The topic of this text will be the financial market, the structure and participants of such a large-scale economic system. I will go deeper into the details of all the processes, reveal the terminology, and also answer the following questions that novice investors often ask:
- what is the financial market;
- who are the main bidders;
- which brokers stand out on Russian platforms;
- How complex is the structure of the financial market.
This concept, even on a global scale, is usually associated with the direct exchange of any product for money. That is, one party gives something material, and the second pays liquid funds for it. However, in reality, money can also act as a commodity. It sounds strange, and imagining such a process is somewhat problematic. But it is precisely this principle that is the basis on which the global and domestic financial markets are built.
So that the theory does not remain a simple set of abstract phrases for you, I propose to understand this topic in more detail. I'll start by deciphering the basic terms that any investor encounters every day. Anyone can make money on the financial market by registering on the Abi forex robot website.
Formation of the global financial market
Despite the long history of money, the world market in the modern sense appears only in the middle of the 20th century. The global financial market has united national markets, and the functions of such international organizations as the International Monetary Fund, the World Bank, and large private banks began to expand.
The integration of national markets into a single financial space was influenced by the following factors:
- active growth in the use of digital technologies in the field of finance, various electronic tools lead to the integration of financial systems, a unified payment system is emerging, which brings together local markets;
- increasing the volume of transactions in national and international markets, expanding the types of securities;
- the emergence of new ways to mobilize capital;
- processes of universalization and diversification of the activities of banks and large corporations;
- privatization processes that increase the potential supply of securities on the market;
- strengthening the role of financial markets in the redistribution of financial resources in global and national markets;
- liberalization and institutionalization of markets, the number of financial institutions is growing, and they are subject to new laws that realize greater economic freedom for market participants.
Thus, the global financial market is being formed as a mechanism for regulating cash flows. It creates continuous conditions for the growth and development of production and stimulates the activity of market players.
The Russian financial market is also included in this integration process, although its development is hampered by several reasons:
- resource shortage; Russia is experiencing a liquidity crisis and low growth in capital investment in real sectors of the economy;
- the passivity of the population as a participant in the financial market, low financial literacy, fear of risks and distrust of financial institutions hinder the development of the investor market;
- high degree of risks, especially during periods of crisis.
Primary and secondary
The primary financial market exists for financial assets that are sold for the first time; this is where their first buyers appear, which is due to the name itself. Sales and purchases are preceded by either the release of relevant assets or an issue. Financial markets, their essence and types help the movement of cash flows and securities in the right and most appropriate direction. In the primary market there are investment dealers (underwriters) who are responsible for the placement of these financial objects.
They buy up either all or a significant part of the volume of securities that have been issued, then sell them to third-party buyers, and, naturally, do the latter on a reimbursable basis. Further, financial assets (in the form of securities or others) may have subsequent transactions that are completed on the secondary market, regardless of the object that is a party to the transaction. The primary market allows cash flows into circulation; these are its functions. Types of financial markets provide for long-term and high-quality movement of capital. The secondary market is absolutely indispensable here because it is there that the most important characteristics of the financial instruments used, such as liquidity or riskiness, are determined. These are the main types of financial markets.
Functions of the financial market
The global function performed by the financial market is the redistribution of free capital between countries in order to stimulate the development of the world economy.
In addition, the financial market performs the following functions:
- Accumulation of money supply. The market provides various opportunities for investing savings, which leads to increased production and market growth.
- Price regulation. The market performs the function of pricing resources on an international scale, thereby promoting a balance between the supply of the seller and the capabilities of the investor.
- Bringing financial assets to the end consumer. The market creates numerous institutions for the sale of assets: exchanges, brokerage houses, banks, etc., which allow investors and buyers to gain access to funds.
- Regulation of international financial flows. The market stimulates the development and growth of national markets by ensuring the free movement of money between them. The global market provides new and extensive opportunities for local markets in terms of investments and other financial instruments.
