Money and Capital Markets Development Term Paper

  • Length: 12 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #65438028

Excerpt from Term Paper :

U.S. financial market. To start with, we shall have an understanding of the various concepts for the study. A Financial Market can be defined as the market that is meant for either the raising of finances or money, as it is known, or the investment of assets. (Financial Market) An investment here means the production of capital goods that are not actually meant to be consumed but are meant to be saved up for use at some future date, and an asset refers to anything that is owned by either an individual or by a group of people who possess the asset together. A financial market is therefore the place in which finance is raised or investments of assets are made. Various risks are present in the market, and these are also dealt with in a financial market. A risk in financial terms means that potential harmful effect in the future that may arise due to an action taken at the present time. (Investment) A financial market is generally divided into several types. One of them is the 'Capital Market'. This is the market that is meant for long-term loans and the dealings with equity capitals. When a particular company or even the Government desires some capital for a long-term investment, it can be raised through he Capital Market. (Capital Market)

Some of the sub-sections of the Capital Market are the Stock Market, which deals with the trading of all publicly held stocks and shares and all the various investment opportunities associated with them, like for example, stock options and convertibles, etc. In the days gone by, stock trading was generally done on the floor of the stock market where individual stockbrokers were allowed to shout and scream the rates out loud. Today, most of the trading is done through the Internet via the Computer at the office or at home, and the trading is done in what is now known as the 'cyber market', where trading is done in real time by matching the orders that are being placed by the buyers and the sellers of the stocks and shares. (Stock Market)

Other divisions of the Capital Market are the Bond Market and the Primary Market. The Primary Market is the market that deals with the issue and also the placement of the securities of the financial market. The advantage in the primary market is that there is no need for any form of organized stock exchanges needed, unlike as in the secondary market. An investment banker would be able to contact a whole syndicate of securities dealers on behalf of a company that needs funds for any reason, and these stock dealers would be able to sell the new stock issue. As far as security dealers are concerned, this type of sale of securities is definitely better as far as their business dealings are concerned. This process by which stock issues are sold to prospective investors in the primary market is called 'underwriting' and the securities that are sold are referred to as 'initial public offerings', also known as IPOs. The commission that the dealers would earn is generally built into the price of the security itself, though this is not a well-known fact. (Primary Market)

The Government is generally responsible for overseeing the trading in securities in the organized capital market, while new issues that are being brought out have to have the stamp of approval from financial supervisors, who are responsible in turn for overseeing the financial market and upholding the rules and regulations that the financial market is supposed to follow in its operations. They will be ultimately held responsible for the stability of the entire financial market. (Financial Supervision) In some cases, Banks are also directly or indirectly responsible for overseeing the trading in the financial market, as they are the Institutions that provide banking and other financial services to an individual or a company or to the Government, by virtue of its possession of a banking license that has been provided to them by financial institutions that gives the bank the right to provide such banking services as the acceptance of deposits of money, the granting of loans, and so on. Sometimes it is possible for a bank to operate without a license, and these banks would be called 'non-banks', meaning that they can perform all the tasks that a bank would perform, and without a license. (Bank)

It is therefore evident that an organized and well planned Capital Market would be able to guarantee the fact that the investments that are being made are safe and sound and without risks. However, the presence of the 'Money Market' cannot be ignored, as money market is the term used for the market from which banks borrow or lend finances to each other, and deal with trading in such financial instruments as 'Certificates of Deposit' or the 'Repos and Reverses'. The trading that takes place is generally between the banks located in the most important 'money centers' that include, primarily, New York, London, Chicago, Frankfurt, Singapore, Sydney and Hong Kong among others. (Money Market)

There is, in addition to the Capital Market and the Money Market, the Futures Market, which makes dealings in commodities contracts, also referred to as 'Futures Contracts'. A Future Contract is nothing but a contract that deals with the intricacies of the agreement between two parties to either buy or sell an asset of any nature, at a fixed future date. The price is generally decided in advance, and the buyer and the seller both agree on the fixed price, which is also known as the 'Forward Price' of the future contract, which in turn is also referred to as the 'Forward Contract'. (Forward Contract)

The Derivatives Market that is another sub-sect of the Capital Market deals with a 'derivative' that is, in other words, a contract between two agencies that either deliver or receive the cash flows that are an important part of the 'derivative security contract'. The contract is based on some event that would take place in the future. A derivative can also be explained as a security that defines the value that has been derived from some security or a particular commodity or an event. A derivative market can exist for the purpose of buying and selling stock options, or for the purpose of issuing 'naked warrants' that are actually warrants that have been issued without an accompanying bond, and also for the purpose of 'interest rate swaps' that are exchanges determined by the interest rates of opposite parties, and for the progress of the 'credit default swaps'. (Derivatives Market)

The Insurance Market is also an important component of the Capital Market in general. Insurance is the way in which any risks that are undertaken by a company or an individual are protected in financial terms. This form of protection can extend for life, property, health, and so on and so forth. An insured or the person who wishes to insure will make monthly or annual payment of money called 'premiums' to the insurer, and when there is indeed a loss of any sort, the insured will be able to claim the sum of money that he has paid. A legal contract binds the insurance technicalities so that there may be a way of settling any dispute in an amicable manner. (Insurance) A completely efficient and excellently performing financial market would consist of all the above elements. It is only when all the elements are present that a financial market would function at its optimum best, thereby improving the financial situation of the country to which it belongs.

What are the need and the purpose of the existence of an efficient Financial Market? If it happened that the Financial Market was not efficient, then what would be the result? According to the Chairman of the Federal Reserve Board Alan Greenspan, in a speech made in the year 1999 at a Financial Market conference in the State of Georgia, the question of whether an efficient financial market would be able to mitigate an upcoming financial crisis in one that needs great debate before it can be answered. The first step, he felt, would be to examine the financial market of 1998, when public capital markets in the U.S.A. happened to just seize up completely after the crisis engendered by the Russian default that had taken place in the same year. It was difficult even for investment grade issuers of bonds to conduct their business at this time. The Federal Reserve happened to ease soon after this incident, and the result was that the financial markets could be restored completely in just a few weeks' time. However, this was not the only reason for the restoration; the main reason was that there are in existence quite a few back-up financial institutions, and these institutions were able to fill the gaps that had been left by the fall. Public debt issuance began to fall, and this resulted in…

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