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Financial markets are the backbone of any given economy. Without a proper, systematic, and dynamic financial market, a country will be nowhere when it comes to finances. The financial system of an economy works in a simple circular flow – the funds from the public are invested, which double up as capital for the economy. Every aspect of the economy then works to use this capital and generate returns – part of which is given back to the public in the form of interest, dividends, and even as wages and salaries. The circular flow of money is what runs the economy in any given country.
When talking about financial markets, you just cannot miss out on financial institutions. What are these financial institutions which hold an essential part in the whole system of financial markets? Let’s have a look.
The institutions which act as intermediaries between lenders and borrowers are known as Financial Institutions. These are basically a link between the lenders and borrowers and strive to ensure that the money which the lenders are ready to pump into the economy reaches the borrowers. Under the umbrella of financial institutions, all the relevant middlemen – the brokers, dealers, investment banks, and financial intermediaries are covered. All of these work to ensure the transfer of funds from the hands of the lender to borrower happens seamlessly.
The main task of the intermediary persons and institutions is to trade in securities and financial asset transformation. Each of the categories mentioned above have different functions and characteristics, but the ultimate aim is to ensure that a smooth transition of fund happens in the economy.
Many people don’t wish to or have enough knowledge about investing in the financial market – this is precisely when the financial institutions come into the picture. Bridging the gap between the public who either don’t have enough time or knowledge to invest in the financial markets are helped by the intermediaries. These financial institutions help to pool these funds and transfer them to the relevant borrowers – all this at a nominal cost, which usually is part of the rate of return earned by the lenders upon investment.
The functions of these intermediaries don’t stop here – they take the lenders’ funds and invest them in diverse investment options. Investing in a variety of stocks at once requires a lot of monitoring too – everything of which is done by these financial institutions on behalf of the lenders.
Financial markets are diverse in nature – there are a plethora of markets which come under the category of financial markets. Most of us aren’t aware and have our knowledge limited to that of stocks and shares. But there’s more to the world of financial markets. This post delves into the types of financial markets and the relevant details which you should know. Read on:
The most significant part of financial markets and The most known one – the stock market. The ownership of a given company is divided into smaller, easily buyable by public parts – each of this part is known as a share. The public can buy these shares if listed at a given price – the market forces then determine the prices of these shares, which tend to fluctuate every single day.
The financial market is not restricted only to shares – we have commodities too. These commodities markets have been created, especially for the trading of grains and other commodities derived from nature. The main objective behind the commodities market is to fix a price for these commodities – their prices fluctuate way too much, which makes it difficult for merchants to carry out the transactions. However, with the commodities market, the prices of these products are capped a day in advance, making it easier for wholesale transactions. Buying and selling of natural based commodities at a whole different level take place in the commodities market.
In the derivative market, the value of the contract is dependent, or ‘derived’ from an underlying asset. Futures contracts, forward contracts, and options come under the derivatives market. The underlying assets in the derivatives market vary – from stocks to commodities, to assets and even mortgages.
Foreign exchange market:
The foreign exchange market is the most happening of all. It remains active because of the innumerable transactions that take place across the world. Also known to be one of the most liquid markets of all, the foreign exchange market includes all the currencies of different countries of the world. The rates of these currencies fluctuate and are influenced by a whole lot of other national as well as international aspects.
For those in urgent, immediate need of money can borrow their required amounts from other traders from the money market. These instruments of money exchanges are short term instruments which were introduced to ensure ease of transaction and also to ensure easy facilitation of credit to traders.
Financial institutions are the soul of the financial system – major credit of smooth functioning of any given financial system and economy goes to these institutions, which act as intermediaries. The main objective of every financial institution is to bridge the disparity between the borrowers and lenders – who, in most case scenarios, don’t even know who the other party is. A huge percentage of people willing to pump funds in the economy don’t really have the required knowledge, expertise, and sometimes even time to invest funds and closely monitor their fluctuations. Here, the financial institutions come in as a huge help and patch the gap to ensure the funds of these eager lenders are put to best use.
There are four types of financial institutions.
Large corporations which handle funds put in by individuals, business, and even the government to make optimal utilization of their spare funds are known as Investment banks. The investment bank culture is thriving these days, with many known, reputed investment banks coming into the picture. The investment banks ensure that the funds of these lenders reach a broader market by investing them in the relevant stocks.
The brokers in these brokerage firms work to ensure that people’s money is invested and converted into a diversified, return-minting portfolio. Brokerage firms handle all kinds of investment options. They provide this service by charging a nominal charge – which usually is part of the returns earned by a particular person with regards to the amount he has invested. This amount is credited to the respective broker’s account in the form of commission.
Unlike Brokers, the dealers take possession of the assets – which is the main thing in which they trade. Purchasing assets at a lesser cost and then striking a deal and selling these assets at a much higher rate is what dealers do. The resultant profit is the return earned by the lender in this dealing. The dealer makes quite some money with his wits here – the amount he is entitled to is the difference between the asked price and the bid price!
The financial intermediaries have a different way of functioning – they buy an asset from the people ready to sell and then sell them a different asset – it’s a very short term claim run. Although the financial intermediaries are extremely popular and advertised on various means of communication, they are still very primitive and aren’t opted for a lot by the general public.
On an individual basis, financial markets for us are only a means of earning money and returns. We never really bother or care to look beyond that – but the reality is that financial markets are the catalyst in every economy – they go way beyond than merely generating returns. So here we’ve listed six reasons which you need to know about the financial markets. Read on:
- Borrowing and liquidity:
The financial markets are the quickest means to raise money – it can be done in a matter of a few seconds. Also, the liquidity of the financial markets, especially the money market, is really high – which makes it very easy for inter-trader transactions. Quick transfers, borrowing money can quickly happen within traders because of the system set up by financial markets.
- Price determination:
The market is all about price – the best price which can be sought out after coming to the point of equilibrium of the market forces of demand and supply. To ensure that commodities are priced reasonably, the commodities market has been specially created. Here the prices of nature-oriented commodities are fixed to ensure fair trade for both traders as well as consumers.
- Information analysis:
The financial market of a country says a lot about its economic state of affairs. Plus, the collective information about the market daily is beneficial to make financial decisions not only for the country but also for companies.
- Boosts the market:
Higher the amount invested in shares and other financial markets, greater the availability and movement of capital in the country. The citizens of a nation are always advised to invest more in shares, and go beyond investing in fixed income, generating fixed deposits or mere savings accounts. The more the funds invested, the greater will be the liquidity of the working and other capital in the country.
- Improved efficiency:
As financial markets are totally paperless, this leads to efficiency in the transactions. Not only this, the transactions are quick, without the burden of any additional costs. The returns generated, too, are tax-free, which encourages people to invest more in the financial markets.
- Transfer of risk:
Financial markets are a source of generating capital for many companies. In the process, the entire risk is transferred from the shoulders of those undertaking the investment to those who actually pump in their money as funds in these investments.