Financial Markets

Financial Markets

Introduction

A Financial Market is a marketplace where buyers and sellers participate in trading of economical investments, merchandise, and other fungible items of value at low transaction costs and at prices that mirror supply and demand. Securities involve bonds and stocks, and merchandise involves gold and silver coins or agricultural goods.

There are both common marketplaces (where many merchandise are traded) and specific marketplaces (where only one investment is traded). Markets work by putting many interested consumers, such as individuals, companies, and government agencies, in one "place", thus making it simpler for them to find each other (Campbell et al. 1996).

Discussion

Financial Markets could be of many types including money market, equity market (capital market), Commodity Markets, Forex Market and derivatives market.

These Financial Markets assist in the following manner:

It helps in raising capital through capital market

It facilitates the transfer/ exchange of risks through Derivatives market

It smoothes the process of Price discovery.

It assists in Global dealings with incorporation of economical markets

It allows transfer of liquidity through Money Markets.

It promotes International business through the forex markets.

Money Market

The money market is an element of financial market where government, financial institutions, national treasuries, central banks, commercial banks, fund managers, insurers, and large companies put their assets or get involve in short term lending and borrowing (less than one or two years). Money market is all about trading that includes financial instruments, such as treasury bills, banker's acceptance, commercial paper, certificate of deposit and other types of short-term obligations like asset backed securities. For transactions in the money market money is exchanged for other liquid (quickly realized) means for opportunity cost, measured in units of the nominal rate of interest. Thus, the interest rate acts as a "price" of money (Brealey, 2007).

The financial markets constitute a very complex design. It is a large system composed by many different markets. The purpose of such market is to provide liquidity funding to the global financial system. However, it is generally based on the period of trading tools in the financial markets. The financial market is divided into two major categories, namely money market and capital market. In turn, the money market is usually divided into accounting, interbank and foreign exchange markets (Cecchetti, 2007).

An accounting market is one, where it includes the main instruments, such as treasury bills, commercial paper and other types of short-term obligations (asset backed securities).

The interbank market is one, where the bank gives out loans to others for pre-determined term. The maturity period of the inter bank loan is for one week or less. However, loans that are extended for overnight term, they are extended at an interbank rate, which are also known as overnight rate. The major cause of 2007 financial crisis was exceptionally low volume of transactions in interbank lending market.

The mechanism of the money market, where the most important elements are the demand and supply of money is influenced by the general state of the economy, which manifests itself in a state of the monetary ...