What Are Financial Markets?

Financial markets refer broadly to any marketplace where securities trading occurs, including the
stock market, bond market, forex market, and derivatives market. Financial markets are vital to the
smooth operation of capitalist economies.

Understanding the Financial Markets

Financial markets play a vital role in facilitating the smooth operation of capitalist economies
by allocating resources and creating liquidity for businesses and entrepreneurs. The markets
make it easy for buyers and sellers to trade their financial holdings. Financial markets create
securities products that provide a return for those with excess funds (investors/lenders) and
make these funds available to those needing additional money (borrowers).

The stock market is just one type of financial market. Financial markets are created when
people buy and sell financial instruments, including equities, bonds, currencies, and
derivatives. Financial markets rely heavily on informational transparency to ensure that the
markets set prices that are efficient and appropriate.

Some financial markets are small with little activity, and others, like the New York Stock
Exchange (NYSE), trade trillions of dollars in securities daily. The equities (stock) market is
a financial market that enables investors to buy and sell shares of publicly traded companies.
The primary stock market is where new issues of stocks are sold. Any subsequent trading of
stocks occurs in the secondary market, where investors buy and sell securities they already
own.

Examples of Financial Markets

The above sections make clear that the "financial markets" are broad in scope and scale. To
give two more concrete examples, we will consider the role of stock markets in bringing a
company to IPO and the role of the OTC derivatives market in the 2008-09 financial crisis.

Stock Markets and IPOs

As a company establishes itself over time and grows, it needs access to additional capital. It
will often find itself in need of much larger amounts of capital than it can get from ongoing
operations, traditional bank loans, or venture and angel funding. Firms can raise the amount
of capital they need by selling shares of itself to the public through an initial public
offering (IPO). This changes the company's status from a "private" firm whose shares are
held by a few shareholders to a publicly traded company whose shares will be subsequently
held by public investors.

The IPO also offers early investors in the company an opportunity to cash out part of their
stake, often reaping very handsome rewards in the process. Initially, the underwriters usually
set the IPO price through their pre-marketing process.
Once the company's shares are listed on a stock exchange, and trading commences, the price
of these shares will fluctuate as investors and traders assess and reassess their intrinsic value
and the supply and demand for those shares at any given moment.

OTC Derivatives and the 2008 Financial Crisis: MBS and CDOs

While the 2008-09 financial crisis was caused and made worse by several factors, one factor
that has been widely identified is the market for mortgage-backed securities (MBS).2 These
are OTC derivatives where cash flows from individual mortgages are bundled, sliced up, and
sold to investors. The crisis resulted from a sequence of events, each with its own trigger—
these events culminated in the banking system's near-collapse. It has been argued that the
seeds of the crisis were sown as far back as the 1970s with the Community Development Act,
which required banks to loosen their credit requirements for lower-income
consumers, creating a market for subprime mortgages.

The amount of subprime mortgage debt guaranteed by Freddie Mac and Fannie Mae
continued to expand into the early 2000s when the Federal Reserve Board began to cut
interest rates drastically to avoid a recession.3 The combination of loose credit requirements
and cheap money spurred a housing boom, which drove speculation, pushing up housing
prices and creating a real estate bubble. In the meantime, the investment banks, looking for
easy profits in the wake of the dotcom bust and the 2001 recession, created a type of MBS
called collateralized debt obligations (CDOs) from the mortgages purchased on the secondary
market.

Because subprime mortgages were bundled with prime mortgages, there was no way for
investors to understand the risks associated with the product. When the market for
CDOs began to heat up, the housing bubble that had been building for several years finally
burst. As housing prices fell, subprime borrowers began to default on loans that were worth
more than their homes, accelerating the decline in prices.

When investors realized the MBS and CDOs were worthless due to the toxic debt they
represented, they attempted to unload the obligations. However, there was no market for the
CDOs. The subsequent cascade of subprime lender failures created liquidity contagion that
reached the upper tiers of the banking system. Two major investment banks, Lehman
Brothers and Bear Stearns, collapsed under the weight of their exposure to subprime debt,
and more than 450 banks failed over the next five years.4 Several major banks were on the
brink of failure and were rescued by a taxpayer-funded bailout.

How does the financial market contribute to the growth of

an economy?
Through its complex web of operations, the financial market has a major bearing on
economic expansion. Capital formation, resource allocation, risk management, and liquidity
provision are just a few areas in which it contributes to the economy’s growth.

