In the United States, the Federal Reserve participates in open market transactions.
Financial markets are a place where not only countless securities are traded, but also where many different types of market transactions take place, some more public than others. An open market transaction, for example, is one in which a member of the company, that is, someone close to the operations of that entity, buys or sells the shares of the company. Other market transactions may apply to the sale of equity or debt in the capital markets or the completion of a merger or acquisition. In addition, the regulatory body that sets a country’s monetary policy, such as the Federal Reserve (Fed) in the United States, participates in open market operations.
Financial markets are a place where not only countless securities are traded, but also where many different types of market transactions take place.
Company executives who are close to the decision-making process in a publicly traded company, where stock and possibly debt or bonds are traded between investors, have responsibilities to shareholders and the public. Chief among these functions is to prevent insider trading, an illegal practice of trading stocks and profiting from information that is not yet publicly available. In developed countries like the US, corporate professionals must file with a regulatory body such as the Securities and Exchange Commission before buying or selling company stock. The executive can then trade the shares at the same or similar price as the security trades in the public markets, and these transactions are open market transactions.
Monetary policy market transactions occur when an organization such as the Federal Reserve makes changes to interest rates, particularly the rate that financial institutions charge each other to borrow money, known as the target federal funds rate. The Federal Reserve can trade government bonds or debt through open market operations, just as public investors do. However, when the Fed makes a deal, the impact is more dramatic. To maintain healthy monetary policy, the Federal Reserve uses market transactions and buys these bonds when the Federal Reserve funds rate is lowered, while selling the debt when that rate is raised.
Capital market transactions encompass a multitude of deals 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 midsize companies, also known as middle 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 hired to recommend potential targets. A medium-sized transaction consists of two companies with revenues or sales that fall within a certain range, and the parties involved in the deal can define this size spectrum.