Functions and prospects
Detailed data regarding supply and demand for financial resources, the formation of prices for them are functions that provide information to all types of financial markets. Every detail is important here, and the quality of this work determines the change, growth and evolution of this part of human activity, along with the development of the entire world economy. A huge role is played in these functions by globalization and the organization of the international financial market. This process is very gradual, but, judging by the results of the activities of world capital, it is developing steadily.
The classification and types of financial markets are so often and widely used in everyday speech that the ambiguity of the rapidly growing capitalization is literally staggering. This concept is largely generalized, but behind it lies numerous independent definitions, which for professionals constitute an entire system, each element of which is classified according to a variety of criteria. In the classical version, the classification and types of financial markets are no longer only well-known, but also in the arsenal of every housewife, since the turnover of capital, even the most insignificant, requires certain knowledge.
Financial market structure
Money in the market takes many different forms, so ideas about its structure can be very different. There are several approaches to determining its structure. Firstly, it is customary to distinguish between a general international market and smaller national ones. The global market does not have a single legislative body and management. While national markets are run by national governments, they exist on the basis of their own currencies, and also build certain relationships with the world's reserve currencies. Therefore, the differences between global and national financial markets are quite large. Residents of countries can conduct transactions in their national currency, as well as in monetary units of other countries.
In addition, the financial market is usually classified according to functional criteria, in this case such structural market segments as foreign exchange, stock, investment, insurance and credit are distinguished.
There is also an approach that distinguishes two large parts in the financial market: the capital and money markets. In turn, the capital market is divided into stock and credit, and the money market into interbank and accounting.
Structure and development
In the CIS countries, financial markets are relatively poorly developed, and a powerful financial “boom” is expected over the next 5-10 years. Thus, those investors who start trading now may be the first to get rich in parallel with the development of financial structures in the country.
Since the development of financial markets contributes to the development of the state’s economy as a whole, the country’s leadership is extremely interested in stimulating the process of financial growth.
The main indicator of the successful operation of the financial market is its financial condition. To determine it, a wide range of indicators is used:
- State revenues and expenses.
- The state of the economy as a whole.
- Inflation.
- Military conflicts on the territory of the country.
- Volume of money issue and securities exchange rate.
- Financial condition of enterprises in the industrial sector.
- Government debt and other financial obligations.
- Balance of payments balance.
- The position of the state in the eyes of the world community.
- Level of provision with natural resources.
- Deficit or surplus of government funds.
Many words in this list may not be entirely clear to the average person. In simple terms, the state of the financial market directly depends on the current macroeconomic indicators of the country as a whole. It is also worth noting that all these indicators relate to the financial markets of a particular country, while the global financial market is more developed and stable.
However, the actively developing markets of the CIS countries have greater potential for investor earnings, this is due to a large number of unrealized opportunities and undervalued assets. Anyone who decides to work with the financial market today or tomorrow will be on the crest of a wave. And the rest will try to catch up with this wave.
Financial market participants
The complexity of the financial sector lies in the fact that entities of different levels operate here. Financial market participants are divided into two parts: supply-side entities and demand-side entities. Usually all participants can speak on both sides.
The basic participants of the financial market are:
- professional subjects;
- individuals;
- enterprises;
- government.
The greatest diversity is presented in the category of financial intermediaries (professional entities). This group includes:
- institutions serving market needs;
- international organizations, such as the IMF, which have special rights and responsibilities;
- investment companies and funds;
- trust funds;
- national and private banks;
- pension and insurance funds.
There are also many other classifications of market participants:
- by the nature of participation in operations - direct and indirect, indirect;
- according to the goals and motives of the participants - speculators, hedgers, traders and arbitrageurs;
- by type of issuer - national, regional and municipal governments, corporations, banks.
General classification
First of all, you need to understand the classification criteria. Each subtype of financial market has its own concept, and types of financial markets aim at completely different functioning. Of the division criteria, the most important are the following.
