Essay Sample: Impact of Information Technology on the Financial Market

Information technology has had a profound impact on the operations of the financial market. This market covers a huge expanse of financial institutions and other practices through which lenders and borrowers can interact ("Impact of technology on the financial sector- Kemp Little", 2014). Lenders are the financial institutions that extend loans to individuals and to other institutions. They benefit through the receipt of interest payments on the loans they offer, receiving dividends and returns on the investments they make and at times an ownership stake in an institution. This market is comprised of the stock, bond, foreign exchange, futures markets among others.

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Benefits

Information technology has spurred unprecedented growth in the financial market through the creation of a platform by which numerous local and international transactions can be conducted swiftly and in a secure manner. If an investor is not satisfied with the local mechanisms available for raising finances, he can look for other options in international markets for raising the funds. The many available options for borrowers to exploit has created competition among lenders, making the cost of financing cheaper as these lenders offer their deals at cheaper rates in order to woo investors. As such, businesses have been able to expand because there are no major financial constraints to their growth.

Information technology has enhanced the functioning of financial institutions through offering enhanced data storage and analysis through which managers of financial institutions can make informed decisions. Through the creation of databases for the various aspects of their businesses, information technology has transformed the financial sector from a system of manual record keeping to digital database system that makes it easy to retrieve information("Effects of information technology on financial services systems.", 2016).

Information technology provides financial institutions with the chance to gather useful information about their customers through social media forums. Through the establishment of online communities related to their products, financial institutions are able to gather useful information regarding their clientele and in the process build brand loyalty. Some websites such as TradeKing provides the opportunity for online stock traders to discuss their picks and to advice new entrants into the market.

Shortcomings

The same technology that gives businesses opportunity to borrow from international markets also increases the probability and the potential cost of market volatility. The problem comes in with the openness that comes with the ease of using technology to transact on a global basis. This same technology can be used by investors to pull out their money or countries quickly, leaving potential devastating effects on the countries affected.

Technological advancements in the financial market has increased the risk of cyber fraud and hacking where a firms funds might be stolen online by hackers and online fraudsters. A firms exposed financial system poses a huge risk to its continued operations as its funds can be siphoned within the blink of an eye("Catalytic Impact of Information Technology on Finance", 2016). Cybersecurity risks have made firms invest huge amounts of money on this area, funds that would have been used for investment and expansion purposes.

In a bid to mitigate the negative effects of information technology, governments and all other responsible stakeholders should come up with measures to reduce market volatility and in the process avert financial crises before they strike("Importance of Information Technology in Finance", 2016). Some countries have imposed restrictions on the outflow of capital in order to prevent economic collapse. Also, cooperation between different firms in sharing ideas that can help in fighting against cybersecurity could help in reducing risk of online financial fraud.

References

Catalytic Impact of Information Technology on Finance. (2016). Law.washington.edu. Retrieved 27 September 2016, from http://www.law.washington.edu/directory/docs/winn/catalytic%20impact%20of%20information.htmEffects of information technology on financial services systems.. (2016). Google Books. Retrieved 27 September 2016, from https://books.google.co.ke/books?id=p_DqYGwRm10C&pg=PA89&dq=impact+of+information+technology+on+financial+markets&hl=en&sa=X&redir_esc=y#v=onepage&q=impact%20of%20information%20technology%20on%20financial%20markets&f=falseImpact of technology on the financial sector- Kemp Little. (2014). Kemp Little LLP. Retrieved 27 September 2016, from http://www.kemplittle.com/site/news/impact-of-technology-on-the-financial-sectorImportance of Information Technology in Finance. (2016). Smallbusiness.chron.com. Retrieved 27 September 2016, from http://smallbusiness.chron.com/importance-information-technology-finance-17292.html