Should the government do more to regulate financial markets? Financial markets work best when investors are fully informed and the markets are free of fraud and manipulation. Instead this is where the government is needed to make markets more stable and improve the way they work. In an unregulated market, investors will not have enough information to guide their investments, which should not be based on rumor and hearsay.
Why are financial markets and institutions important? Financial markets play a critical role in the accumulation of capital and the production of goods and services. The price of credit and returns on investment provide signals to producers and consumers—financial market participants.
Those signals help direct funds from savers, mainly households and businesses to the consumers, businesses, governments, and investors that would like to borrow money by connecting those who value the funds most highly i.
In a similar way, the existence of robust financial markets and institutions also facilitates the international flow of funds between countries. In addition, efficient financial markets and institutions tend to lower search and transactions costs in the economy.
By providing a large array of financial products, with varying risk and pricing structures as well as maturity, a well-developed financial system offers products to participants that provide borrowers and lenders with a close match for their needs.
Individuals, businesses, and governments in need of funds can easily discover which financial institutions or which financial markets may provide funding and what the cost will be for the borrower. This allows investors to compare the cost of financing to their expected return on investment, thus making the investment choice that best suits their needs.
In this way, financial markets direct the allocation of credit throughout the economy—and facilitate the production of goods and services. Integrating existing EU financial markets The European Unionwith its single banking market and single currency, the Euro, has created Europe-wide financial markets and institutions.
These markets use the Euro to facilitate saving, investment, borrowing, and lending. Euro-denominated stock, bond, and derivative markets serve all of the EU countries that use the Euro—replacing smaller, less-liquid, offerings and products that previously were available mostly on a country-by-country basis.
In addition, the Euro likely increases the attractiveness of Euro-based financial markets and instruments to the rest of the world. Within the EU, the Euro eliminates the cross-border exchange rate risks that are part of transactions between countries with different currencies.
What happens without well-developed financial markets? In many developing nations, limited financial markets, instruments, and financial institutions, as well as poorly defined legal systems, may make it more costly to raise capital and may lower the return on savings or investments.
Limited information or lack of financial transparency mean that information is not as readily available to market participants and risks may be higher than in economies with more fully-developed financial systems. In addition, it is more difficult to hold a diversified portfolio in small markets with only a limited selection of financial assets or savings and investment products.
In such thin financial markets with little trading activity and few alternatives, it may be more difficult and costly to find the right product, maturity, or risk profile to satisfy the needs of borrowers and lenders.
More evidence that financial development matters For further research on the topic, you may wish to review a study of financial structure and macroeconomic performance by Lopez and Spiegel, economists at the Federal Reserve Bank of San Francisco.
With respect to the long-run relationship between financial systems and the economy, they reached the following conclusion: We examine the relationship between indicators of financial development and economic performance for a cross-country panel over long and short periods.
Our long-term results are consistent with much of the literature in that we find a positive relationship between financial development and economic growth.
Their findings also shed light on why financial development affects growth: These results therefore indicate that the primary channel for financial development to facilitate growth over the long run is through physical and human capital accumulation. See Introduction, Chapter 1.Why do you think financial markets are required?
What are your views on proper regulation of these markets? 2. Discuss the evolution of financial services in India.
What are the problems faced by financial services industry in India? 3. a)'Stock exchanges in India have not served their purpose.' Do you agree?
Validate your arguments. Supply and demand effects individuals, companies, and the financial markets as a whole. In some markets, such as commodities, supply is determined by a physical product. Why are financial markets and institutions important? Financial markets play a critical role in the accumulation of capital and the production of goods and services.
About this course: In this course, you will learn what the main financial markets and their characteristics are as well as how they are linked to the economy. Our very diversified team of experts will start by teaching you how the price of stocks and bonds are computed and why they move while you. Secondary markets exist to enable buyers and sellers to resell their products and contracts to a third party. The most well know secondary financial market is the stock exchange, which allows trading in company shares that have been issued in the past. All financial markets have a primary and secondary element to them. Why do you think these institutions have become so important in the modern financial system? 8. Why do banks and other financial intermediaries exist in modern society, according to the theory of finance?
The price of credit and returns on investment provide signals to producers and consumers—financial market participants. Lastly, financial markets provide greater liquidity to individuals who desire it, and in so doing, allow for investment in projects with a wider variety of time horizons until completion.
Without financial markets, only individuals with extremely low time preferences would be able to make any loans at all. Financial markets work best when investors are fully informed and the markets are free of fraud and manipulation.
They also work better when there isn’t a breakdown of management control at companies, or the threat of failure of one financial institution leading to the failure of others and in turn a possible collapse in the market.
Secondary markets exist to enable buyers and sellers to resell their products and contracts to a third party. The most well know secondary financial market is the stock exchange, which allows trading in company shares that have been issued in the past.
All financial markets have a primary and secondary element to them.