The Financial Market

Purpose of financial markets

The financial market plays a significant role in enabling the better operations of capitalistic markets through allocation of resources and making liquidity for corporations and business people. The markets allow sellers and buyers to trade their financial affluence by creating securities products that profit investors and make money available for borrowers. The financial market brings people together by enabling money to flow where it is needed. Therefore, the financial market provides companies with finance for hiring, investing, and growing.

Primary and Secondary Market

Primary Market emboldens direct dealings between the businesses and the investor, whereas the secondary market is where stockbrokers assist investors in purchasing and selling the stocks amongst other investors. The primary market provides ways to market new securities to investors, while the secondary market deals with securities already dispensed by the company(Joyce, et al.,2019). The primary market is more critical as it helps capital development by translating reserves into savings. It supports trades issue new stocks to increase cash straight from homes, develop the business, or meet financial obligations.

Ponzi scheme

A Ponzi scheme is an investment scheme that pays its preexistent investors with money collected from new investors. Ponzi scheme directors frequently promise the new investors that they will invest their money and make high profits with minimal or no risk involved. In most Ponzi schemes, the money is used to pay those who invested earlier, and the Ponzi scheme organizers keep the rest for them. With little or no reasonable incomes, Ponzi schemes need a continuous flow of new money to thrive in the market(Boshmaf et al., 2020). A Ponzi scheme is more likely to collapse when in a situation where the management fails to recruit new investors.

Market efficiency

Market efficiency occurs when the prices reflect the available information about the particular market; this encompasses information about economic, social, and political events. Factors that make markets efficient include availability and accessibility of cost information, cheaper transaction costs than an investment approach’s predictable profits, and investors having adequate funds to take advantage of inefficiency. Other forces that make the market efficient are the government, supply, demand, international transaction, and speculation and investments. The monetary and fiscal policies enacted by the government have a significant effect on the financial market. Equally, the strength of a country’s currency is determined by the flow of funds between the countries. For instance, countries that predominantly export constantly bring money into the country, which can be reinvested, stimulating the fiscal marketplace. The change in supply or demand of products has a significant effect on their prices.

Institutional investors

An institutional investor is an organization that pools money to buy real property securities and other investment properties or give loans. Institutional investors use other people’s money and invest it on their behalf. Institutional investors play a significant role in the economy by improving price discovery, increasing allocates productivity, and promoting management accountability. Therefore institutional investors aggregate the money that industries need to grow and offer trading marketplaces with liquidity – the lifeblood of the capital markets.

Future and forward contracts

A forward contract refers to a customizable and private agreement settled at the end of the agreement. In contrast, a futures contract has uniform terms traded on an exchange, settling prices every day. A forward contract has a high degree of default risk as the counterparty is responsible for settling payment, while future contracts have little or no risk as the payment is guaranteed on the agreed date. Forward contracts have no administrator, whereas the Commodity Futures Trading Commission controls futures.

Conclusion

The financial market is divided into primary and secondary market. The government, international transactions, demands and supply, and speculations and investment plays major role in ensuring market efficiency.

References

Boshmaf, Y., Elvitigala, C., Al Jawaheri, H., Wijesekera, P., & Al Sabah, M. (2020, October). Investigating MMM Ponzi scheme on bitcoin. In Proceedings of the 15th ACM Asia Conference on Computer and Communications Security (pp. 519-530).

Joyce, M. A., Lasaosa, A., Stevens, I., & Tong, M. (2020). The financial market impact of quantitative easing in the United Kingdom. 26th issue (September 2011) of the International Journal of Central Banking.