Financial Markets

10 Key excerpts on "Financial Markets"

• 

  eBook - ePub

  Financial Integration in the European Monetary Union

  • S?awomir Ireneusz Bukowski(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  In Poland, the bank-oriented system features the following: lower GDP per capita than in the higher-developed countries, relatively lower effectiveness of the legal system than in developed countries, relatively higher corruption and a medium European tendency to risk-taking – greatly differing from American and British standards (see Bukowski, 2011, p. 14).

  The financial market is one of the key markets in economy, connected with the market of products and services and labor markets through the supply-and-demand coupling and prices. On the one hand, Financial Markets are platforms where short-, medium- and long-term financial transactions take place and, on the other, mechanisms of short- and long-term capital mobilization and its allocation in order to finance investment ventures operate.

  Financial instruments embodying capital are traded in Financial Markets. A financial instrument is a contract (agreement) between two parties that governs financial interdependence between them.

  A financial market has its infrastructure created by a network of relationships among banks, investment fund companies, insurance societies and stock exchanges. The financial market participants include financial institutions, enterprises, households and the state. These entities provide financial capital and benefit from it at a specific price: interest.

  Financial Markets fulfill an important role in economy. First, they provide a mechanism of capital mobilization for investment purposes, its allocation and its transfer of financial capital into production capital. Second, they determine the price of capital and enable estimations of investment risk, which is the basis of investment decision-making. Third, they strengthen the motivating role of profit in enterprises and enable the enterprise value assessment. Fourth, they assure liquidity in economy, which means that all of the needs of economic entities in terms of money are satisfied. Moreover, Financial Markets play an important role in the absorption of economic shock results.

  The financial market institutions include the legal system regulating capital turnovers, institutions of state financial supervision, financial intermediaries and financial instrument exchange markets. The system of law governing capital turnover consists of the rules of public and non-public capital turnover (financial instruments) and “rules of the game” between the turnover participants. It aims at ensuring safety to capital turnover, including the safety of financial investment projects. The distinction between a public and a non-public turnover of financial instruments is conventional. Usually, the criterion here is the number of people to whom the offer for sale of financial instruments is addressed. Public trading of financial instruments is usually subject to special supervision from the state institutions established for this purpose and to special requirements that must be met by the issuers of these instruments concerning the way of presenting economic information, financial safeguards, the way of issuance and so on.

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  Investment and Portfolio Management

  A Practical Introduction

  • Ian Pagdin, Michelle Hardy(Authors)
  • 2017(Publication Date)
  • Kogan Page

    (Publisher)

  01

  Financial Markets

  By the end of this chapter you should understand the following key areas of Financial Markets:

  • the definition of Financial Markets;
  • the history and development of Financial Markets;
  • Financial Markets today;
  • the categorization of markets;
  • the key participants in a financial market;
  • recent developments in Financial Markets;
  • financial crises.

  Introduction

  As with the global fund management industry, which we cover in Chapter 2 , the Financial Markets provide a critical link between the providers of capital and those looking to use capital. Providers of capital include retail and institutional investors whilst users of capital include corporations and governments. Capital itself can include both debt and equity as well as other more exotic investments. Both providers and consumers of capital want transactions to be conducted efficiently, which, as we will see in Chapter 5 , includes transactions being conducted accurately, at low transaction costs, and with assets being valued at a fair price. One key aspect of Financial Markets over recent years is the pace of change which is being experienced due to increasing volatility in global markets, as well as developments in products, technology and investor sentiment. All of which make this industry dynamic and challenging for participants.

  Defining Financial Markets

  The term ‘market’ in financial literature is used inconsistently and sometimes with little thought to the context of the situation. This is not a problem when you have been studying finance for a while as you will automatically know which market is being referred to in a piece of writing or conversation. However, when you first study finance it can make the area appear confusing and impenetrable. In the first instance, it helps to understand that a financial market or marketplace, unlike traditional food markets for instance, can be both a physical place and a virtual space. Additionally, the term ‘marketplace’ is often shortened to market, which again can make differentiation and understanding more difficult.

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  Financial Systems

  Principles and Organization

  • Edwin H. Neave(Author)
  • 2002(Publication Date)
  • Routledge

    (Publisher)

  The chapter discusses significant economic differences among the major domestic markets. Its purpose is not to develop a fully comprehensive list of traded securities, but to help you understand major features of the transactions carried out in four major types of domestic markets. The four types found in most developed financial systems are the money markets, the equity or stock markets, the bond markets and the mortgage markets. To discuss these markets’ features, the chapter mainly uses examples from the United States. One reason for focusing on US transactions is that they are representive of most countries’ domestic financial market activity. A second reason is that some of the US markets discussed are more fully developed than their counterparts in other countries, and thus serve as examples of the directions in which other countries’ markets are likely to evolve.

