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The financial markets are a place where not only countless numbers of securities are traded but also where multiple different types of market transactions unfold, some more public than others. An open market transaction, for instance, is one where a company insider, meaning someone close to the operations of that entity, buys or sells shares of stock in the company. Other market transactions might apply to selling equity or debt in the capital markets or completing a merger or acquisition. Also, the governing body that sets monetary policy in a country, such as the Federal Reserve (Fed) in the U.S., participates in open market operations.
Company executives who are close to the decision-making process at a publicly traded company, where shares of stock and possibly debt or bonds trade amongst investors, have responsibilities to shareholders and the public. Chief among those duties is to avoid insider trading, an illegal practice of trading a stock and profiting based on information that is not yet available to the public. In developed countries like the U.S., corporate professionals must file a document with the regulatory body like the Securities and Exchange Commission before buying or selling shares of company stock. The executive can then trade the stock at a price that is the same or similar to where the security is trading in the public markets, and such deals are open market transactions.
Monetary policy market transactions occur when an organization like the Fed makes changes to interest rates, mainly the rate financial institutions charge one another to borrow money, known as the target federal funds rate. The Fed is permitted to trade government securities or government debt via open market operations just like public investors do. When the Fed makes a trade, however, the impact is more dramatic. To maintain a healthy monetary policy, the Fed uses market transactions and buys these securities when the Fed funds rate is lowered while selling the debt when this rate is increased.
Capital market transactions cover a multitude of deals that can be executed in the financial markets, including mergers and acquisitions. Certain financial institutions focus on performing deals in specific segments of the corporate markets, such as mid-sized deals, also known as middle market transactions. If a mid-sized company is looking to make an acquisition in the financial markets, a financial firm, such as an investment bank, is hired to recommend potential targets. A mid-sized transaction consists of two companies with revenues or sales that fall in a given range, and that size spectrum can be defined by the parties involved in the deal.
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