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What is financial market and what is its role in the business.
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By: niwasreddy • 3 year ago
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Generally, financial markets refer to any market involve in trading (buying and selling) ofsecurities. Financial markets create a bridge between creditors and debtors or issuers and
investors. The financial markets can be categorized in stock market, bond market or
commodities market (Tarver, 2021). Moreover, we can break down the financial market into
capital markets and money markets which can be still more subcategories.
The main goal of any business is to make profit where revenue will be more than expenses.
Thus, institutions like commercial banks, venture capital firms, insurance company, investment
banks and etc. will play a vital role for borrowers to survive in competitive advantage within the
local and global market. There are six ways that affect the markets which is properly explained
in handout week 3 and it will be re-write to mention it here.
Edmans et. al. (2012), stated that "the active role of financial markets implies that any factor that
influences prices can also influence takeover activity (and other real actions). Therefore,
mispricing (e.g., due to market frictions or investor errors) can have real consequences by
impacting takeovers".
In this essence, the efficiency and effectiveness of financial markets is a major contributor to the
development of economies throughout the world. Hoffmann (2010), accentuated the impact of
financial market on performance stability and specially exchange rate. Companies involve in
foreign trade, inevitably, expose to this instability. Therefore, financial markets provide ways for
business to predict and hedge these risks via insurance companies, commodity markets, forex
markets and etc. Also, Financial markets give organization a chance to have a short-term
investment by purchasing treasury bills, deposit certificates or saving accounts interests.
To demystify how the proper use of financial markets can affect not only a business but globally,
we can have a look at today billion-dollar businesses which start with nothing and developed
with the help of financial markets such as Apple in U.S.A which started in the garage and now it
is one of the top listed company in NYSE or two famous food brands in South Africa Ocean
Basket which starts with a 26m2 shop and Anat which start their business with a food trailer.
Overall, financial Market plays a critical role in business smooth operation and sustainability.
References
Edmans, A., Goldstein, I. & Jiang, W. (2012). The Real Effects of Financial Markets: The Impact
of Prices on Takeovers. The Journal of finance.43(3). Pp.933-971. Retrieved from
http://faculty.london.edu/aedmans/Feedback.pdf
Hoffmann, M. (2010). International financial markets' influence on the welfare performance of
alternative exchange rate regimes. 62(3). Pp.442-477. Retrieved from
https://www.jstor.org/stable/i40038301
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