  Domestic Financial Markets facilitate both primary and secondary market activity. The most significant features of primary market activity, the considerations involved in arranging a deal, were discussed in Part II. Accordingly, this chapter focuses principally on secondary market trading and on market organisation. The next three sub-sections explain that domestic Financial Markets’ specialised forms are determined chiefly by the economics of market operations, the economics of the firms operating in these markets, and the economics of information production.

  12.1.1 Economics of market operations

  Financial Markets emerge because market agents profit from executing trades. Financial Markets perform the valuable economic function of creating a central meeting place whose existence minimises the difficulty of finding a counterparty. That is, a functioning marketplace makes it less time consuming and therefore less costly for potential buyers to find potential sellers, or vice versa. The more prominent the market, and the greater the variety of instruments traded in it, the lower search costs become, because larger markets attract greater numbers of potential counterparties.

  If search costs are important in relation to the size of a transaction, the existence of a central meeting place gives its organisers a competitive advantage. So long as the market’s members do not charge trading commissions that exceed search costs, parties seeking to trade will use the market’s facilities. The bigger the market, the easier it will be to trade, and the more trades the market will attract. Market operating economics create a second tendency for a market to increase in size. The profits earned by a market’s organisers increase with trading volume because trading members can either charge their clients trading commissions or profit on the difference between bid and ask prices even if commissions are not explicitly levied. At the same time, the costs of market operations are usually shared proportionately by the market’s members. These costs usually have a fixed component so that members’ unit trading costs fall with volume. In addition, operating costs can be further reduced if market agents standardise the terms of the instruments they will trade.

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  How the Trading Floor Really Works

  • Terri Duhon(Author)
  • 2012(Publication Date)
  • Bloomberg Press

    (Publisher)

  They are as broad and diverse in what they offer and who participates as any supermarket is. This seems a daunting space to then try to classify and explain; however, there is one primary driver of the Financial Markets that is a good framework on which to base an understanding. The Financial Markets are primarily driven by the supply of issuers and the demand of investors. Or in other words, the Financial Markets are a place where entities who need money meet with entities that have money. Where do banks and in particular trading floors come into this? They sit in the middle. They facilitate the meeting of the supply and the demand. Within the broader world of Financial Markets, this particular space is called capital markets, where capital refers to cash in any currency and the focus of these capital markets is capital raising by the issuers and investing by the investors. Who are the entities who need money? Doesn’t everyone need money? Yes, at some point or another, everyone generally comes to the capital markets to raise some money. Figure 1.1 shows the position of banks in the capital markets. FIGURE 1.1 Banks as intermediators in the capital markets. Capital moves from the investors to the issuers via banks acting as financial intermediators. Before going into details of who each of these entities is and what exactly they do in the capital markets, it is important to first distinguish between the equity capital markets and the debt capital markets. All issuers who need money must first decide whether they need equity capital or debt capital. Throughout this book, there are references to the price of a financial product in the financial market. A market is where buyers and sellers meet. Think supermarket, flower market, flea market. . . Some of these are places which have fixed prices and others are places where a buyer and seller come to an agreement. In the latter case, the price is determined by the number of buyers compared to the number of sellers

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  Policing the Markets

  Inside the Black Box of Securities Enforcement

  • James Williams(Author)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  As a quick perusal of any basic economics or finance text will reveal, Financial Markets are defined in terms of formal centres of exchange in which investors come together to buy and sell stakes in a variety of financial products or ‘securities’, including stocks, bonds, commodities and derivatives. These transactions take place in a variety of fora, the most recognizable of which are the organized exchanges which represent the primary institutional form of the markets and are divided into various areas of specialization. There are dedicated exchanges dealing primarily or exclusively in equities, commodities and derivatives. In addition to the formal exchanges, there are also a number of other trading venues including: (1) alternative trading systems (ATSs), which trade exchange-listed securities independently of the exchanges themselves based on the promise of superior price discovery and trade execution, among other perks; (2) the ‘dealer market’, which consists of trading in fixed-income products such as bonds, asset-backed securities and money market instruments; and (3) the ‘over-the-counter’ (OTC) market, where parties engage in private or ‘off board’ transactions while benefiting from minimal listing requirements and a decidedly light regulatory touch. Collectively, this ‘confederation of markets’ (Reichman 1993: 67) is integral to the economy financing corporations and governments, hedging risks and operational liabilities, as well as determining the value of companies and other financial entities in the form of published prices.

