Basics of Financial Market

Posted by | June 14, 2004 | Business | No Comments

Financial Markets/: Markets facilitating investment and credit opportunities, Financial Markets consist of Money Market, Capital Market, Insurance Market and Bond Market. So the question is how do these various markets determine the growth of the economy. The basic fact is that an economy per capita income and GDP determines, its growth. Let us take the stock market for example. If the stock market shows a favourable term then the consumers stand to gain with their stocks on the rise, this in turn leads to increase in expenditure, thereby increasing the productivity of the economy (more supply to meet the increasing demand). What determines the stock prices? There are various reasons for the stocks of a company to increase or decrease, these reasons are at times outside the reach of the central bank, and hence they cant regulate according to the condition of the economy. The reasons can be decisions taken within the industry example acquisitions, mergers, family feuds, court settlements etc .One major reasons is the financial outcome or earnings of the company which play a major part in deciding the company’s value of shares. Let us take today economy’, quarterly outcome of the companies play a major role.

Money Markets deal with short-term lending and borrowing of money and other assets. This is directly opposite to the working of capital markets. How will money flow determine the economy? The central bank has a hand over the demand and supply of money, thereby keeping in check the inflation rates. Obviously you must of heard of terms M0, M1 and M3. Let me refresh your memory M0 is liquid cash in hand, M1 is in the form of current deposit and currency in circulation and M3 is in the form of saving deposit i.e. which cannot be liquidated immediately. In many instance the demand and supply of money has played a major role in the determination of the GDP of the economy. The Central Bank usually has control over this money market and can issue orders, which might affect the supply of money and hence the inflation rate.

Insurance Market: How can Insurance lead to economic growth? Or how does Insurance market affect Financial Market? Insurance will help in bearing risks. Insurance can be undertaken by firms with poses risk threats. Employees of the company are also encouraged to apply for insurance, to avoid various risk factors. Insurance nowadays is being used as an instrument to evade tax and in this course streamline income towards bearing of risks or diverting part of the income for the future. There are manifold uses of insurance; one is that it helps in helping those industries grow which has high risk potential. Also with more and more individuals taking insurance as a future cover, accidental cover, medical cover or educational cover. There is more chance of the employees depending on their own income to meet their demands rather than take credit, also the dependency of the older generation is reduced as they have saved for their retirement days. This way there is an increase in productivity and more income generated in the economy, with more cash flow, the purchasing power parity increases, increasing demand, thereby increasing supply of various commodities and thereby increasing productivity. Thus this circle effect definitely helps in the growth of the economy.

Bonds are investments, which promises lesser risk. Bonds usually refer to Government Bonds, which provides interest on the bonds issued. Bonds yield is measured by its interest rate divided by the Government determined market price of the Bond. Thus capital can be raised by selling these bonds rather than shares or bank loans. The Government thus has a hand over the flow of money from bonds and can accordingly increase or raise the prices depending on the situation of the state.

Thus the entire above factor put together or sometimes individually determine the growth of the financial market and hence the economy. Some times factors affecting one might affect the other while determining growth. All said and done there are factors like foreign investments and income from abroad, which is a strong factor in determining an economy’s growth. These foreign Investments in order to grow need the economy to be conducive or of favourable environment, better infrastructure and a controlled inflation.

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