Financial Markets and Institutions

Name

Institution

Introduction

The financial system consists of all instruments, institutions and financial markets. Financial structure is specifically of significance in relocating funds hence offering a foundation for continuous reorganizing of economy that is required to support development. Countries that have well advanced financial system do observe greater portion of investment allocated in fast developing sectors.

Roles

The basic role for many financial institutions is to offer liquidity to economy and allow for higher rank of economic task than it would be. These may be achieved through the following ways managing markets, offering credits and pooling of risk between customers (Madura, 2011). On the other hand, financial markets play a crucial role in capital accumulation and processing of products and services. The value of credit and gains on investment give signals to consumers and producers. The signals assist to direct funds to businesses, governments, consumers and investors who would need to borrow cash through linking those who rate funds highly too willing lenders. The existence of a developed financial institutions and markets facilitates global flow of funds among countries (Madura, 2011). In addition, effective and efficient financial institutions and markets tend reduce transactions and search costs in an economy. By offering an extensive collection of financial products through varying risk and mode of pricing structures as well as maturity, when the financial market system is well developed it provides products to market participants which offer lenders and borrowers equivalent for their requirements. Governments, individuals and businesses in need of capital may easily determine which financial markets or institutions can offer funding and the cost borrower will incur. This permits investors to be able to compare cost of funding to expected gain on investment, thus creating investment alternative that suits their requirements.

An example is in the integrated European Union (EU) financial markets. The EU through its single currency and banking market Euro has developed a Europe base financial institutions and markets. These markets utilizes Euro to promote saving, borrowing, lending and investment. Euro dominates bond, stock and all derivative markets that serve EU countries using Euro (Madura, 2011). In addition, Euro increases the attraction of Euro centered financial instruments and market to entire world. Euro has eliminated cross border risks of exchange rate, which are portion of transactions among countries having different currencies.

Different between primary capital and secondary capital

The different between primary market and secondary market is in primary market company issues securities to investors who purchase them directly; whilst in secondary market securities are traded between investors themselves, the corporation with securities being traded cannot participate in transaction. When a firm publicly trades new bonds and stocks for its first time in the market then it operates on primary capital market (Graffins, 2016). In most cases, it normally takes shape of IPO (initial public offering). If investors buy securities on primary capital market, firm providing securities has already appointed an underwriting company to review providing and developed a prospectus-summarizing price and other information of securities to be issued.

Secondary market can be termed as a place of purchasing securities after the firm sells its bonds and stocks provided on primary market. Secondary markets range from Nasdag, London stock exchange or New York stock exchange (Graffins, 2016). Secondary market provides a platform for small investors to sell or buy securities, as they do not exclude IPOs because of small capital representation. Secondary market offers a chance to any person who wants to purchase securities as long as they show willingness in price payment for security being purchased. In most instances, an investor needs a broker in trading securities on investor’s behalf. Security price fluctuates with market and investor cost involves broker commission paid. Security volumes sold varies daily as security demands fluctuate (Graffins, 2016). The investor’s price payment is not directly linked to security price initial as concerned by first issuance; also, the firm issuing security should not be in partnership to any purchase between two investors. The firm has a privilege to be involved in secondary market of stock buyback.

Differences between money and capital markets

Money market can be termed as short-term utilization mainly assets taking one year. In contrast, capital markets can be utilized for long period basis incorporating any assets that have maturity over one year (Bagehot, 2013). Capital market consist the stock (equity) market and bond (debt) market (Graffins, 2016). Capital and money market contain a large part of financial market applied in management of risks and liquidity for individuals, governments and companies.

Capital Markets

These are viewed as worldwide followed markets. Both bond and stock markets are closely tracked and daily trends analyzed as proxies to be used for general economic circumstance of global markets (Graffins, 2016). Due to operating institutions for capital markets commercial banks, stock exchanges and all corporation types involving nonbank institutions like mortgage banks and insurance firms are analyzed.

The operating institutions in capital markets acquire them for raising capital in long period purposes like acquisition or merger; enter in a new trade or line expansion, or for capital projects. Firms raising funds for the long period purposes originate from more or single capital markets. Firms in bond markets may provide debt in corporate bonds form. Similarly, firms may opt to raise funds by issuing stock market equity. Government firms are generally not held publicly thus they do not normally offer equity. Government entities and companies that provide debt or equity are seen as market sellers.

Securities buyers in capital market seem to use money targeted for an investment of long-term. Capital markets viewed as risky and not mostly used in investment of short-term monies. Many investors take capital markets in saving their education or retirement since investors have long horizons time that mostly shows that they take risks and are young.

Money Market

Money market mostly access in line with capital markets. Investors willing in taking more risk while acquiring patience in investment are advised to venture in capital markets. The money markets mostly are viewed as the best place to invest funds that require shorter period less than a year (Bagehot, 2013). Financial instruments applied in the capital markets range from bonds and stocks, but instruments applied in money markets include exchange bills, acceptances, collateral loans and deposits. Institutions working in the money markets involve acceptance houses, commercial banks and central banks.

Money market offers various functions for government entities, corporate or individual. Liquidity is termed as the major reason for acquiring money markets. During the issuance of short period debt, for operating expenses purpose, government, or firm working capital and not projects for large scale or capital improvements (Bagehot, 2013). Money market acts a vital function in ensuring governments and firms enhance appropriate liquidity level daily without lacking and requesting expensive loan without having excess monies and losing the chance of gaining funds interest.

In conclusion, investors apply money markets in funds investment while capital markets are seen as low risk; investors have a tendency of accessing them by anticipation that the liquidity is present. Elderly people staying on fixed income normally apply money markets due to safety connected to this investment process.

References

Bagehot, W. (2013). Lombard Street: A description of the money market. Kitchener: Batoche.

Graffins, F. (2016). Issue Information. Financial Markets, Institutions & Instruments, 25(3), 167-168. doi:10.1111/fmii.12058

Madura, J. (2011). Financial markets and institutions. Australia: South-Western College Pub.