Introduction to Financial Markets - Essay Example

 Introduction A financial market is a trading environment where individuals and business entities can buy and sell financial assets, securities, and other fungible products at relatively low transaction costs. Securities consist of bonds and stocks, (Roberts, 2008) and commodities include metals or agricultural goods. Other experts refer to it as a market where monetary assets are being traded (Mishkin, 2009). Financial markets cater for six fundamental functions. The essay is developed from the Financial Markets Theory that avails classical asset pricing hypothesis, a hypothesis composed of objectives such as portfolio choices, basic asset pricing theorem, risk management, portfolio limit, information in financial markets and no risk neutral assessment. Financial Markets Functions The functions of the financial markets are geared towards fulfilling the theory statements and they include: Financial market price determination usually offers modes by which prices are determined both for freshly issued financial assets as well as the available stock of financial assets. The next function is the Information Aggregation and Coordination within the financial markets that work as aggregators (computers) and gatherers of information of financial asset worth and the flow of finances from borrowers to lenders (Banks, 2001). Information Aggregation and Coordination also help in Risk Sharing. Financial markets permit a transfer of vulnerability from those who assume investments to those who supply funds for these ventures. Additionally, it promotes Liquidity where the financial markets offer the financial assets possessors with a possibility to liquidate or resell the already available assets. Finally, it is worth noting that Information Aggregation and Coordination promotes efficiency in the functioning of financial markets. Financial markets cut transaction costs and information expenses (Roberts, 2008). Financial Markets Institutions By differentiating the functions of the financial markets, it is important to mention both, diverse financial institutions that operate in such markets as well as the diverse ways in which these souks are structured. This is referring to the financial institutions otherwise referred to as the major players in the financial markets. Financial institutions can be broadly classified into four broad categories including: The brokers. Brokers are often considered as commissioned mediators of a buyer or seller who aids transaction by identifying a seller or buyer to achieve the desired transaction (Mishkin, 2009). A broker does not have a say in the assets she or he just trades. In other words, the broker does not reserve records in these assets. The benefits or wages of brokers are established by the commissions that they charge to consumers of their services such as the sellers, the buyers, or sometimes both. For instance, brokers include stockbrokers and real estate brokers. The dealers. The next institution is the dealers. Like brokers, they facilitate business by matching purchasers with assets from sellers; they do not connect in asset conversion. Unlike brokers, however, dealers can maintain records of the assets that they have traded such bought or sold. Such activities often allow them to, the dealer to vend out of the catalogue rather than constantly having to identify sellers to match each tender to purchase. In addition, unlike brokers, they do not get sales commissions. They make earnings by buying assets at comparatively low costs and reselling them at comparatively high prices. This is called buy low and sell high. The difference between the price a dealer provides to sell and the price at which he offers to purchase a product is referred to as bid price. Examples of dealers include car dealers, dealers’ of government bonds, and stock dealers. The investment bankers. The third institution which is involved in the financial markets affairs are the investment Banks. It facilitates the first offer of newly issued securities such as IPO by engaging a number of diverse activities. These activities involve advising corporations on whether to issue stock or bonds (Roberts, 2008). If it is about the bond issues, then the investing banks' advice on the exact types of payment securities to be offered. Apart from advice, these institutions often do the underwriting. This involves guaranteeing corporations a value either on the security they provide, solely or by involving several different investment banks that form an association to underwrite the issue cooperatively or collectively. The financial intermediaries. Finally, these investment banks assist in selling the securities to the public and other businesses. The last institution is the financial intermediaries. Unlike dealers, brokers, investment banks, financial intermediaries are monetary institutions that are involved in financial asset conversion. In other words, financial intermediaries usually buy one type of financial commodity from borrowers; generally some type of long-term credit contract whose provisions are adapting to the precise situation of the borrower such as a mortgage (Mishkin, 2009), and sell a diverse kind of economic asset to savers, normally some kind of comparative liquid claim contrary to the financial intermediary. The types of financial market structures The types of financial market structures that exist include; Auction markets that are conducted by the brokers. An auction market may be considered as a centralized infrastructure or clearing house where sellers and buyers, through their brokers carry out trades in a free and competitive bidding process. Over-the-counter (OCT) markets that are conducted by the dealers. An over-the-counter market has no clearinghouse or centralized mechanism for doing business (Roberts, 2008). Instead, the marketplace is a community market consisting of several dealers spread transverse a region, a nation, or indeed the universe, which make the soul in some kind of asset. An organized exchange is another type of financial structure; it combines the functions of auctions and OTC. The intermediation financial markets conducted by financial intermediaries are the last type of this financial market (Valdez, & Molyneux, 2010). An intermediation financial market is a money market in which financial mediators assist in transferring funds from investors to borrowers by providing certain types of financial assets to investors and receiving other kinds of monetary assets of borrowers. Types of Financial Markets The main types of money markets include (Fasani, 2012): The Foreign Exchange Market or Forex or FX is the key liquidity of the financial markets. Each nation has its unique national legal tender and each national currency has worth in associations with other national currencies. Stock Market Once a corporation reaches a particular size it can provide shared ownership to private financiers in the type of ‘Shares’. These are purchased and sold in the Stock marketplace, through a small figure of recognized Stock Exchanges, where each corporation is given a symbol. The Commodities Market. Commodities are usually raw physical items such as metals, grains or oil, which can be purchased and sold in uniform ‘lots’, depending on an individual’s outlook on the world of that commodity. The Futures Market. Trading Futures is a means of securing a commodity at today’s worth, but not actually assuming ownership of it up to a future date. Deals are carried out by way of contracts, commerce on a Futures Exchange. There are other financial markets such as money markets, bond market, and insurance markets and derivatives markets. The London Stock Exchange or London Financial Market The London Stock Exchange financial market is categorized into four major kinds including the AIM, the main market, the professional securities market statistics and international order books. The computerization of doing business has boosted the creation of liquidity. Technological development has offered traders in the financial markets with chances to carry out their business tasks in real time. In addition, entrepreneurs in the financial markets have taken the gain of technological growth to reduce trade threats (Melsheimer, 2010). The improved trading constructively influences market reliability and integrity. In regard to LSE, technology has enabled its trading activities to be augmented at a higher rate, thus, ensuring increase competition for liquidity. The Corporation’s Multilateral Trading Facility (MTF), which is controlled by the LSE group; provide traders with chances to trade in the financial productively at almost 99% accomplishment rate. A financial market deals with buying and selling of financial assets. Financial institutions can be broadly classified into four broad categories as dealers, brokers, and investment bankers, as well as financial intermediaries. The already known financial market structures include Auction Market, Over the Counter (OCT) markets, organized exchanges, and intermediation financial markets. The finance market principles are equal across the world, however; implementation differs concerning regulations and rules governing trade in various parts of the earth. It is worth noting that these factors are responsible for making the London city the mega city when the financial market is a factor of consideration. References Banks, F. E. (2001). Global finance and financial markets: A modern introduction. Singapore [u.a.]: World Scientific. Fasani, M. (2012). the Main Types of Financial Markets. Retrieved from http://www.theindicatorguys.com/the-main-types-of-financial-markets/ Melsheimer R. E, (2010). The Law and Customs of the London Stock Exchange; BiblioBazaar, 2010, Reprint Mishkin, F. S. (2009). The economics of money, banking, and financial markets. Boston: Pearson/Addison Wesley. Roberts, R. (2008). The city: A guide to London's global financial centre. London: Profile. Valdez, S., & Molyneux, P. (2010). An Introduction to Global Financial Markets; Palgrave Macmillan, 2010: Ed 6. Read More