Financial Markets and Risk - Essay Example

It will also mobilize and pool savings. Financial market also helps in diversification of trade and reduction of risk. (Campion 2010, pp.67-209) It is vivid to note that this market facilitates development of financial institutions and instruments that can manage risks. (Baumol 2011, pp.122-130) The system also provides financial regulation to ensure stability of financial institution in any given economy. It is also worth noting that financial system ensures that funds are channeled from households, firms, and governments that have surplus funds to those with deficits (The economist 2011, p.39) . Various products are always provided by retail banks and non-banking institutions, these products promote movement of funds in the market to create a balance.

The depository institutions always take deposits and lend out funds in terms of loans. This aspect always creates financial assets and enhances liquidity in a given market. In spite of considerable innovation in the financial sector, the popularity of depository services always persists. In Europe, bank deposits remain to be the best-known long-term savings. About 74% of European households have bank deposits. Various types of bank deposits are always offered. First, the time deposits which are not always disposable immediately because they are always fixed.

Another type of bank deposits is the savings deposits whose negotiability is always restricted to a given level. (Campion 2010, pp.67-209) There are always deposits resulting from savings scheme that always require the depositor to make regular payments. Securities Varieties of securities always exist in the financial market. The investment by households in securities has tended to increase in the developing countries in the past two decades. A good example of security is bonds. A bond is a debt instrument, which is the obligation of the borrower of funds to make specified interest and principal payments to lender of funds.

The bond obligates the issuer to make specified interest and principal payments to the holder on specified dates. (BME 2008, PP.200-223) Giving long term loans The banks always offer long-term loans to the people with fund deficit and those who need to deposit. The banks always require the borrowers to have collateral to reduce default risk. The banks always require the borrowers to pay the principal amount and the interest accrued. This is the most common method of advancing credit to the borrowers.

It is also vivid to note that the amount borrowed is always returned after a specified period. (Campion 2010, pp.67-209) Implication of general increase in interest rate The general increase in interest rates always has an impact on the individual savers and investors. It is vivid to note that both savers and investors always receive this increase differently. (The economist 2011, p.39) Impact on savors Increase in the interest rates charged by banks and other financial institutions have a positive impact on the savors.

The main aim of saving is always to gain interest. It is therefore fundamental to note that savors would be highly motivated to save when the interest rate is higher to gain more interest on their principal amount. (Campion 2010, pp.67-209) It is salient to comment categorically that in the periods of low interest rates savors would opt to investing in other securities like bond, notes payable and even equity as long as the return is higher. (BME 2008, PP.56-89) Impact on investors