Functions of Financial Markets

7 Key excerpts on "Functions of Financial Markets"

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  eBook - ePub

  Financial Integration in the European Monetary Union

  • Sławomir 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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  The Path to a Modern Economics

  Dealing with the Complexity of Economic Systems

  • Henning Schwardt(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3.5 Specific Markets: Finance I A second area for markets that is of particular interest is related to financial products and money. Beyond credit and loans, more in general, financial sector activity entails the trading of papers granting 3.5 Specific Markets: Finance 137 rights to future streams of income in different shapes and forms. All advances in financial sector activity revolve around two, related, issues, namely, the spread of the risk of particular activities and possibilities to increase the leverage in investments. We will address these issues in more detail below in this section. We will also include considerations concerning foreign exchange markets in this section. Traditionally connected to trade-flows, financial investment-driven foreign exchange demand has dwarfed trade-related demand for quite a while now. The general role of financial markets that results stems from the related issues of making monetary capital available for financing investments, enabling larger investments than possible for individual agents, or permit- ting to smooth over momentary shortfalls of revenue, and from spreading the risk of such investments to larger numbers of agents. On the other market side, access to future streams of income is acquired. Increasingly, this covers the resale of rights to income streams, from bonds, shares, mortgages, etc., or more complicated papers drawing a number of such income streams together. The prices for financial products are therefore assumed to relate to expectations about the development of these income streams. How loose or tight the connection is interpreted to be may differ. What information prices can offer in regard to financial sector products is accordingly evaluated differently under different perspectives. Making monetary funds available and spreading risk is easily enough illustrated.

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  Who's Afraid of John Maynard Keynes?

  Challenging Economic Governance in an Age of Growing Inequality

  • Paul Davidson(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  With the computer and the inter- net, there will be huge numbers of buyers and sellers meeting rap- idly and efficiently in virtual space. Consequently there is no need for humans to act as specialist market makers to keep the books and to assure the public the market is orderly as well as well-organized. Underlying this efficient market view of the role of financial markets is the presumption that the current and future value of traded finan- cial assets is already predetermined by today’s market “fundamentals” (at least in the long run 3 ). Former US Treasury Secretary and Harvard Professor Lawrence Summers has written that financial markets are effi- cient in that their “ultimate social functions are spreading risks, guid- ing investment of scarce capital, and processing and dissemination the information possessed by diverse traders….prices always reflect funda- mental values …. The logic of efficient markets is compelling” 4 . In the numerous financial markets that became disorderly and failed in the Winter of 2007–2008, the underlying financial instruments that were to provide the future cash flow for investors typically involved long term debt instruments such as mortgages, or long-term corporate or municipal bonds. A necessary condition for these markets to be efficient 84 P. Davidson is that the probabilistic risk of the debtors to fail to meet all future cash flow contractual debt obligations can be “known” to all market partici- pants with actuarial certainty. With this actuarial knowledge, it even can be profitable for insurance companies to sell credit default swaps insur- ance to holders of these financial debt instruments guaranteeing the holder would be reimbursed for remaining interest payments and prin- cipal repayment at maturity if a default did occur.

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  Basic Finance

  An Introduction to Financial Institutions, Investments, and Management

  • Herbert Mayo, , , (Authors)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  40 PART 1 Financial Institutions The primary function of a stock market is not to raise funds for firms but to transfer securities from sellers like you and me to buyers like you and me. There is no net change in the number of securities in existence; no funds are transferred to firms. All that occurs is a transfer of ownership from the seller to the buyer. Stock markets are secondary markets that facilitate the transfer of existing se-curities among investors. This transfer is extremely important, for owners know a secondary market exists in which they may sell their securities. The ease with which securities may be sold and converted into cash increases the willingness of investors to buy and hold stocks and bonds and thus increases the ability of firms to issue securi-ties. Without secondary markets, investors would be reluctant to buy the shares when a firm initially issued them. This chapter considers securities markets, especially the stock market. The me-chanics of investing, the role of brokers and securities dealers, cash versus margin ac-counts, long and short positions, and foreign securities are covered. The chapter ends with a discussion of the efficient market hypothesis, which suggests that over a period of years few investors will outperform the market. 4.1 Market Makers Millions of shares and billions of dollars change hands every day. The buyers and sellers never meet; instead the securities markets impersonally transfer the stocks (and bonds) from the sellers to the buyers. The transfers may occur on an organized exchange, such as the New York Stock Exchange (NYSE), or through an electronic market, the over-the-counter (OTC) market. While there are organizational dif-ferences between the exchanges and the OTC markets, from your perspective as a potential investor, they work essentially the same. Suppose you want to buy a stock such as IBM or Amazon.com, Inc.

