Why do financial markets and financial intermediaries exist finance essay

Bert Scholtens Abstract This essay reflects upon the relationship between the current theory of financial intermediation and real-world practice.

Why do financial markets and financial intermediaries exist finance essay

Market is a term used in economics used to mean the combined of number of possible buyers and sellers of a commodity and the transactions which take place between them. Basically, this term is from time to time used for what are more strictly exchanges or organizations that aid the trade in financial securities such as stock or commodity exchange.

A market can either be a physical location or an electronic system. While much trading of stocks takes place on an exchange, two corporations or people may agree to sell stock without using an exchange.

Nonetheless, trading of both currencies and bonds is mostly on a bilateral basis regardless of people who are building electronic systems which are similar to stock exchanges. The market where financial securities such as stocks, bonds and commodities e.

Hans Degryse, Moshe Kim, and Steven Ongena

The efficient market prices mean the impartial price which replicates belief at combined speculation of all investors about the future viewpoint. In the financial markets, the buying and selling of stocks and bonds either takes place directly i.

These financial markets can also be either domestic or international markets. These financial markets are also defined as mechanisms which allow to buy and sell or trade financial securities. In economics, these markets enable the trade of financial securities which include stocks and bonds, agricultural goods and other fungible items at low costs and at prices which reflect the efficient market proposition.

These markets also exist in two major categories which are general markets where many merchandise are traded and specialized markets where only one product is traded.

Generally, markets work by placing many potential buyers and sellers in a central place and consequently making it easier for these buyers and sellers to find each other. The starting point of financial markets is borrowers and lenders who have different roles as described below: The borrowers of the financial market are either individuals, privately owned companies, public firms, government and other local authorities such as municipalities.

These individuals normally take short or long-term mortgage loans from banks for personal reasons including the purchase of property. The private companies on the other hand take short or long-term loans for the expansion of their businesses or upgrading their businesses infrastructure.

Public Corporations such as the railway companies and postal services also take loans from financial markets to collect required money.

To bridge the gap between government revenue and government spending, the government also takes loans from financial market. Finally, local authorities sometimes borrow the money on their own and sometimes the government borrows on their behalf "Types of Financial Market," n.

Investors in the financial market are commonly referred to as lenders. The invested money by lenders is used to fund or finance the requirements of borrowers. These types of investments include the depositing of money in savings bank accounts, paying of premiums to insurance companies, investing in the shares of various companies, investing in government bonds and the investment in pension and mutual funds.

In order to understand the main reasons why financial markets exist, we should first know the different types of financial markets which exist. These different types of financial markets are: These markets consist of both the primary markets where newly issued bonds and stocks are traded and the secondary markets where the exchange of already existing bonds and stocks take place.

These markets can also be divided into the bond market which provides financing through bond issuance and the subsequent trading in bonds and the stock market which offers the financing through shares or common stock issuance and the trading in shares. Regardless of the category, capital markets generally facilitate the raising of capital.

These are markets used for short-term, highly liquid debt securities and they basically help the short debt financing and capital. The securities in the money markets are normally safe investments with relatively low interest rate returns which are most suitable for temporary cash storage or short-term financial needs James This is a major growth sector in the financial markets which has developed since the s and s.

The derivative markets majorly trade in derivative products or derivatives in short. While stock prices, bond prices, currency rates, interest rates and dividends create risk by going up and down, derivatives are financial products which are used to control or ironically exploit risk. This kind of trading in the derivative products is known as financial economics.

The other types of financial markets in existence include foreign exchange markets for foreign exchange trading, insurance markets which facilitate the relocation of various risks, commodity markets that organize the trading of commodities and futures markets for provision of standardized forward contracts for future trading in products.

Reasons why Financial Markets Exist: Being financial mechanisms which allow people to trade financial securities, commodities, and other fungible items at low costs of transactions, financial markets exist to facilitate three main things: Through capital markets, financial markets are essential for capital or fund raising.

The financial markets majorly exist to help borrowers to find suitable lenders at a central place.Explain the main reasons why financial markets and financial intermediaries exist.

Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services.

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In the past decade the banks have become a very important part of the economy. When appearance of the finance, there is no condition to form the financial market, and there is no doubt that the finance does not need the financial intermediaries, the financial market and the financial intermediaries forms when the finance develops to a certain degree, and will improve the efficiency of the finance.

Explain the main reasons why financial markets and financial intermediaries exist. Under recent years, our financial institutions have come under intense criticism, questioning their very purpose.

In order to look at the questions that arise as to why financial markets and intermediaries exist, it is first important to look at what they are. However, to analysis and explain what is the role of financial market and financial intermediaries and why exist, are the main purpose of this essay.

Main body. 1. What is financial market. Financial markets are the markets where capital providers and capital demanders transaction through the credit instruments.

Why do financial markets and financial intermediaries exist finance essay

This chapter deals with the question of why financial intermediaries exist. The empirical literature on this topic started with event studies looking at the impact of bank loan announcements on stock market performance of firms.

Financial intermediaries exist because they improve on unintermediated markets in which the ‘ultimate’ parties (such as borrowers and savers, or firms and investors) deal directly with each other without the use of any intermediary.

The Theory of Financial Intermediation: An Essay On What It Does (Not) Explain