The organization of financial and commodity markets and their role in international trade and economic performance

The organization of financial and commodity markets and their role in international trade and economic performance

Introduction

Financial markets, in terms of stock exchanges, are devoted to the buying and selling of financial tools called securities. Merchants first created joint-stock companies during the Middle Ages and the Renaissance to spread the risks of sea voyages and explorations carried out to establish trade with foreign markets. Stock exchanges are as old as the capitalist mode of economic production, and, with the advent of the Industrial Revolution, stocks were used to finance the infrastructures of industrial civilization.

Today the growth of capitalist societies is funded through the trading of the securities offered by companies, governments, and other institutions. Securities include stocks, bonds, futures, and options. Stocks are still the main form of securities traded in stock markets. Stocks are shares of ownership in companies owned by the stockholders.

Stockholders receive portions of the company's profit margin (dividends) and usually benefit by trading company stocks, buying them when they are at a lower price and selling them when they reach a higher price. However, if the company does not make profits, dividends are usually suspended and stocks' value may decline below the original purchase price. The stockholder may then have to sell at a lower price, losing rather than gaining money.

With the emergence of globalization, financial markets are becoming increasingly interdependent and can easily influence each other. Fluctuations in the American stock market can soon have an impact on European and Asian markets and vice versa. The crises of financial markets are preceded by the creation of a stock market bubble, caused by the development of public enthusiasm for a particular stock into herd behavior. This creates an exaggerated bull market, a type of market where prices of a given stock rise dramatically, making them significantly overvalued.

Noneconomic events can influence stock values and the volume of trading as much as the economic situation. For example, the New York Stock Exchange (NYSE), mostly known by the name of its location, Wall Street, went through cycles of growth and loss since the 1970s, when the scandals of the Richard Nixon presidency and the setbacks of the Vietnam War had a negative impact on the market.

Discussion

A foreign exchange market is the institution for the exchange of one state's currency with that of another state; actually, “the market” is made up of many different markets because the trade between individual currencies—say, the euro and the U.S. dollar—each constitutes a market. The foreign exchange (or forex or FX) markets are the original and oldest financial markets and remain the basis upon which the rest of the financial structure exists and is traded in: Foreign exchange markets provide international liquidity, preferably with relative stability. There are two key related governance issues: (1) systemic governance, that is, the international monetary system, and (2) the governance problems faced by individual governments given the currency markets.

The foreign exchange market is a ...