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  Applied Intermediate Macroeconomics

  • Kevin D. Hoover(Author)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  But that is unlikely; most savers look for a safe place to lodge their savings and one that will pro-vide them with interest or other return. As we saw in Chapter 2 (see Figure 2.3), FINANCIAL MARKETS serve to connect savers with excess purchasing power with borrowers with deficient purchasing power. Firms and individ-uals who borrow do so in order to spend. Investment and other spending using borrowed funds make up the shortfall in aggregate demand caused by savings. Once again, in a monetary economy whenever money flows in one direc-tion, something of equal value must flow in the opposite direction. When savers transfer money to financial markets, they receive in return a FINAN -CIAL INSTRUMENT – that is, a record (paper or electronic) that specifies a claim to a current or future valuable good – for example, to the repayment of a debt or to the privileges of ownership . There are a bewildering vari-ety of financial instruments, although many are familiar to us all: checking accounts, savings accounts, corporate stocks, and government bonds. (The counterflow of financial instruments is not shown in Figure 2.3, but it is there in reality nonetheless.) Again, a disruption to the flow and counterflow of savings and financial instruments is likely to disrupt the flows of real goods and services that ultimately matter for our welfare. Even in a smoothly flow-ing economy, the terms on which people and firms borrow and lend, partic-ularly the rate of interest, will affect not only how much is saved and bor-rowed, but who does the saving and the borrowing. We have isolated two aspects of the financial system: the monetary trans-actions system and financial markets. We now look at each in more detail, starting with money. The Monetary Economy For economists, “What is money?,” has long been a vexed question. There is no doubt that a dollar bill is money. But what else, if anything, counts as money? Traditionally, money has been defined by its functions: 1.

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  Corporate Finance

  Theory and Practice in Emerging Economies

  • Sunil Mahajan(Author)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  Insider trading refers to trading on stocks by employees of a corporation based on information that is not available to the public. Finally, the importance of the financial markets has grown disproportionately and, over the years, their share as a percentage of the overall economy has increased multifold. Thomas Philippon (2014), professor of finance at the Stern School of Business, New York University, undertook a study to find out how well financial markets perform their primary task of intermediation. The study covered a period of the last 30 years. According to his study, there has been no significant improvement in the cost of intermediation over the years and the benefits of technology and productivity improvement have not been passed on to the customer by the finance industry. According to Professor Philippon’s study, the cost of intermediation has remained largely steady over the years. Many people believe that finance in recent times is more about secondary market trading than intermediation. Financial market participants need to undertake serious introspection to ensure that financial markets serve the needs of the economy and that of the common man and do not overwhelm the real economy which they are expected to support. KEY CONCEPTS 1. Financial markets perform critical functions of the intermediation of funds, allocation of investments, price discovery and risk management. 2. Companies can raise funds through equity or debt. Both these instruments have very different features and risk–return characteristics. 3. Stock market, fixed-income securities market, foreign exchange market and the derivatives market are four types of financial markets based on the instruments traded. 4. The IPO is an important event by which a company raises funds from the public by issuing equity shares. 5. Secondary market enables trading of shares previously issued by the company through an IPO or otherwise and provides liquidity to investors.

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  Corporate Governance and Directors' Liabilities

  Legal, Economic and Sociological Analyses on Corporate Social Responsibility

  • Klaus J. Hopt, Gunther Teubner, Klaus J. Hopt, Gunther Teubner(Authors)
  • 2012(Publication Date)
  • De Gruyter

    (Publisher)

  Cf. Rodrian (1977: 10); Hopt (1982: 173). These rules, however, do not address other kinds of insiders, e. g. persons possessing nonpublic information in impending monetary policy actions. Disclosure, Insider Information and Capital Market Functions 339 II. Capital Market Functions There are just two capital market functions. Obviously, the first is to pro-vide companies with capital and investors with shares. This fund raising function, although most important, is overlooked at times in sophisticated discussions of capital market policy; it may be too simple. The second function is to channel the funds into the most desirable, most profitable 2 uses. This allocation function may be perceived as including the fund raising function and, hence, the only capital market function, because allocation of funds newly committed to business implies the raising of funds. However, since the allocation function is restrictive and the fund raising function is ex-pansive, the distinction may prove useful, e.g. in times of high unemploy-ment when the (proper) allocation may be neglected and the focus is on raising capital to create employment. If shares of all companies sold at the same price (given a fixed number of shares offered) there would be no discrimination of any share issuing company, and thus no allocation. The discrimination is brought about by the market's valuation of the shares. It is important to realize that the market does not provide a company which is planning a particular project 3 with capital on the basis of the funds needed to implement the plan. The market may provide more or less, depending on the value it attributes to the shares. The value of the share issue is generally arrived at in the following way: The investors or the underwriters forecast the expected future pay-ments from the project to the shareholder, and assess the relative riskiness of these payments, finally discounting them at the proper, risk-adjusted rate.

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