Let’s go through each of them to gain a deeper insight into the contributions it makes to the
growth of the economy.
Capital formation and redistribution of funds

Financial markets facilitate capital creation by providing a forum for individuals and
organisations to invest in businesses through the purchase of stocks and bonds. In turn, this
investment facilitates firms' access to the capital it needs to prosper, stimulating the economy
and creating more employment.

Further, financial markets are important as they allow for the redistribution of funds, laying
the groundwork for the ongoing reorganisation of the economy essential to its expansion.

Allocation of resources in the most effective way

A financial market also plays a vital role by allocating resources effectively. It ensures that
the economy makes good use of its resources and promotes productivity by directing funding
towards the businesses with the greatest potential for development and profit.

Managing risks

Financial markets are helpful when they come to risk management. Businesses participate in
derivative markets to protect themselves from possible financial losses, such as those for
futures on commodities and currency exchanges.

Liquidity

Liquidity is a crucial factor in the financial market. Notably, markets may have a more
challenging time finding buyers or sellers for their assets if they need more liquidity, which
might increase transaction costs and widen bid-ask gaps.

As a consequence, enterprises and individuals may find it tough to access money and obtain
cash for investment, which may lead to a drop in market activity and overall growth of the
economy.

Conclusion

The importance of the financial sector to economic growth is indisputable. The financial
market is crucial to the global economy's success because of its role in capital generation,
efficient resource allocation, prudent risk management and much more.

If you're interested in pursuing a career in finance, then Imarticus Learning’s Postgraduate

Certificate Programme for Emerging CFOs is a good place to start. This CFO course covers
the theoretical foundation of finance and accounting as well as their practical application in
real-world scenarios.

Banking
Banking is essential for managing and safeguarding money. Financial institutions, like banks
and credit unions, gather deposits from individuals. They then lend these to those in need,
acting as intermediaries. Banks offer many financial services that help people save, manage
and invest money. These services benefit both individuals and businesses.
What Is Banking?
Banking is the business of protecting money for others. Banks lend this money, generating
interest that creates profits for the bank and its customers.

A bank is a financial institution licensed to accept deposits and make loans. But they may
also perform other financial services.

The term “bank” can refer to many different types of financial institutions — including bank
and trust companies, savings and loan associations, credit unions or any other type of
institution that accepts deposits.

Why Use a Bank in the First Place?

Security
Banks protect your cash from theft and natural disasters like fires or floods. Your
insurance may not cover money lost in your home, car or on your person. But banks
don’t typically carry the same risk.
Insurance
Banking security is more than just vaults and guards. Most of your assets are federally
insured up to $250,000 by the federal government if the institution fails. The FDIC
(Federal Deposit Insurance Corporation) insures assets in banks and the NCUA
(National Credit Union Administration) insures assets in credit unions. Federal laws
also require institutions to maintain minimum levels to help them remain solvent.
Convenience
Banks allow you to access your money when you need it. They can also provide “one-
stop shopping” for financial needs from investments to home and auto loans, along
with other financial services. Convenience, along with interest rates and low fees, are
major selling points for banks.
Services to Grow Your Wealth
Banks offer many services that can help you grow wealth. These include high-yield
checking or savings accounts, individual retirement accounts (IRAs), self-directed
401(k) plans and certificates of deposit (CDs).

Role of Bank in the Economy of India

The role of banks in the economy of India can be categorized as follows:

Removing the deficiency of Capital Formation

The banks provide loans to the investors. This helps in capital formation in an economy. In
the developing economy, it helps in removing capital deficiency. The banks also convert the
dormant money in the economy into active capital by giving interest to the customers.
Helps in generating Employment Opportunities

The banks give loans to start-ups and finance their expenses. This provides impetus to the
generation of employment. The loan also helps in scaling up the firms. The banking sector
creates lakhs of jobs every year.

Helps in implementing Monetary Policy

Since the banks are the producers of money, they are very crucial in the implementation of
monetary policy. Banks by regulation of the interest rate decide the flow of liquid cash in the
economy. It also helps in combating inflation.

Financial Assistance to Industries

The financial assistance rendered by the banks is very helpful to the MSMEs and other small
informal businesses. It helps an economy to get through the recession.

