Question

Briefly synopsize your understanding of how financial markets function. In addition, give your observation or perception on the failings of Financial Markets to certain segments of the population.

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Answer 1

Financial markets are common to each country, and play an important role in the country's economic development. Many countries have small markets, while others, including NASDAQ, have big financial markets. These markets act as intermediaries between savers and investors, or help savers become investors. On the other hand, they're also helping companies raise money to expand their business.

Price Determination: In a financial market, the demand and supply of a commodity help to decide its price. Investors are the source of the money, while the industry needs the funds. The interaction of these two participants with other market forces thus helps to determine the price. Savings mobilization: It is important that the money does not sit idle for an economy to be efficient. Therefore, a financial market is helping to bind those with money with those who need money.

Ensures liquidity: Capital with high liquidity from buyers and sellers in the financial market. This means investors can sell those assets quickly and turn them to cash whenever they wish. Liquidity is a major reason for investors to become interested in trade. Save time and money: The financial markets act as a forum where buyers and sellers can find each other quickly without making too much effort or wasting time. As these markets deal with so many transactions, it also helps them reach economies of scale. This results in lower costs and fees for participants in the deal.

If a financial market crashes, this means the price mechanism is not working effectively. One important function of the price mechanism is to assign a price to goods and services, but in financial markets, asset prices may not represent the full range of costs and benefits associated with owning or investing in those assets. For example, failing to establish the‘ risk' associated with holding a financial asset may cause a divergence between the market (or traded) value of the asset, and the true value. That can impair decision-making and lead to resources being misallocated.

One characteristic of financial markets in the period prior to the financial crash was the emergence of new security types, and hence new risk types. Low interest rates and poor returns from' free' government bonds meant global investors were looking to invest in new assets. The demand sparked the securitised debt growth, where existing debts are packaged and sold as new assets. It facilitated the introduction of new and groundbreaking derivatives and other instruments, such as CDOs. It meant however that debt holders were increasingly ignorant of the threats to which they were vulnerable. It meant however that debt holders were increasingly ignorant of the threats to which they were vulnerable. Consequently, they remained ignorant of the possible impact of individuals and organizations defaulting on their debts (or their balance sheets) on them.