Financial market

In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate: The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) The transfer of liquidity (in the money markets) International trade (in the currency markets) and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

In mathematical finance, the concept continuous-time Brownian motion stochastic process is sometimes used as a model.

Types of financial markets The financial markets can be divided into different subtypes:

Capital markets A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,[1][dead link] as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Stock market A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion at the start of October 2008. [1] The total world derivatives market has been estimated at about $791 trillion face or nominal value, [2] 11 times the size of the entire world economy. [3] The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto Stock Exchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Brse (Frankfurt Stock Exchange).

In Africa, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV.

Bond market
he bond market (also known as the credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion,[1] of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS (or alternatively $34.3 trillion according to SIFMA).[1] Nearly all of the $822 billion average daily trading volume in the U.S. bond market [2] takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges. References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. Commodity market Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.

This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency markets cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets. See List of traded commodities for some commodities and their trading units and places. Money market The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities.[1] It provides liquidity funding for the global financial system. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lending-banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

Derivatives market The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

Futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the underlying asset (stock, physical commodity, index, etc.). The aforementioed category is named "derivatives" because the value of these instruments is derived from another asset class. One of the earliest written records of futures trading is in Aristotle's book Politics. He tells the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application". Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be

plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and a sharp increase in demand for the use of the olive presses outstripped supply, he sold his future use contracts of the olive presses at a rate of his choosing, and made a large quantity of money. [1] It should be noted, however, that this is a very loose example of futures trading and, in fact, more closely resembles an Option contract, given that Thales was not obliged to use the olive presses if the yield was poor. Insurance In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Foreign exchange market The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business' income is in US dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of


its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion;

 

its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities. The transaction in primary market exist between investors and public while secondary market its between investors

Role and importence of finacial marketimg

The Role of Financial Markets in a Crisis Financial markets play an important role as financial intermediaries in the economy. Surplus funds are channeled through financial markets from those who saved their excess money to those who need money. Why is this channeling of funds from savers to spenders so important to the economy? The answer is that the people who save are not the same people who have profitable investment opportunities. Financial markets intermediate both sides and help funds get to those who need the money. Recently, financial markets are severely hit by the financial crisi s. Adverse selection and moral hazard are often blamed for the cause of financial crisis. They prevent financial markets from channeling funds to people with productive investment opportunities, leading to a sharp contraction in economic activity.

It has been frequently said that no matter how much money the government puts into the financial markets, it does not flow into the real economy quickly enough. This is mainly due to the increase in counter -party risks and economic uncertainty, particularly preval ent during the global financial turmoil and the downward trend of growth. In response, the government is pursuing restructuring of insolvent businesses, such as the construction and shipbuilding companies, in order to eliminate economic uncertainty. In addition, it will continue to provide liquidity to recoverable companies selectively through policy banks and government guarantee programs. The Bond Market Stabilization Fund was created to help resolving credit crunch in the bond market. The amount of fund is almost 10 trillion won raised by all financial institutions. And the Bank of Korea has a plan to support up to 5 trillion won which is 50% of all amounts. The institutions of funding are consists of 91 financial corporations such as 17 domestic banks (8 trillion won), 36 insurance company (1.5 trillion won), and 36 stock company (0.5 trillion won). Then let us consider the market evaluations about this bond market stabilization fund. First of all, the firms liquidity problems are solved after the founding of the bond market stabilization fund. By acting as a safety valve, this makes investors buy bonds again who were reluctant to buy bonds even with good grades. The three-year bond yield with AA-grade was 7.98% when the bond market stabilization fund was created on December 17, 2008. It fell to 5.069% on May 15, 2009, recording about 292bp decrease in six months. And that with BBB- grade witnessed about 72bp decrease from 12.07% to 11.35%. But bond purchasing time was delayed by the problem involved in raising funds and the scope of maintaining was narrow because this was raised by private party. Many market participants insisted that the bond market stabilization fund should continue to provide the insurance for potential risk although economical environment has improved. The second fund I will introduce is the Bank Recapitalization Fund. The Fund aims to strengthen banks financial soundness and ability to absorb losses in the face of a prolonged economic slump and major restructuring,

leading to a credit expansion in the real sector, including SMEs. A total of 20 trillion won will be raised by the BOK (about 10 trillion won in loans), institutional and individual investors (about 8 trillion won in investment) and KDB (about 2 trillion won in investment). With this fund, some securities such as a new kind of capital securities and subordinated bonds will be taken over. In particular, subordinated bonds will be sold to institutional investors as the type of asset-backed securities. Basically, the fund will be used to support the real economy and restructuring. But for effective supporting, the specific objective will be admitted. Commercial Banks, Corporation Banks, National Agricultural Cooperative Federation, and National Federation of Fisheries Co operatives apply for this, and then authorities fix the limit and support funds for asking. Fixing the limits is to prevent the concentration of the funds. And the authorities differentiate their funding amount depending on applicants performance such as progress in restructuring and financing foreign currency.

The Importance of Financial Markets It is always a pleasure for me to be in Brazil. It is especially a pleasure to be here at a time when Brazil appears successfully to have surmounted the crisis of last year, and to be on a path that will lead to renewed growth with low inflation. And I am honored to have the opportunity to speak at this first International Derivatives and Financial Market Conference of the Brazilian Mercantile and Futures Exchange. I will be talking today about the importance of financial markets in economic growth. During the financial crises of the last decade, we all saw that a weak financial system not only makes a country open to international capital flows more vulnerable to crisis, but also exacerbates the costs of any financial crisis that does occur. The

Asian crisis countries, Thailand, Indonesia, and Korea, vividly demonstrated that. Among all the recessions associated with the financial crises of the past decade, Brazil s were the shallowest. That was in part the result after 1999 of the very skilled management of the economy fiscal and monetary policy not least during the pre-election financial crisis last year. It was also the result of Brazil s willingness to use its reserves and debt management policy actively to influence the exchange rate. Brazil s superior information system about capital flows has been very useful for policymakers. But we should not overlook the paradoxical fact that although Brazil s financial markets are in many respects highly sophisticated as the success of the BM&F Exchanges illustrates Brazil was helped during the crises by having a financial system that is much smaller,relative to the economy, than those in Asia.