Login with Facebook

What is the economic role of the financial market?

The financial market is based on the activity of two compartments whose functions are different and complementary: the primary market and the secondary market.

- The primary market is the “new” market, that of securities issues. Savers can acquire securities at the time of their creation through banks or brokerage firms.

- The secondary market is the "second-hand market," the one where transactions take place between those who wish to sell securities already issued and those who want to acquire them. It is on this market that old securities are listed. It is organized in the form of Stock Exchanges. The exchanges that take place there do not concern the issuers of securities and do not directly contribute to their financing.

What is the role of the primary financial market in the Economy?

The primary market performs two essential functions in an economy: the financing of economic agents and the allocation of resources:

Agent financing: the primary market fulfills a function of financing the economy. It balances the needs of lenders and borrowers. Three categories of securities issuers (borrowers) operate on the primary market: companies, the state, and local authorities, as well as financial institutions:

- Companies

the primary market allows companies to obtain the capital they lack to finance an investment. In return for the capital raised, companies issue securities using three methods: IPO, capital increase and bond issuance.

- The IPO

the operation consists of a company wishing to access the stock market, selling investors part of the shares making up the share capital. The introduction takes place via a public sale offer (OPV) and is accompanied by an opening of the company's capital to the public.

- The capital increase

is an operation that consists of a company, in increasing the amount of its share capital by new contributions. For this, the company issues new shares sold to investors.

- Bond issuance:

only large companies can issue bonds on the stock exchange. They have to offer higher rates than the states. The higher the rates, the lower the "rating" given by the rating agencies.

- The State and local authorities

States issue long-term bonds (beyond five years) to make up for their budget deficits. These are the assimilable treasury bonds (OAT). In addition, governments issue short bonds, treasury bills, to finance their cash requirements due to the mismatch between their revenues and their expenses. Government bonds are considered to be the safest securities on the market.

- Financial intermediaries: to obtain resources, financial intermediaries have recourse to the capital markets. They can issue bonds, stocks, or hybrid securities on the financial market (a mixture of stocks and bonds). To do this, they use the same methods as companies.

Resource allocation

The meeting point between supply and demand for capital, the primary market, allows the allocation of resources between activities and between regional and national spaces. It makes it easier to mobilize the national and foreign savings of agents with financing capacity. It facilitates the financing of investments and innovation necessary for economic growth.

What is the role of the secondary financial market in the economy?

The secondary market performs three essential functions: fixing the price of securities, liquidity of securities, and capital restructuring of listed companies:

- Fixing the price of the securities

on the secondary market, transactions are carried out after a large number of offers and requests are confronted with establishing the price of the securities. It is fixed according to the law of the offer and demand. If the title is more in demand than offered, its price rises. If it is more offered than requested, its course regresses. By setting the price, the financial market helps to determine the value of companies, that is to say, their market capitalization (market capitalization = share price x number of shares).

- The price reflects investors' expectations for the future and the results of listed companies

If investors anticipate an increase in a company's profit, they buy its shares, which increases demand and push up the price. Conversely, if investors anticipate a decline in the results of a company, they proceed to sell their shares, which increase the supply and lower the price. However, investors' expectations are sometimes irrational, which generates speculative bubbles and disconnection between prices and corporate results.

- Securities liquidity

liquidity is the characteristic of security that can be bought and sold quickly, without high costs and without a capital discount. The ability for investors to easily sell their securities is a decisive factor in encouraging them to subscribe when new securities are issued. It is the secondary market that ensures the liquidity of securities, stocks, and bonds. A market is considered all the more liquid as it welcomes a large number of transactions and operators.

- Capital restructuring of listed companies

the secondary market allows the external growth of companies by acquiring share packages, to acquire stakes in other firms or to merge with them. The secondary market offers to any investor who wishes to take control of a listed company, three instruments: stock market picking, takeover bid, and takeover bid.

- Stock picking

stock market transactions being free, it is enough to take control of a listed company, to buy half of the shares plus one. This method is long and expensive. It is visible, which gives the managers of the target company time to organize themselves.

- The public takeover offer (OPA)

is a financial transaction allowing a company to take control of another, with or without the agreement of its managers. It is done by proposing to the shareholders of the target company to buy their shares from a price higher than the price observed on the market. This procedure is severely regulated by the Financial Markets Authority (AMF).

- The public exchange offer (OPE)

is close to the takeover bid, but shareholders are offered a settlement in the form of securities, generally those of the company carrying out the transaction. In addition to these three economic functionsfinancial market, the secondary market provides operators with transparency and security of transactions.



Comments




Send Comment

Need a custom
essay?

We will write it for you.
Order now

Free Essay Examples

Free essays:

Analysis of Consumption and Investment
Analysis of Business Cycles
Analysis of Fiscal and Monetary Policies
An Overview Of Economic Studies
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Broadcasting: How to Be Good In Front of the Camera
Bioconjugates for the Drugs Delivery
Cells of Immune system
Challenges that IT Managers are facing
Cochlear implant: what it is and how it works
Current challenges to the health of women
Doppler ultrasound or simply eco Doppler
DNA extraction
Dynamic Systems Modeling with Machine Learning
Digital Imaging: What Is It?
Economy analysis: Business Cycle and Economic Trends
Exchange rate and foreign currency risk
Economic Factors Affecting Decision Making In A Business
Economy Analysis: Inflation, Unemployment And Policies
Factors Influencing Interest and Exchange Rates
Fiscal and Monetary Policies in Response to 2008/2009
Fermentation: how it works and what it is used for
Financial Markets and Functions
Genetic regulation networks: modeling in biology
How does the economics of war affect society?
How can immigrants blend in the American society?
How to make your business survive at economic crisis
Importance of corporate sustainability
Interaction of Consumer and Firm Choices in Markets
Introduction to Microeconomics
Introduction of Microfabrication techniques
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Methods of labeling of nucleic acid that enable their detection
Macroeconomics: International Economic Issues
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Overcoming Hiring Challenges for Nonprofit Organization
Principles of Microeconomics - Producer Theory
Principles of Microeconomics - Consumer Theory
Principles of Economics
Role of media in wartime.
Role of technology in the modern business environment
Role of Homeostasis in Human Physiology
Role of a digital artist
Skills in Journalism: Effective Interview
Systems biology - An understanding the functioning of biological systems
Self-assembly for biological systems
School of American Ballet
Types of corporate responsibility
The Role of Government Policy in Improving Economic Outcomes
Types of bioreactors and their applications
Technological perspectives and reflections of neural engineering
Understanding Perfect and Imperfect Competition
Ultrasound: physical principles and image formation
Understanding social entrepreneurship
Understand the importance of investigative journalism
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What is MBA with Concentrations
What are the Causes of financial instability?
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 strategies to maximize corporate profits
13 Best colleges for political science in the world
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations