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Financial Markets in the present scenario

   

Added on  2020-01-28

10 Pages3695 Words402 Views
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INTRODUCTIONFinancial systems in the present scenario has become one of the most important systemfor many economies of the world. And since almost every economy of the world is interlinked tothat of others which has made financial system very complex. Financial systems consists of allthe banks, financial institutions, and stock markets. Performance of financial markets contributesa lot in growth of the economy(Ellis and Dennison, 2016). A financial system is a market inwhich one can trade financial securities ,commodities and fungible items. Financial securitiesconsists of bonds, shares, derivatives and commodities agricultural goods and metals(Amrominand Murton, 2016).1The key functions performed by the financial systems are-Channelization Of Savings- Financial system regulates the savings of the individuals and makesit available to the borrowers who may be the companies which takes loans which helps inincreasing the production of goods & services. The increase in the production and provision ofservices would contribute in the growth of the economy.Capital Formation- Finance is the key requirement of every business. They are available throughequity or loans from banks. Thus financial systems helps to mobilize savings which lead to theformation of capital.Liquidity- An instrument is said to be liquid if it is able to convert into cash easily in a shortwhile. The financial markets provides the opportunity to the investors to convert theirinvestments into cash. However price of these investments will be determined in accordance withthe market forces of demand and supply.Better Decision Making- Financial markets helps in keeping the investors up to date about theprices of their investments and the situations of the economy. Hence it helps in making informeddecisions about the trade of investments(Amromin and Murton, 2016). This further helps theinvestors in formation of portfolio and wealth allocation.Economic Development- As the savings which are non productive for the investors is applied inthe productive forms which lead to the growth of the economy. Hence financial systems helps inthe development and growth of the economy.2

Risk Management- Financial system helps in the creation of portfolios consisting of differenttypes of securities which helps in diversification and thus minimizes the risks for the investors. Ithelps to raise finances for the companies and thus helps in availing a cheaper finances to theindustry from that of equity or any other sources (Fischer, 2016). A very crucial role is played by markets and intermediaries from which many merits are derivedto the investors, companies, and all the other stakeholders. Some of the key merits of theintermediaries are as follows-There is availability of low costs of funds to the industries as compared to the other sources forthe procurement of finances that through direct lending or borrowing. There is protection available to the investors against market failures and other risks such as nonperformance by the counter party. The intermediary keeps a proper check on the documentationsand other formalities as per the applicable laws in order to provide safety to the prospectiveinvestors. Another benefit which the most essential is there is diversification of risks which helpsin the reduction of risks of the investors. Then the concept of economies of scale can be achievedin the function of collection and lending the deposits by the intermediaries (Fischer, 2016). 2The classification of financial products based on their risks & Returns characteristics ishelpful in gaining a proper and clear understanding of them. There are risk free financialinstruments which are bonds, fixed deposits, debentures etc. On all these a fixed rate of interestsis provided by the issuer of the instrument. There is no risk in the cash flows derived by theinvestors and hence they yield a return which is low as compared to the risk bearing securities.However there is surety of the future cash inflows. Hence the investors who doesn't wishes totake any risks and also expects periodic returns will opt this type of investments. However thereis another category of financial instruments which bears certain degree of risk and thus willgenerates higher returns as compared to the risk free investments. They are derivatives, futures,options, shares, interest rate swaps etc. They all bear some risk which are related to the market,political situations of the countries. Also there are certain risks related to the internalmanagement, technological, that is on the overall performance of the companies. Based on thegeneral rule of higher the risks higher will be the returns. Hence investors investing in this typeof investments will gain more returns as compared to those investing in the risk free investments.3

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