What is a financial market?
It is a market for lending and borrowing funds, and a market in which a traded product has a maturity period of less than one year is called a money market, whereas a market in which it exceeds one year is called a long-term financial market.
A financial market means the place where funds are traded, but there are several classification methods. One of them is to focus on the flow of money from the fund provider (surplus department) to the fundraiser (shortage department). From the perspective of intermediary, this means, the flow of funds is further divided into two main types:
- The securities market (this is known as direct finance)
- Through financial institutions such as banks (this is known as indirect finance).
Direct finance:
This means that a company issues securities (stocks, bonds, etc.) and receives the funds necessary for the business directly from general investors. Companies pay dividends and interest to investors when they make a profit from their business activities. On the other hand, investors provide funds directly to companies, so if a company goes bankrupt, the funds provided will bear the loss (risk) that cannot be recovered.
Direct financing is carried out is the securities market, which is divided into the “issuing market” where securities are issued and acquired, and the “secondary market” where securities that have already been issued are bought and sold.
When these two markets are organically related and interact with each other, the securities market functions as an efficient allocation and use of funds.
Indirect finance:
This means that a company collects the funds necessary for its business by borrowing from a financial institution (bank, etc.). The funds lent to companies are called “indirect” because they are money collected as deposits from ordinary people.
Depositors do not know to which company their deposits are lent. In addition, even if the lending company goes bankrupt, the deposit will not decrease unless the bank goes bankrupt (nowadays, if the bank you are depositing goes bankrupt, you will be guaranteed up to 10 million dollar and interest.) Since the loan from a financial institution has a repayment deadline, the company will use the borrowed funds – though this must be returned, stocks on the other hand do not need to be repaid in principle, so they can be used as stable funds for a long period.
In general, it is said that indirect financing is suitable for short-term working capital, and direct financing is suitable for long-term capital investment funds.
What is the role of finance in the first place?
Finance is literally a system that accommodates money and where you need it. In the private sector, there is a mechanism to send money to where it is needed and have it work efficiently. For example, as a company grows, it always needs money. Money is the precursor to new product development costs, new employment, and capital investment. Raising funds efficiently is an important point in corporate finance when it comes to managing corporate money.
Stocks are both risk money and “capital”, and are funds that do not have to be repaid.
Capital is the essence of finance that shares risk and receives a fair return commensurate with the risk. Without this system, new businesses cannot be started and developed. There are always risks associated with new businesses. If we follow the precedent and repeat only the risk-free options, we are trapped in the world of the traditionalist and Weber’s “eternal yesterday.” When you dare to open up an unknown world, you cannot make new profits without risk.
Raising Funds:
There are three main ways to raise funds. The first is bank borrowing, which is a direct loan from the perspective of the bank. Next, there are two ways for companies to procure directly from the market, one is the issuance of shares and the other is the issuance of bonds. Bonds, like borrowings, are debt and money that must be repaid during the maturity period.
Banks, securities companies, insurance companies, general companies, national governments, local governments etc. participate in the money market and it plays an important role as a place for financial adjustment.
The money market is divided into an interbank market and an open market. In the interbank market, only financial institutions participate in transactions, and the main market is the call market. In the open market, general companies other than financial institutions can participate in transactions. There are also bond repurchase markets, repo markets, CP (commercial paper) markets etc.
The market for buying and selling financial products, including the stock market, may be called the financial market in a broad sense.
Summary:
In this way, the financial market is the “national backbone” that supports the real economy. In this way, financial markets are essentially unsung heroes, helping companies, helping the country, and supporting the lives of citizens. In addition, in the age of globalization, the national economy is closely connected to the world and forms an international financial market. At the root of that capital market is the principle “Risk money = Equity = Capital”. Capitalism requires the freedom to start a business and take risks, and an environment in which players (market participants) who take “calculated risks” and can compete within this market.