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What role do primary financial markets play in the current economy? What role do secondary markets fill? Describe the relationship between financial institutions and financial markets and suggest a method by which this relationship could run smoother. Support your rationale with at least one citation from the literature.
Primary financial markets play a very critical role within the economy. First, they provide critical capital to emerging companies through the IPO process. Here, individuals with excess capital can deploy it through stock ownership of public companies. In exchange for this capital, the companies can then create further products, good, and services that ultimately benefit society. If dont properly, investors will be rewarded through capital appreciation of the stock and dividend over the course of the investors holding period. Primary financial markets ultimately help to facilitate the exchange of capital to businesses that need the capital.
Secondary markets are just as important as they also allow investors to trade stocks and financial assets, they already own. This ultimately provides investors with a large amount of liquidity and the ability to sell their assets in a quick and efficient manner. Through secondary markets, traders can also leverage their expertise and market knowledge to take advantage of pricing inefficiencies (Bryant, 1980).
Financial institutions and financial markets have a very symbiotic relationship. Financial institution can leverage their large customers and deposit base by also facilitating transactions in the financial markets. For example, JP Morgan underwrites offerings for new share issuances. It also conducts investment research that can be used by its clients to make better informed financial decision. To run smoother, financial institutions and financial markets should continue to improve disclosures to potential investors. In certain instances, investors will often need to read a 200-page prospectus or other documents in order to uncover misleading information. Through strong and continual improvement in disclosures, investors can continue to make better informed decisions.
References
1. Bryant, R.C. 1980 Money and Monetary Policy in Interdependent Nations. Washington, D.C.: The Brookings Institution.
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