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Financial Markets and Their Importance

Financial Markets

The article “The Importance of the Financial Derivatives Markets to Economic Development in the World’s Four Major Economies” by Vo et al., 2019 investigated the association between economic development and financial markets. According to the article, financial markets positively contribute to economic growth. Financial markets’ significance is realized when nations attain economic superiority (Vo et al., 2019). Financial markets are crucial to efficiently direct the flow of savings and investment in the economy, which accumulates services, goods, and capital production. Well-established financial marketplaces help lenders and borrowers accumulate more money, which is integral in producing goods and services.

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Financial markets are fundamental in a robust economy and economic expansion since they aid firms to generate revenue from investors, which is later used in development and expansion. Additionally, fiscal markets enhance investors to generate returns on their capital. When a firm expands and upsurges its revenue, the government receives more taxes, infrastructure advancement occurs, and revenue distribution intensifies. A higher flow of money in an economy fosters economic growth because of increased economic activities (Vo et al., 2019). A nation with good financial markets records an increased foreign investment, which improves the country’s infrastructure and creates jobs. A financial institution is an organization involved with financial and monetary transactions like currency exchange, investments, deposits, and loans. Various financial services institutions exist, including insurance companies, brokerage firms, and commercial banks.

A profitable bank denotes a financial society that involves primary banking, business-related banking services, which accepts offers, counter-checks individuals’ savings accounts, deposits, and makes various loans. A financial service corporation is an institution that provides a wide variety of fiscal services, including commercial banking, insurance, brokerage operations, and investment banking (Vo et al., 2019). The normal public individuals and investors prefer using financial services corporations. A pension endowment is a superannuation fund that compels an employer of a firm to make significant contributions to resources set aside for an employee’s future advantages. Retired individuals receive retirement funds after retiring from work. A mutual fund refers to funds collected from several investors and invested into specific investment avenues to generate a fair rate of returns, such as money market instruments, bonds, stocks, and other assets.

Markets

These are unrequited transfers where either the side making the transfer discovers the capital involved by setting an asset apart from inventories or cash, renouncing a financial claim excluding accounts receivable. The transfer of capital can be achieved in three distinct ways: indirect transfer via a monetary intermediary, indirect transfer through investment bankers, and direct transfer (Vo et al., 2019). The direct transfer involves transferring assets from a tax-deferred retirement account or plans to the borrower.

Direct rollovers from certified plans are a type of direct transfer, which occurs when organizations directly sell their bond or stock to savers without involving any financial firm. The benefits of direct transfer are that they are simple to trade between borrower and saver, in that, when the borrower and the saver agree with the terms and conditions, the transaction begins (Vo et al., 2019). Additionally, the transaction is cost-effective and takes a short duration to complete. Various transfers take some days to complete, although the procedure is now faster in the electronic era than in the past.

Indirect transfer via investment bank is the second-way capital is transferred from savers to the borrowers. Investment banks are financial institutions that enable corporations and individuals to generate money by underwriting. Investment banking institutions act as customers’ agents when issuing securities like bonds and stock. Investment banks also aid firms in acquisitions and mergers and offer subsidiary services (Vo et al., 2019). Investment banks help transfer capital from savers to borrowers by serving as intermediaries. A company trades its securities to an investment bank, which correspondingly trades them with the savers.

Transferring capital from savers to borrowers via investment banks helps businesses get expert suggestions from professionals concerning the sale of securities. Capital can flow from the savers to borrowers through a financial intermediary (Vo et al., 2019. An example of financial intermediaries is banks because they receive money from small savers and lend capital to borrowers, firms, and government corporations. Other financial intermediaries include pension funds, insurance funds, and mutual funds.

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Financial markets are any marketplaces where the selling of securities takes place. These marketplaces play an integral role in the good functioning of capitalist economies. Examples of financial markets include the derivatives market, forex market, bond market, and stock market (Vo et al., 2019). Physical asset markets are markets in which actual commodities are traded. Spot markets are markets whereby financial instruments are traded for instant delivery. On the other hand, futures markets are auction markets whereby participants sell and buy future commodities and futures agreements for delivery on a particular future date.

Money markets are marketplaces for short-term debt investments and involve trading between traders and institutions on a large scale (Vo et al., 2019). Capital markets are financial markets that unite buyers and sellers to trade currencies, bonds, stocks, and other financial assets. Private markets denote equity and debt investments of companies owned privately. Public businesses are publicly operated on the standard market and invested by the universal public.

Reference

Vo, D. H., Huynh, S. V., & Ha, D. T. T. (2019). The importance of the financial derivatives markets to economic development in the world’s four major economies. Journal of Risk and Financial Management, 12(1), 35.

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StudyCorgi. (2023, January 7). Financial Markets and Their Importance. Retrieved from https://studycorgi.com/financial-markets-and-their-importance/

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