment bank, is retained to recommend potential targets. A median transaction consists of two companies with revenues or sales that fall in a given range, and that spectrum of sizes can be defined by the parties involved in the deal.
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