Financial market is any marketplace where buyer and seller participate in the trade of assets such as equities, bonds, currencies and derivatives. It's also typically defined by having transparent pricing, basic regulation on trading, costs and fees, and market forces determining the prices of securities that trade. The financial market also the market which facilitate the raising of funds or the investment of assets, depend the viewpoint. They also facilitate handling of various risks. The financial markets can be divided into different subtypes: capital markets, money markets, derivatives markets, future markets, insurance markets and foreign exchange.
Capital markets: A capital market is simply any where a government or a company can raise money (capital) to fund their operation and long term investment. A capital market is not a compact unit, but a highly decentralized system made up of:
Stock market: A stock market known as a stock exchange, where brokers gather to buy and sell stocks and other securities.
Bond market: Bond market is the supply and demand for the buying and selling bonds which involves the government and corporate bond into.
Money market: A money market is trade in short-term and low-risk securities. It also provides short-term debt financing and investment.
Derivatives market: A market for the sale of future, forwards, option, and other securities except for regular stocks and bonds. It might be traded on an exchange or over the counter.
Future market: A future market is an auction market which participate buy and sell future contracts for delivery on a specified future date.
Insurance market: It is a simply the buying and selling of insurance. Consumers buy insurance for risk management from insurer offering coverage for specific risk.
Foreign exchange: It is a transaction of international monetary business, as between government or business of different countries.
2.2 Ways for transferring capital
Transferring capital might happen in the position of moving funds between accounts or to a third party account at the same financial institution. There are three ways for transferring capital or funds from saver to borrowers in financial market: direct transfer, indirect transfer through investment bankers and indirect transfer through a financial intermediary.
2.2.1 Direct transfer
Savers
(Money lender)
Business Corporation
(Borrowers) Issue corporation's securities to
Receive capital or fund from
This diagram has shown about the direct transfer. A transfer of assets from one type of tax deferred retirement plan or account to another. Direct transfers are not considered to be distributions and are therefore not taxable as income or subject to any penalties for early distribution. This type of transfer is now usually done electronically, without a check being cut from one custodian to another. A direct transfer is not a withdraw a land does not incur any taxes or penalties. This allows a person to move his/her retirement assets as many times as he/she wants to plans or custodians that might be more suitable for him/her at that point in time.
2.2.2 Indirect transfer through investment bankers
Investment Banking House
Business Corporation
(Borrowers) Issue corporation's Resell corporation's
Savers
(Money lender) Securities to securities to
Receive fund from Receive fund from
This diagram has shown about the indirect transfer through investment bankers. It takes place when the investment banking becomes the consignee of the issuance of a corporation's securities where the investment bank serves as a middleman to facilitate the issuance of corporation's securities by purchasing the securities of corporation and then resell the same securities if the corporation to savers so that the money paid by the savers for purchase of corporation which acts as borrower. Therefore, the corporation's securities and the savers money merely pass through the investment banking house. By this, the capital or fund is indirectly transferred through investment banking house from savers to corporation (borrower).
2.2.3 Indirect transfer from savers to borrowers through a financial intermediary
Business Corporation
(Borrowers)
Savers
(Money lender)
Financial Intermediary Issue Corporation shares to Resell Corporation's shares to
Receive fund from Receive fund from
This diagram has shown about the indirect transfer from savers to borrowers through a financial intermediary. The financial intermediary is the middle man that also is the money lender to the corporation and can be a borrower from the savers. The financial intermediary uses the fund collected from savers to purchase and to hold the securities of other corporations as investments. The capital or fund is transferred from savers to financial intermediary when savers pay money to financial intermediary in exchange for receiving certificate of deposit or securities issued by the financial intermediary. Then, in turn the financial intermediary will further transfer this fund to other corporation. Most of the savers prefer to hold certificate of deposit and the securities of financial intermediary because they are safer and more liquid than mortgages and loans. Therefore, financial intermediaries greatly increase the efficiency of money and capital markets.
2.3 Investment Banking House and Financial Institutions
The investment banking house is an organization that underwrite and distributes the new issue of business corporations' securities to assist corporation obtain fund for financing. Merril Lynch and Morgan Stanley Dean Witter are the example of investment banking house.
2.3.1 Financial Intermediary
Financial intermediary is an institution that acts as the middleman between investors and firms raising funds, it is also often referred to as financial institutions. There have several types of financial institution:
Commercial bank: Commercial bank are the usual 'departmental stores of finance", it is an institution which accepts deposits, make business loans, and offers related services. There are also allows for a variety of deposits accounts, such as checking, savings, and time deposit.
Saving and loan associations: A saving and loan association is a government regulated savings institution in which deposits are exchange for shares of ownership and funds are invested chiefly in home mortgages.
Mutual saving fund: This is actually are similar to saving and loan associations which accepts saving from individuals and then lend out money, and the main purpose is on a long term basis to house buyers and consumers.
Credit unions: The term of credit unions refers to a non profit financial institution owned and operated by its members in deposit terminology. A credit union is typically run as a cooperative and offers a number of banking services such as deposit account and loans.
Pension fund: These are retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. Pension funds invest primarily in bonds, stocks mortgage and real estate.
Life insurance companies: It is a financial intermediary that shares the financial risk of untimely death of its policy holder.
Mutual fund: A mutual fund is a company that brings together money from many people and invest it in stocks, bond or other assets. The combined holdings of stocks, bond or other assets the fund owns are known as portfolio.