1. Assets and conditions of their circulation: the primary or secondary financial market is involved.
2. Based on the degree of organization, a distinction is made between weakly organized over-the-counter markets and well-organized exchange markets.
3. Transactions and the urgency of their implementation: spot or futures markets are selected.
4. Tradable assets and their types: the insurance or foreign exchange market, the credit market, securities or precious metals can be used.
5. According to the scope of distribution, financial markets are of different levels: global and national, regional and local.
6. The main criterion that determines the concept and types of financial markets is the period in which the assets exist. It can be a long-term capital market or simply a money market.
Financial market instruments
Transactions with money require different approaches, and therefore various financial market instruments appear, and this process continues. To date, among them the following can be distinguished:
- money and payment documents;
- stock;
- bills;
- checks;
- bonds;
- promissory notes;
- credit cards;
- certificates;
- insurance policies;
- mortgages.
Instruments are usually classified according to their validity period into short-term (up to 1 year) and long-term (over 1 year). According to the guarantee of income received - for instruments with fixed income and with uncertain income.
Definition
Experts are still discussing the structure of the financial market and trying to come up with a definition that fully characterizes this phenomenon. There are especially many discrepancies regarding the structure. Markets are distinguished based on the urgency of transactions, the regional principle, the use of certain financial instruments, the components of organizational issues, the forms of functioning, and so on. The types of financial markets in Russia since 2010 differ in terms of the instruments used, and they are divided into markets for securities, pension and insurance products, monetary and derivative instruments.
The securities market considers bills of exchange, investment shares, mortgage certificates, issuer options, bonds, shares, privatization papers and government bonds to be the main financial instruments. There are other types of financial markets in the insurance segment; here you only need an agreement between the insurer and the policyholder. Derivative instruments used in such markets include contracts - futures, options and others according to the standard, in addition - options, forwards and other derivatives transactions. The money market uses funds such as loans, deposits and other debt obligations.
World stock market
This segment of the global financial market is associated with transactions with securities. The stock market is a mechanism that provides communication between buyers and sellers of securities - stocks, bonds, etc. It has a specific legislative framework; the activities of financial markets are regulated by international and national law. The peculiarities of this market are that goods in the form of papers do not deal with material assets, but interact with such segments as the capital market, manufactured products, and money. But all these values are presented in the form of special instruments: bills of lading, futures and options, bills of exchange, mortgage notes, shares, bonds. The main function of the stock market is the redistribution of cash savings into the most promising and profitable sectors.
Exchange and over-the-counter markets: differences
In most developed countries, stock trading trends were the same: at first, municipal, government, and railway company bonds were traded; stocks were rare. However, in the nineteenth century the joint stock form began to predominate. The twentieth century gave stock exchanges not only the quantity but also the quality of trading as new technologies emerged. In the middle of it, an organized over-the-counter market appeared, the basis of which was computerization. However, exchange and over-the-counter markets were still fundamentally different from each other, including their types of activities in the financial market.
It is necessary to consider the functions of each of these institutions and carry out a comparative description in order to identify all the similarities and differences. The exchange market, unlike the over-the-counter market, has a listing and a high concentration of supply and demand. There are very strict trading rules here and absolutely all transactions are registered, so the level of risk is not so high. In addition, all bidders must have a license. The over-the-counter financial market does not have a listing, supply and demand are low concentrated there, there are no strict rules and registration of transactions, licenses are not required from trading participants, and therefore the level of risk is much higher. These are the essence, types and functions of the financial market.
Foreign exchange market
Trading in national currencies takes place on the foreign exchange market. Its specificity is that money is sold here to carry out other transactions. Typically, analysis of financial markets is based on the indicators of this segment. Currency transactions are carried out on special exchanges, the most famous of which are London, Tokyo and New York. The structure of the foreign exchange market includes international, national and regional markets. The functions of the foreign exchange segment are setting national currency rates, ensuring exchange transactions, and managing credit and currency risks. The foreign exchange market also has a speculative function, which is based on the difference in rates.
