Paper Example on Financial Markets: Trading Bonds and Stocks for Years

Introduction

The financial market is the place where both companies and individuals meet to either sell or buy assets, including bonds, commodities, stocks, as well as other products. More significantly, people have been trading on the financial markets for several years, and the financial market has assisted many people in selling and buying bonds and stocks effectively, as well as helping companies to raise funds easily, which in turn has helped most companies grow. For many years now, the financial markets have grown faster and bigger than expected, and many people around the world are able to access such market to trade on the bonds and stocks raising good incomes (Bai, Thomas and Alexi 625). The market participants include the institutional investors, banks, brokers, the market makers, as well as the retail investors. The institutional investors involve the asset managers, the mutual fund providers, and pension funds; all of them participate in the financial market to generate income both for the customers and for themselves. While retail investors buy shares or participate in the financial market through spread bets. The paper seeks to explore financial markets, including research based on the financial market.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Literature Review

Research indicates that the financial system is more significant for the growth and development of every economy in the world (Bai et al. 630). More imperatively, many investors save money to accumulate funds for long-term needs as well as companies raising money with the motive of financing capital expenditures, and that needs a proper functioning financial market. In the recent years, the increased use of technology and improved communication has triggered cross-border financial transactions while increasing the effectiveness and the scope of the world financial system. Notably, most of the companies have raised funds through trading on bonds and shares, which has helped in financing many projects around the world. For instance, an investor in Nebraska may deposit money in the European bank, as well as use the money to buy a mutual fund that invests in securities in China.

More importantly, it is worth noting that the most significant and appropriate functioning financial market is often based on trust (Bai et al. 635). Understandably, the individual investors can purchase stock by using an online brokerage, deposit money in the bank, or use the broker to purchase mutual funds, thus give trust to the financial institutions that keep the money, provide advice and transaction services. Additionally, businesses and companies raise capital by engaging the investment banks and commercial banks based on suitable terms possible, trust, and proper advice.

Trends in the Financial Market

Financial market has shown tremendous transformations in the last few decades because of the advancement of technology and the use of telecommunication, as well as the globalization of both commerce and banking which has consequently caused lack of regulation, and in turn causing more competition in the financial market all over the world (Nyborg and Per 30). The increased use of technology among the financial institutions has not only led to the increased competition but also led to efficacy in the financial market, as well as internationally connected markets. Despite the importance of such development in the market, the advancement in technology as also increased problems to policymakers around the globe. For instance, Alan Greenspan, who was the board chairman at the Federal Reserve, suggested that the contemporary financial markets have exposed the many countries to shocks from the new sources (Bai et al. 639). He believed that all the central banks should create new methods to asses and reduce the risks to the financial system. A large quantity of capital rapidly moves globally due to the changes that occur in the rate of interest and those that occur in the rate of exchange. Therefore, such movements may affect local economies and financial institutions.

More imperatively, globalization has also promoted the need for collaboration at the international level, especially among the regulators in the financial markets. Several factors have led to greater challenges in the effort to improve coordination, including differing structures in different country's securities and banking industries, the reluctance of many nations to control monetary policies, and the financial services corporations in Europe. Another significant trend in the financial market is the use of derivatives. It is the security in which the value is derived from the value of other assets. For instance, the purchase of the IBM stock is referred to as derivative since the contract involved the purchase of Japanese yen. Therefore the value of IBM is based on the value of the Japanese yen, which also depends on the dollar and yen exchange rate (Nyborg and Per 38). Notably, the derivative market has tremendously increased in the last few years, thereby enabling suitable opportunities for companies, as well as exposing them to different risks in the financial market. The derivatives are used for speculations or for reducing the risks. For example, if the cost increases for the importers and the income decreases at the same time, the company may reduce the risks through buying derivatives that increase the value as the price of the dollar reduces.

Types of Financial Market

There are two types of financial markets, including the money market and the capital market. The money market helps in borrowing and lending loans, which are of the short term that can mature in less than a year. The participants include banks, corporates, and other financial institutions, and the financial market requires a large amount of money. The financial instruments that are used include a certificate of deposit, Treasury bill, and bills of exchange (Nyborg and Per 41). On the other hand, the capital market is used for buying and selling of bonds and shares. Capital market is used for borrowing and lending of long term loans. Functions of the Financial Market

Financial markets perform critical roles in the economy, including price determination, where the financial market discovers prices of the financial instruments traded upon by the sellers and the buyers in the market. The prices of shares and bonds are determined by the financial market forces; thus, the demand and supply in the financial market (Nyborg and Per 46). Another major function is the mobilization of the fund; the financial market participants determine the return of the investment fund. Therefore, issuing of the financial instruments enables mobilization to ensure that it reaches the people who need the fund. Again the financial market helps in risk-sharing since the investors can transfer their risks to the fund providers. Capital formation is another significant function of the financial market because it creates capital flow into the economy (Bai et al. 654). The financial market also plays an important function in reducing the cost of the transaction and the cost of providing information.

Effects of Financial Market on Businesses

The financial market has a great influence on the business. The prices of stock can influence investment because the business can raise capital if their investment can cause an increase in the market values, for example, during the bull market. The management in the business or companies is more flexible in their operation when the prices of the financial instrument are increasing steadily, thereby leading to increased spending by the consumers (Nyborg and Per 52). An increase in the acquisition and merger of many companies can be experienced because the financial market allows the companies to use the stock as a currency. The market also does business to reduce their confidence in implementing expansion plans or executing investment projects. Therefore, reduced business investment may deter economic growth.

Factors Affecting Interest Rate in the Financial Market

More importantly, many factors affect the rate of interest in assessing the movement of the interest rate. Notably, an increase in the growth of the economy is a reflection of the increased demand for money, which triggered an increase in the interest rate due to the increased employment, savings, as well as the increased borrowing for investment (Hardiman, Nicolas and Jean-Philippe 442). Other factors may include inflation, the value of the dollar, supply, and demand, as well as the political gains.

Conclusion

The financial market plays an important role in the growth of the economy. The financial market enables the investors to accumulate more funds for long term needs, and the companies can also raise capital for expenditures and the expansion of business, hence leading to economic growth. Most of the companies have participated in buying and selling bonds and shares, which has helped then raise funds to finance different projects around the world. It is worth noting that the advancement of technology and the improved telecommunication around the world has enhanced effectiveness and efficiency in the financial markets. The use of derivatives also has important because it can be used for speculations or for reducing the risk in the financial market.

Works Cited

Bai, Jennie, Thomas Philippon, and Alexi Savov. "Have financial markets become more informative?." Journal of Financial Economics 122.3 (2016): 625-654.

Hardiman, Stephen J., Nicolas Bercot, and Jean-Philippe Bouchaud. "Critical reflexivity in financial markets: a Hawkes process analysis." The European Physical Journal B 86.10 (2013): 442.

Nyborg, Kjell G., and Per Ostberg. "Money and liquidity in financial markets." Journal of Financial Economics 112.1 (2014): 30-52.