Important of Financial markets

    Financial markets

    There are many things that the financial market makes possible, including the

    following. The financial market provided a place where participants like investors

    and debtors regardless of their size, will receive fair and proper treatment. They

    provide individual companies and govt. Organizations with access to capital. The

    financial market help lower the unemployment rate because of the many job

    opportunities it offers. As mentioned in the example above, a savings account that

    has money in it should not let that money in the vault. Thus finance markets like

    banks open it up to individuals and companies that need a home, a student loan, or a

    business loan.

    Investors aim to make profits from their Securities. However, unlike goods and

    services whose price is determined by the law of supply and demand, prices of

    securities are determined by the financial market. Firms wanting to raise funds or

    to invest surplus must enter the financial market. A financial market is a

    the mechanism for bringing together buyers and sellers of financial assets. A financial

    asset is a monetary claim on an issuer in the form of paper assets such as stock

    or bonds. In a financial transaction, one party exchanges one paper asset for another

    securities or loan. For example, debt and equity Securities are financial assets from

    the perspective of investors but are claims on assets from the perspective of the

    issuing firm. Financial markets duffers in several ways depending on the types of

    security traded practices, and buyers and sellers.

    This interaction involves the following five major steps :

    1. Raised debt and equity through the financial market.
    2. Invests these funds in various assets.
    3. Generates cash flows from its investment in these assets.
    4. pay taxes to the government, dividends to shareholders, and debt payments to creditors.
    5. Reinvents the remaining cash flows in its operations.

    Types of the financial market

    Because financial markets are highly diverse and complex, there are several ways

    to classify them. One way to categorize the financial market is by the maturity

    dates of assets, which classifies markets into money and capital markets. Another

    way to classify the financial market depends on whether the securities are new or

    already exist. This mainly focuses on capital markets because our concern involves

    long terms financing by Corporations. Well, begin, however by briefly discussing money markets.

    Money markets:

    A money market is a financial market for issuing and trading short-term debt Securities. Money markets are decentralized markets, consisting of security dealers who are linked by an electronic communication network. Leading money market centers include New York, London, and Tokyo.

    Long terms financing decisions:

    Some Corporations raise funds in money markets by issuing commercial paper, which

    is a short-term unsecured promissory note or IOU issued by a financially secure

    firm. Corporations also temporarily invest their surplus funds in various money

    market instruments, including US Treasury bills (T-bills), negotiable certificates of

    deposit, and Eurodollar market time deposits, Besides corporations, other major

    participants in money markets are govt. and financial institutions such as brokerage

    firms and Insurance Company.

    Capital Markets:

    A market is a financial market for long terms securities. The corporation may raise funds in capital markets by selling bonds, preferred stock, and common stock. Other market instruments include US Treasury notes and bonds, mortgages, state and local bonds, term loans, and leases.

    Primary Markets:

    The primary market, also called the new issue market, is a financial market for the original sale of new Securities. This market is not a physical trading exchange or location but represents a telecommunication network for selling New Securities. The issuing corporation receives the proceeds from the sale of the new Securities, less any related cost of the issue.
    The buyers who are mainly individual and Institutional investors receive a share of a new security issue.

    In primary markets, buyers and issuers of Securities may or may not negotiate directly with one another. Direct negotiation occurs when a Corporation arranges a term loan with a bank, leases an asset, or places debt privately. In an indirect negotiation issuers usually rely upon another party in selling Securities to buyers. An example of indirect negotiations includes the public sale of bonds, preferred or common stock, in which investment bankers and brokers act as intermediaries in bringing together the sellers and the buyers.

    Secondary Markets:

    The secondary market also called the aftermarket, is a market for trading existing Securities among investors, either directly or through an intermediary. Secondary markets exist for bonds, stocks, options, futures contracts, and other financial assets. Firms do not use secondary markets to raise external funds because these markets are resale. The corporation may enter the secondary market to repurchase its Securities or buy securities in other companies. Once a firm has issued its securities, investors may trade them in the secondary markets. The most important secondary markets in Bangladesh are the securities exchanges such as the Dhaka stock exchange &Chittagong stock exchange.

    Foreign Exchange Market:

    If refers to the activists where currencies of different countries are exchanged. Today’s world is much more globalized, hence it is very important to have an efficient foreign exchange market for the smooth supply of foreign currencies. It plays a vital role in the economy of a country.

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