Becoming
Non-state shares appeared at the same time - on the Amsterdam stock exchange, when the East India Company announced a subscription to participate in profits, thereby influencing the types and formation of financial markets. With the help of shareholders, this trading company, over three hundred years, exported and sold practically all the wealth belonging to India. Amsterdam accordingly enriched itself by being an intermediary, not only trading shares for cash, but also conducting futures transactions, thus forming the first speculative stock market. In the eighteenth century, England took over this initiative, opening, in addition to the exchange market, the over-the-counter market, which was called the street market. London brokers made deals in coffee shops and on the pavement.
The types and structure of financial markets in those days were quite disorderly. In France it was done a little differently. At the end of the eighteenth century, a bill exchange opened in Paris, where transactions were carried out only by official brokers. For a long time, even prices were not openly announced, and the trading procedure on the stock exchange was not public. The government supervised the exchange, controlling all movements of securities. Over time, exchanges were already everywhere, and they became universal: both specialized financial and commodity exchanges were opened.
Global investment market
The modern development of the financial market largely depends on attracting finance from various spheres of production. Therefore, an investment market arises, which ensures transactions for the purchase and sale of investment goods and securities. The variety of investment opportunities makes this market complex and specific. Functions of the investment market: mobilization of capital, search for investment-attractive industries and areas, distribution of capital, activation of production and economic processes.
Who are brokers and what do they do?
Brokers are companies that represent the interests of their clients on the stock exchange for a fee. In other words, they are precisely financial intermediaries in the market.
The broker must also have the appropriate license from the Central Bank of the Russian Federation (permission to trade securities). Now on the Internet there are a huge number of offers from such companies offering their services to the common man. Anyone who wants to earn extra money in the financial market can register a personal account on the official website of the intermediary, open a trading deposit, watch video tutorials or try their hand at a demo account.
Typically, a trader chooses a broker based on the size of commissions and the size of the asset selection. The trading brokerage platform can have both browser-based and mobile versions. For example, MT4 or 5 works perfectly on both a full-fledged PC and a simple smartphone.
Remember one important rule. A quality broker puts his client's success first, because this is the only way the intermediary will receive his reward. The financial result of trading mainly depends on the savvy of the trader, which is why many firms offer their clients training in the intricacies of trading.
Global insurance market
A special part of the global market is the insurance segment. The insurance market is the sphere of operations for the sale of insurance products: policies, certificates, etc. Any financial market, banks, people need insurance. This market performs such functions as compensation, distribution, savings, investment, and precautionary. All of them are sold in different segments of the insurance market, which consists of:
- insurance organizations, insurance products;
- policyholders;
- intermediaries;
- appraisers;
- systems of state regulation of the insurance market.
Traditionally, the insurance market is divided into international, regional and national. Each segment has its own legislative framework, but today there is a clear trend towards globalization and consolidation of this market.
Time value of money concept
"Time is money!"
Who among us has not uttered this phrase at least once in our lives, perhaps without thinking particularly about its essence. Meanwhile, the principle of time-value of money is one of the fundamental principles in financial management. According to this principle, the money we have at different times has unequal value. Moreover, in business and in everyday life, the time of receiving money plays no less a role than the amount of money itself. For example, a ruble today is more valuable than a ruble that will arrive some time later, since it can already be spent on meeting current needs or invested (invested) with the prospect of receiving additional income in the future.
Let's return to our metaphor with the apparatus for producing money. Whatever the value of the cash flow output, it will only be received after a certain period of time. However, the money necessary to receive the specified flow must be “put in” into the device now.
When deciding on the advisability of such investments, you need to be able to assess future cash flows from the position of the current point in time, i.e., determine their present value (PV). To estimate the present, or current, value of future amounts, financiers use a special technique known as discounted cash flows.
