Importance of Financial Markets
Financial markets General and Stock Exchanges trade many commodities, and specialized markets such as financial markets change trillions of dollars daily.
In economics, the financial market is an instrument that allows individuals and entities to buy and sell financial securities, including stocks, bonds, currencies, derivatives, commodities and other consumable items of value, at a low business cost and a price that reflects the supply. And demand. The stock market is centralized and regulated.
This allows companies to finance their projects and activities by selling their assets or titles. With this, the market offers investors the possibility of investing in companies by purchasing assets or titles.
The Elements that type up the Stock Market are:
- Stock Exchange is the institution where the purchase-sale of shares, public bonds.
- Issuers: are the companies that offer their shares for sale, either on their capital or obligations.
- Investors can be individuals or legal entities interested in acquiring said shares or titles offered on the stock exchange.
- Stockbrokers are the authorized representatives to carry out the purchase-sale of the securities exposed in the stock market in support of third parties.
Importance OF Financial Markets
Basically, for the IDB, a systemic problem in the financial sector invariably disturbs the real economy (companies) through its effects on credit supply and payment mechanisms. It increases the risk associated with real investment.
A clear example of the importance of financial markets has been the international crisis that is still shaking several developed countries and touching emerging economies.
Today, companies have various alternatives in the financial markets to lend money and thus carry out their growth and expansion plans. The most traditional financing is to go to banks or entities of the financial system, which grant preferential conditions to corporate clients with the best rating.
Another option is to go to secondary markets.
Companies can sell their shares or issue debt (bonds), obtaining new resources for their immediate plans. In Peru, the Alternative Securities Market (MAV) has been created, aimed at small and medium-sized companies since it facilitates their access to financing at lower rates and requires to present fewer information requirements and obligations.
The Market Maker is a member authorized by the Mexican Stock Exchange (BMV) to promote companies’ liquidity, especially in times of volatility such as the current ones. It is a practice that, at an international level, the stock exchanges are implementing—values to streamline operations.
This figure establishes reference prices during the auction session in security or Capital Market protection. It continuously maintains purchase and sale positions for a minimum number of shares and costs within the maximum spread established by BMV. This model makes it possible to smooth prices and moderate the ups and downs of issuers’ share prices, but it is not an issue related to changing market supply and demand conditions.
Financial Market Functions
The primary function of a financial market is to mediate between people who save and people who need financing. In other words, putting buyers and sellers in touch. Based on this, we can name these four primary functions of financial markets:
- Contact everyone who wants to intervene in it.
- Set a reasonable price for any asset.
- Provide liquidity to assets.
- Reduce terms and intermediation costs, facilitating the more excellent movement of assets.
Characteristics of the Financial Market
These are the main features with which we can define a financial market:
- Breadth: A broader financial market is the more significant the volume of assets traded in it. If there are several investors in the market, more invest will be change, and therefore, there will more breadth.
- Transparency: The ease of obtaining information about the financial market.
- Depth: A more profound financial market, the greater the number of buy-sell orders.
- Flexibility: Facility for quick action by agents in the event of a desire to buy or sell.
If the five characteristics are raised to the maximum, we would be facing what is called a “perfect market”.
Types of Financial Markets
in addition, there are several types of financial markets. A fundamental way to separate them is created at the time of the invest:
- Money market: Exchanged short-term financial assets (less than 12-18 months).
- Capital market: Longer-term financial assets are exchange. The variable income, fixed income and financial derivatives markets belong to this type of market.
- Capital Market. These two markets are within the capital market: fixed income and variable income markets.
- Financial market of raw materials
- Currency market (Forex market).
- Financial derivatives market :
- Organized markets: They are standard and controlled by a clearinghouse. Inside we find mainly the financial futures market and the financial options market.
- Non-organized markets (OTC).
- Spot Market.
- Insurance market.
- Interbank market.
- Cryptocurrency Market.
Who are the Financial Markets?
Financial markets end up of all the people who exchange financial assets since when we think of a call, no one comes to mind with an empty place.
So we could also say that the financial markets are complete up of all the investors who buy and sell those financial assets. And who is that public?
Almost everyone. When a married couple saves cash and invests it in an allowance plan, this method is a portion of the financial markets; if someone buys a household and asks for a mortgage, they are also part of the market.
When someone buys shares and treasury bills, they are also part of the financial markets if the government or a company issues debt. Even commodity markets are considered part of financial markets if the customer is not the final consumer.
Some economic agents have more effect than others in the financial markets. One who invests 1,000 million euros will have more control over persuasion than a person who participates in 1,000 euros. If an individual sells 1,000 euros, they will have little effect on the market.
In contrast, if a person sells vast amounts of shares of a bank, the claims of this bank will probably go downcast. In theory, in the mean while, no matter how high the quantity, if there is market breadth, the operation of that investor will be dissolve, and the financial market will once again reflect an efficient price.
That is to say, an economic market is a marketplace in which persons trade-economic securities and derivatives at low transaction costs. Some of the safeties include stocks and bonds, raw materials and expensive metals, known in the financial markets as commodities.
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