Financial Markets and Institutions Nowadays - Essay Example

Financial Markets and s Financial markets have an nature that shields their role in a country’s economic growth and prosperity (Stacey, 2007). The US financial market plays a significant role in the country’s economy. A financial market can be considered as a market or a forum in which individuals and entities buy and sell financial commodities such as securities and fungibles at negligible operations costs. Financial markets can be specialized or trade in a variety of commodities. Despite their abstract nature, financial markets give a precise representation of the country’s economy (Stacey, 2007). This is because the markets operate in a classical economic forum of willing buyers and willing sellers. This paper will therefore analyze the role of financial markets in creating US economic wealth and its implication on different securities. The country’s economic wealth is characterized by two types of wealth, which include monetary and non-monetary wealth. Monetary wealth includes things that can be bought or sold through open markets. In this case, monetary wealth represents things that have ready markets and marked prices. On the other hand non-monetary wealth include thing whose demand depends on scarcity and they cannot be sold in a market such as education and security. The financial market facilitates the country to acquire monetary wealth, which create a demand for non-monetary wealth. Firstly financial markets facilitate borrowing of funds and hence increases the purchasing power of a given entity or government. Ability to purchase or purchasing power is the basis of economic growth (Stacey, 2007). Secondly, financial markets act as price determinants. Price is an essential measuring unit that determines the value of different goods and services in the market. In addition, financial markets facilitates risks sharing, this builds confidence among investors leading to the creation of wealth. Financial markets also provide a platform for liquidation of assets. This is an essential factor or determinant of economic growth. Lastly, financial markets enhance efficiency through reduced transaction and operational cost. This factor attracts investors and citizens to put their saving and earning in the financial markets. Financial securities are financing or investment instruments that are bought or sold through financial markets. They include shares, debentures, bonds, and warrants. The Gap, Inc. (GPS), General Motors Company (GM) and Siemens AG (SI) are some of the stocks listed in the NYSE. General Motors is an international car manufacture that specializes in manufacture of light and heavy commercial vehicles. The company issued its latest IPO in 18 Nov 2010 and traded a volume of 6,206,054 shares (NYSE, 2012). The Gap, Inc is a US based company that specializes on personal care products for both men and women. The company was listed in the NYSE in 1976 and its shares have enjoyed considerable influence. On the other hand, Siemens AG is an electronic and engineering firm that specializes in the manufacture of mobile phones and communication devices. Risk returns are a significant aspect of financial markets and trade. The parameters define or measure the relationship between returns on an investment versus the risks undertaken by the investor (Smith, 2003). Thus, low risks or low levels of uncertainty are linked with low returns. Similarly, risky investments are associated with high returns. Among the three selected securities, Siemens AG has the highest risk and hence greatest expectations among investors. Siemens is technology-based industry and therefore the prices of its share are highly dependent on technological innovations. On the other hand, the Gap, Inc operates in a more stable industry and, therefore its shares are low risks securities. Lastly general motors securities can be considered to have moderate levels of risks. The nature of the industry in which a given company operates plays a significant role in determining the security levels of its securities (Burke, 2010). The levels of risks associated with a certain security determine the amount of expected returns. However, investors are cautious about possible risks that may arise from risky ventures or investing their money in stocks that have a high risks returns. Ability to balance risks with returns is the main factor that leads to successful operations in the stocks markets. For instance, Siemens AG investors can maximize their returns by building an extensive investment portfolio. Diversification of investment portfolio requires investors to spread their investments on stocks from different companies. On the other hand, GM investors can increase their returns by having accurate prediction of the market trends. This will require them to buy stocks when there is an expectation of attractive business and sell them when the company is likely to experience financial difficulties. Lastly Gap, Inc operates in a considerably stable industry and hence its investors can increase their earnings by maximizing the size of their stocks. Monetary policies are actions undertaken by the Federal Reserve to control the amount of money and levels of credit in the economy. Such policies are based on the principles of interest rates, which influences people’s lending and borrowing capabilities. Liquidity is a significant element of economic sustainability. When the Federal Reserve wants to increase its holdings, it increases interest and subsequent borrowing costs. This in turn reduces liquidity and willingness of people to invest. In addition, investors are forced to sell most of their securities in order to increase their levels of liquidity. However, this process is governed by expectations of returns and risks. Investors of risky stocks such as Siemens and GM will be willing to sell their stocks due to expectations of high returns and risk avoidance because of increased interest rates (Boar, 2001). On the other hand, monetary policies have minimal effects on less risky stocks such as Gap, Inc shares. Financial securities have different levels of attractiveness that determines investment trends among investors. Thus, the three securities have a varying level of attractiveness that is dependent on time. Firstly, Siemens securities are the best form of investment over the next twelve months. On the other hand, GM and Gap Inc, stocks will have minimal implication as investment tools over the next twelve months. These conclusions are primarily based on the nature of the industry in which each of the respective companies operates. For instance, the technology industry will experience constant growth in the next twelve months due to increasing demand for technology equipments. Motor vehicle industry is likely to face a market crisis resulting from government’s policies aimed at cutting carbon emissions and overproduction in the previous years. Moreover, the industry has hit its maturity stage and hence it is likely to experience minimal growth within the next twelve months. This will reduce the stock value for respective companies such as GM. This level of attractiveness will replicate itself within the next five years. However, after the next ten years, Siemens securities will have low levels of attractiveness compared to the GM and Gap, Inc securities. This is because the technology industry is likely to become unattractive due to new entrants. The attractiveness will lower the demand of Siemens’ securities reducing their attractiveness in the market. Finally, GM Company and other players in the industry are likely to change their operation tactics or introduce new products in the market. This will increase demand for their stocks and hence their attractiveness. In conclusion, financial markets provide a platform for investment and liquidity control in the US economy. This translates into economic wealth of the country, which influences the amount of money in circulation. The Federal Reserves regulates amount of money in circulation through monetary policies, which determine the prices of different financial securities. The GM, Gap Inc and Siemens AG securities have different levels of attractive within the next ten years. Different levels of attractiveness are dependent on the forces of demand and supply of each of the different stocks. References Boar, B. (2001). The art of strategic planning for information technology, 2nd ed. New York, NY: John Wiley & Sons. Burke, W. (2010). Organization Change: Theory and Practice. 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