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Financial Market

Financial MarketThe financial market plays an extremely important role in the economy. It is a fundamental structure for business entities that are the core of the financial system.

What Is a Financial Market?

It is a system of economic relations arising in the exchange of economic goods. An FM is a place where capital mobilization, credit provision, currency exchange transactions, and allocation of funds in production occur. The combination of supply and demand for the capital of lenders and borrowers from different countries forms the global financial market. It can be a part of the financial system only in a market economy when entrepreneurs mobilize most of the financial resources through trade. In essence, it is an infrastructure of the financial system.

The purpose is to provide the enterprises with the conditions necessary to attract funds and sell temporarily free resources. Thus, enterprises are almost equivalent, both in the role of the buyer and the seller of resources. A prerequisite for the functioning of the FM is the non-coincidence of the need for financial resources with the sources of their satisfaction. In organizational terms, an FM is a set of market financial institutions, which support the flow of funds from owners to borrowers. The objects of relations are securities, financial services, and monetary resources.

The functions of the Financial Market are as follows:

  • transfers of temporarily free financial resources from lenders to borrowers;

  • distribution of accumulated free funds between the end users;

  • enhancement of income - allowing lenders to earn dividend or interest on their surplus invisible funds;

  • providing the borrower with funds to allow them to implement their investment plans;

  • providing liquidity in the market to facilitate the trading of funds;

  • promoting savings and investment;

  • facilitating balanced economic growth;

  • allowance for the productive usage of the borrowed funds;

  • determination of the financial assets price via the interaction of purchasers and sellers;

  • providing liquidity to commercial banks;

  • formation and acceleration of capital - activation of economic processes in the state;

  • providing conditions for minimizing financial risks.

The Financial Market has the following principles:

  • free access to market information and instruments for all participants;

  • transparency and investor protection;

  • competitiveness and efficiency;

  • compliance with international standards.

It consists of two groups of channels:

  • Direct funding channels, where funds move directly from holders to borrowers through the sale of shares, bonds and other securities.

  • ndirect funding channels, where the cash flow from holders to borrowers move through financial intermediaries (banks, insurance companies, and other financial institutions).

History of Financial Markets

Historically, there are two main models of FMs: a bank-based financial system (the so-called continental model) and a market based financial system, or the Anglo American model. The continental model is characterized by a high level of share capital concentration with a small number of shareholders, non-public placement of securities, and a relatively weak secondary market. The Anglo American model is characterized by a focus on public offering of securities and a highly developed secondary market. In the late 20th century, FMs in Europe started adopting the features of the Anglo American model.

Components

According to the market level, the components are:

  • Primary market: An FM for the new issues or financial requirements, which deals with the securities that are issued for the first time.

  • Secondary market: An FM for the secondary sale of securities. In other words, securities that were issued in the primary market are traded in this market. As a rule, such securities are listed on the stock exchange and provide a permanent and regular market for the purchase and sale of securities.

  • Tertiary market: Trading securities in the over-the-counter (OTC) market. These transactions allow institutional investors to directly trade in blocks of securities rather than through an exchange, providing the liquidity and guaranteeing anonymity for buyers. The tertiary market was first developed in the 1960s and today there is a number of brokers targeting the tertiary Market.

Simply put, the primary market is the market in which the newly created company issues its shares to the public for the first time through an IPO (initial public offering). The secondary market is the market in which the “second-hand” securities are sold.

According to the type of goods, there are the following components:

  • Money market - for assets and securities with a maturity of up to one year. In other words, this is a market for short-term funds only.

  • Financial services market – an FM whose participants (e.g. banks) deliver various financial services, such as an ATM, credit card, credit rating, stock brokerage, etc. Individuals and firms use financial services markets to purchase services that increase the efficiency of debt and equity markets.

  • Capital market - for assets with a long or unlimited maturity. As a rule, it deals with long-term securities that have a maturity higher than one year. The capital market can be subdivided into the commercial and long-term credit market.

  • Stock market - a FM where the ownership of securities is issued and signed. An example of a secondary stock market is the Bombay Stock Exchange.

  • Debt market - for borrowers that agree to pay the lender the original loan amount plus a certain interest.

  • Derivatives market – for trading underlying assets, such as commodities or stocks.

  • Depository market – an FM that accepts deposits from individuals and companies and uses these funds to participate in the debt market by providing loans and acquiring other debt instruments, such as treasury bills.

  • Non-depository market – an FM that carries out a range of functions in financial markets, from the financial intermediary to insurance, sales, etc. Non-depository markets can consist of brokerage firms, insurance companies, mutual funds, pension funds, etc.

  • Forex market - an FM where foreign currencies are traded. This FM is the most liquid market in the world, as cash is the most liquid of assets.

Raising Capital

FMs attract funds from investors and direct them to corporations, thus allowing the corporations to finance their operations. Money markets allow companies to borrow funds on a short term basis whereas capital markets allow corporations to gain long term funding and support expansion. FMs help borrowers find lenders, which otherwise would be difficult. The lender-borrower interaction via a financial market can be compared with a bank deposit and credit system. Banks take deposits from those who have money to save and then lend this money to those who want to borrow in the form of loans and mortgages.

More complex transactions require markets where lenders can meet borrowers and where existing lending or borrowing commitments can be sold to other parties. A stock exchange is a good example of an FM. A company can use a stock exchange to raise money by selling shares to investors.

Summary

A financial market is an integral part of a financial system in a market economy. It is a place where people trade financial securities and derivatives such as futures and options. According to the market level, an FM is divided into primary, secondary, and tertiary markets. According to the type of goods traded, there are the following FMs: money, financial services, capital, stock, debt, derivatives, depository, non-depository, and forex, as well as cryptocurrency markets.