  In addition to their varied morphology, there are a number of additional attributes that define Financial Markets and distinguish them from other forms of market-based exchange. First, in contrast with producer and consumer markets, ‘Financial Markets are not primarily concerned with the production of goods or with their distribution to clients, but with the trading of financial instruments not designed for consumption’ (Knorr Cetina and Preda 2005: 4). These financial instruments are abstract, intangible and largely virtual in nature, representing ‘claims on future states of the world that they embody: rights to dividends from a corporation, to interest payments from a government and so on’ (MacKenzie 2007: 357). This trading on the basis of possible futures is relatively straightforward, in theory if not necessarily in execution, in the context of bread and butter products such as equities and bonds but becomes much more complex in the case of items such as derivatives whose value is determined through an intricate layering of different product futures and thus seemingly remote lines of financial fate.

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  Reformulation Of Keynesian Economics, A

  • Jagdish Handa(Author)
  • 2015(Publication Date)
  • WSPC

    (Publisher)

  This chapter addresses the reformulation of macroeconomics for a ‘financial economy’ to bring financial capital into its analysis. A barter economy is one in which economic agents do not need money as a medium of payments, nor do they need financial capital to fund their operations. A “monetary economy” differs from the barter one in that it requires that the exchanges of commodities financial instruments and labor be against money but not directly against other commodities, financial instruments or labor. Money in the medium of payments in such an economy; however, economic agents in such an economy do not necessarily need financial capital to produce or consume. A financial economy goes beyond a monetary economy in requiring that its economic agents must have the financial resources/capital (in addition to merely having money balances for exchanges) to fund their operations, such as, for firms, to purchase and hold physical capital and pay labor or, for consumers, to buy and hold consumer goods (including housing). We consider the modern economy to be a financial one.

  The amount of money held by the economic agent can be regarded as one element of the broad definition of financial capital. However, the role of money as facilitating exchanges with others is quite different from that of the financial capital, which is needed by firms and households to produce or consume. Since the role of money is a very distinctive one, we will treat money as distinct from financial capital. However, we define the financial economy as encompassing a monetary one but going beyond a monetary economy by requiring the use of financial capital.

  Financial capital differs from physical capital, with the former having a nominal form (i.e., in currency units) while the latter has a physical one. To stay with the usual terminology of economics, we will leave the word “capital” to continue to have its usual meaning as physical capital. We will often use the word “funds” as a short form for financial capital.

  Firms need financial capital to bridge the gap between the time when they incur costs and receive revenues from sales. A major part, though not all of it, of the need for financial capital arises from the firm’s use of physical capital, parts of which have a long life. For firms, while the need for working finance can be reduced by leasing the required physical capital rather than its outright purchase, in practice, most capital equipment is owned outright rather than leased.2

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  An Introduction to Financial Markets and Institutions

  • Maureen Burton, Reynold F. Nesiba, Bruce Brown(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Part 4 Financial Markets

  1. The Money Markets
  2. The Corporate and Government Bond Markets
  3. The Stock Market
  4. The Mortgage Market

  Passage contains an image

  Chapter Eleven 11 The Money Markets

  DOI: 10.4324/9781315706405-15

  The need for a money market arises because receipts of economic units do not coincide with their expenditures. —Timothy Q. Cook and Robert K. LaRoche

  Learning Objectives

  After reading this chapter, you should know:

  • What the money market is and how it is used by various participants
  • Recent trends in money market instruments
  • How the money markets have become international in scope
  • What money market mutual funds are and why they have become important intermediaries

  Financial Markets

  In Part 4 of this text, we examine debt and equity markets more closely. The next three chapters look at the various capital markets, where financial assets with a maturity of greater than one year (or no maturity at all) are traded. Capital markets include the bond, stock, and mortgage markets and we spend a chapter discussing each one. In this chapter, we look at the money market—the short-term credit market where debt securities having original maturities of one year or less are traded. This definition distinguishes the money market from the capital market for longer-term debt and equity transactions. We begin by exploring how various participants use money market instruments to meet their borrowing and lending needs. In the second section, we review the individual money market instruments (originally covered in Chapter 3 ) and the development of money market mutual funds (MMMFs).

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  Macroeconomic Theory

  A Dynamic General Equilibrium Approach - Second Edition

  • Michael Wickens(Author)
  • 2012(Publication Date)
  • Princeton University Press

    (Publisher)

  12

  Financial Markets

  12.1 Introduction

  Having considered the general principles of asset pricing in the macroeconomy in chapter 11 , we now apply these to three key Financial Markets: the stock market, the bond market, and the foreign exchange (FOREX) market. Each market has specific features that need to be taken into account that make the analyses very different. Their common feature is that they all satisfy the asset-pricing equation

  (12.1) Et [M

  t+1

  (1 + ri, t+ 1 )] = 1,

  where ri, t is the real return on the ith risky asset, which is defined differently for each market. In general equilibrium this can be expressed as the no-arbitrage condition

  (12.2)

  where rf

  t

  is the real risk-free return, M

  t+1

  = βU ′ (c

  t+1

  )/U ′ (c

  t+1

  ) is the stochastic discount factor or marginal rate of substitution, U ′t is marginal utility, ct is consumption, and σt is the coefficient of relative risk aversion. More generally, M

  t+1

  may be represented by a set of factors not necessarily involving consumption growth.

