Financial markets refer to the system where people trade in financial securities, commodities, and other items of value (Mishkin, 2007). Low transaction costs characterize the markets, and the prices are affected by the forces of supply and demand. The common securities and commodities traded in these markets include stocks, bonds, precious metals, and agricultural products (Santomero & Babbel, 2011). Several activities take place in the financial markets. This paper reviews some of these activities using examples for illustration.
The operation of the financial markets is enabled by the activities of the various financial institutions. These include brokerages, insurance companies, investment banks, commercial banks, and investment companies (Mishkin, 2007). The brokerage firms are some of the most important players in financial markets. The brokerage firms help to facilitate the activities of the markets by acting as the intermediaries between the sellers and buyers.
They are, in turn, paid through commissions for their work. For instance, when an investor purchases a security, he pays the broker a commission for facilitating the trade. Insurance companies are players in the financial markets through their work of pooling risk. They collect premiums from people in return for helping them manage their risks and preserve their wealth. Investment banks help in underwriting financial securities offered by businesses and governments. For instance, if a company wants to issue a bond, it can use an investment bank as an underwriter. Commercial banks provide security to the financial markets. Individuals and institutions operating in the financial markets can make deposits and get loans. These funds are then circulated in the financial markets (Mishkin, 2007).
One of the core activities in the financial market is mobilizing funds from various individuals or organizations. The markets are often open to a variety of investors, both from the private and public sectors. These investors mobilize their surplus units and place them in the markets (Santomero & Babbel, 2011). This is through the purchase of bonds, stocks, or other commodities in the markets. An example is through the purchase of government bonds. Individuals can use this as a form of saving, since it is one of the most secure financial security in the market. Government bonds are often given for a period of time such as ten years. It means that an investor will have saved a certain amount of money over that duration of time.
The financial markets are made up of different components. These components play a significant role in promoting the development of industries. This is achieved through the utilization of the savings made in the markets (Santomero & Babbel, 2011). For instance, a company can offer a corporate bond intended to raise money for the building of an industrial complex. If the bond is successful, the company launches its project, manufactures goods, and creates employment for the people. The industries further develop through the provision of markets for their commodities.
Financial markets help entrepreneurs to get funding for their business ideas. One of the biggest challenges facing entrepreneurs is a lack of capital. With the financial markets, they can get some of the funding needed for their operations. An example is whereby an entrepreneur starts a company, but lacks adequate funds for expansion. To raise the required capital, an entrepreneur can choose to make the company public by listing it on the stock exchange. The listing invites members of the public to purchase stock in the company, and this gives the entrepreneur the capital needed for growth. The stock exchange carries out an initial public offer (IPO), whereby the investors are officially invited to purchase stock (Hillier, Grinblatt & Titman, 2011). The investors, thus, become part owners of the business. Investors can provide the entrepreneur with additional ideas on how the business can be grown.
The IPOs takes place through a number of activities. The entrepreneur must first develop a management team that will attract the interest of investors. Since finances are involved, people want to be assured that they are investing in a sound company. A management team helps to bolster this confidence. The business should also improve on its corporate governance, and this often entails the appointment of a board. The board should provide oversight to the operations of the management, while representing the interests of the shareholders. The entrepreneurs must then grow the business so that it is attractive to the marketplace. While the intention of an IPO is to get funds for growth, the marketplace must be convinced that the existing business is on a growth path (Hillier, Grinblatt & Titman, 2011).
This means that there must be some projects that have been successful for the business. There must be a clear path to how getting the additional capital can benefit both the business in terms of growth and the investors in terms of returns. Different countries have varying regulations to guide the procedure of listing. However, most stock exchanges require that businesses seeking to list should provide audited financial statements. These financial statements should be prepared in line with the accounting principles preferred by that stock exchange or country. Once these steps are taken, the company gets approval from the stock exchange to market its shares (Hillier, Grinblatt & Titman, 2011). This is done through a prospectus. For instance, if a retail chain seeks to expand through additional capital gained from the stock exchange, it can follow the steps and seek approval from the stock exchange. Once the stock exchange approves, the company prepares a prospectus which lists the prevailing position in terms of financial statements. It then illustrates the need for additional capital by showing the upcoming projects. In addition, it also shows the benefits that the investors stand to gain.
The financial markets provide potential investors with a convenient platform for investments. The investors can select securities or commodities in which they wish to invest. For example, an investor can decide to invest in an agricultural forward market. This is where the investor enters into a contractor to receive agricultural products in the future at current prevailing prices (Mishkin, 2007). The investment here is the expectation that prices for the commodities will be higher than presently.
Financial markets contribute to national growth in a number of ways. For instance, it happens through the payment of taxes. The government levies charges on the transactions of the financial markets. In addition, when there is entrepreneurial growth and investment, there is economic growth with elements such as job creation and the manufacture of goods (Hillier, Grinblatt & Titman, 2011). The government also participates directly in the financial markets through the issuance of bonds and bills meant to finance national projects. These projects include the provision of social amenities and construction of national infrastructure.
The financial markets play a significant role in the economy of a country. Through the various activities that take place, it helps in achieving economic and national growth. Financial markets also help in mobilizing savings, promoting industrial growth, investment, and entrepreneurial growth. In this manner, financial markets are an important component of the economy. The activities of the financial markets are facilitated by the various financial institutions in existence. These include brokerages, commercial banks, insurance companies, investment banks, and investment companies. Without these institutions, many of the activities would be difficult to facilitate. Therefore, the institutions become part of the activities.