  In general,

  where Pt is the price of an asset at the start of period t and X

  t+1

  is its payoff at the start of period t + 1. The payoffs define the different assets. For example,

  1. for a stock which pays a dividend of D

  t+1

  and has a resale value of Pt + 1 at t + 1, we have X

  t+1

  = P

  t+1

  + D

  t+1

  ;

  2. for a Treasury bill that pays one unit of the consumption good regardless of the state of nature next period, X

  t+1

  = 1, and the price is then Pt = 1/(1 + rf

  t

  );

  3. for a bond that has a constant coupon payment of C and can be sold for P

  t+1

  next period, X

  t+1

  = P

  t+1

  + C;

  4. for a bank deposit that pays the risk-free rate of return rf

  t

  between t and t + 1, X

  t+1

  = 1 + rf

  t

  , and the price is Pt = 1;

  5. for a call option that gives the holder the right to purchase a stock at the exercise price K at date T

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  The Gulf Cooperation Council Project

  1981-2016 - The elusive potential for economic gain through regional integration

  • Kambiz Zare(Author)
  • 2019(Publication Date)
  • Editions L'Harmattan

    (Publisher)

  Europe is a case that must be studied and restudied. Between 1980 and 1990, many regulations were eliminated, resulting in the expansion of markets. A series of privatizations saw state-owned companies sold to individuals and helped Europe go through the integration process and ultimately share the same currency, monetary policy and a fully integrated financial market. There were also few crises. More recently, there has been the Greek crisis, while the consequences of Brexit are still unknown, raising the question of how much regulation would guarantee the safety of markets and participants without undermining efficiency and without harming the global economy. Other questions remain to be answered also, for instance, whether Greece would be better off unilaterally or as part of a regional bloc.

  265

  Financial Markets and Foreign Exchange

  Within the world economy, countries buy and sell goods and services from each other. In addition, based on the concept of the allocation of resources, nations that are in surplus lend to those that are in deficit, and at the same time, based on investment opportunities available, they invest abroad or accept the investments made by other countries within their own territories. If we exclude foreign aid and other politically motivated economic exchanges, it is seen that the same principles governing national businesses govern also businesses and economic activities conducted internationally. Thus, nations buy goods and services from each other based on their needs and prices offered to them. Evidently, if circumstances change, there would be a shift in demand, supply, or perhaps both of them. Subsequently, prices would be affected as well, and ultimately the pattern would change. Countries take actions and change their decisions accordingly. Since nobody can just live by borrowing and being a deficit unit forever, they need to adjust themselves to the reality of economics; therefore, they need to reduce consumption or increase production in order to face the coming payments. Countries with different currencies must know the price of their currencies in terms of those of other countries. An exchange rate is simply the price of one currency in terms of another. Currencies are traded in the foreign exchange (“forex”) market. Being an institutional arrangement that regulates buying and selling of different foreign monies, it is considered as a kind of money market within the financial system.

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  Management Economics: An Accelerated Approach

  An Accelerated Approach

  • William G. Forgang, Karl W. Einolf(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  3

  Money and the Financial Markets

  The previous chapter develops a model of the economy that explains short-term macroeconomic fluctuations through an income and expenditures approach. The prior chapter does not consider (1) the role of money in facilitating transactions in the goods or resource markets, (2) interest rates, monetary policy, and economic fluctuations, (3) the process by which funds flow from savers to investors, or (4) the mechanics of financing government budgetary deficits. This chapter fills the gaps.

  Learning Objectives

  The successful reader understands:

  • The structure and operations of the money and financial systems and the role of money and interest rates in the economy

  • Monetary policy and its effects on a firm’s operating environment

  • The money and financial system as environments within which business and personal investment occur

  An understanding of how money and credit interact with real economic activity is fundamental to management responsibilities. Business decisions dependent upon money and credit conditions include the management of a firm’s cash position, extending and receiving credit, establishing the appropriate debt-to-equity ratio, and planning for the firm’s long-term physical and financial capital needs. However, the importance of money and credit extends well beyond financial management decisions. The demand for many products is sensitive to the price and availability of credit, and decisions in production, procurement, hiring, and inventory control are made within the monetary and financial environments. Further, personal financial planning and investment decisions are made within these environments and include the timing of buying goods on credit, choosing a fixed-or variable-rate mortgage, selecting stocks, and choosing the maturity of financial investments.

  Two sets of issues are covered in this chapter. The flow of funds section of this chapter examines the institutions and markets that facilitate the transmission of foreign and domestic savings to companies for investment in plant and equipment, to government to finance public debt, and to households for purchases of homes, cars, and other durable products. The second section of this chapter examines the role of money in the economy, monetary policy, and interest rates.

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