Promote Saving Habits of the people

The banks attract the money of the public by giving lucrative interest payments. It helps in
promoting saving habits among people.

Banks as Safe Custody

Safe custody services are offered by banks to provide a secure place for customers to store
important items that they do not need to access frequently. Customers can store many types
of items in safe custody like a bank including important documents like wills, property deeds,
and contracts, as well as valuable items like jewelry, precious metals, and artwork. Securities
like stocks, bonds, and mutual fund certificates can also be held in safe custody with a bank.
Banks may charge fees for safe custody services which can vary depending on the size and
value of the items stored and the length of time they are held in custody.

Funds to Organizations

Banks play an important role in promoting economic development by providing funds to

organizations. By providing funding to businesses and other organizations, banks help to
create jobs, stimulate investment, and contribute to overall economic growth.

Loans by Banks

Banks provide loans to generate profits, manage risk, promote economic growth, and build
relationships with customers. By providing loans banks help to support the growth and
development of individuals and businesses which can have a positive impact on the broader
economy. Banks also provide loans to small businesses, entrepreneurs, and individuals so that
they can use this money to increase their business.
Interest on Deposits

Banks need deposits to fund their lending activities. so, they offer lucrative interest rates to
attract more depositors. This increases the funds of the banks. And then the bank can use this
fund for other activities. Different banks have different interest rates. It also varies depending
on the type of account.

How and why are banks Different from Manufacturing Companies?

The financial statements of a quoted bank and a quoted manufacturing company differ in
terms of their components and the way they are presented. Here are some of the key
differences:

1. Balance Sheet: The balance sheet of a bank and a manufacturing company

differ in their presentation of assets and liabilities. A bank's balance sheet
shows assets such as loans, cash and cash equivalents, and investments in
securities, while liabilities include deposits and other borrowings. On the
other hand, a manufacturing company's balance sheet shows assets such as
inventory, property, plant, and equipment, while liabilities include accounts
payable and other long-term debts.
2. Income Statement: The income statement of a bank and a manufacturing
company also differ in their presentation. A bank's income statement shows
interest income, net interest margin, and net profit from operations, while
expenses include interest expense, operating expenses, and loan loss
provisions. A manufacturing company's income statement shows revenues
from sales of goods, cost of goods sold, and gross profit, while expenses
include selling and administrative expenses.
3. Cash Flow Statement: The cash flow statement of a bank and a
manufacturing company also differ in their presentation. A bank's cash flow
statement shows the movement of funds in and out of the bank, including
cash flows from operating activities, investing activities, and financing
activities. A manufacturing company's cash flow statement shows cash
inflows and outflows from operating, investing, and financing activities, but
with a focus on manufacturing operations.

In summary, the financial statements of a quoted bank and a quoted manufacturing company
differ in terms of their presentation and the components that they include. Banks tend to have
a more complex balance sheet, income statement, and cash flow statement, while
manufacturing companies tend to focus on inventories, cost of goods sold, and selling
expenses.
Production cycle for Banking and manufacturing

Recruitment vs. raw material purchase

Banking

Bank sets the strategy and corporate culture that drives the competencies and skills needed to
have the right person in the company for different line of business. In order to be efficient
works with human capacity management frame and controls organization to control the stock
of the head count

Manufacturing

In order to have the right product at the end company sets the rules, types of raw material
they need and also the level of stocking

Education vs. Pre-production

Banking

Human resources creates a curriculum of learning to teach each hired employee the facts of
the company for strategy, rules, ethics, how to do the job facts and develop skills

Manufacturing

Manufacturing mixes raw materials with ingredients and other necessary materials to turn
raw materials into semi-product

Assignment vs Production
Banking

Bank creates a common approach to successor management to have the best possible plan for
recruitment of whole levels of the organization. This program covers all levels with a
common approach for different segments and positions. But in total it represents and serves
to a common target. at the end assigning people to right jobs at the right time is the target

After a well set targeted education company human resources assigned employees to the jobs
they were originally recruited for. This is where we also decide on compensation level and
benefits depending on the jobs an employee assigned to. Human resources also puts
performance system in place to check if the desired production level reached, surveys to
check the employee morale and satisfaction so company continuously improved the
environment and conditions to keep production health.

Manufacturing

Semi-products are ready so production starts for the each assembly line set for different
products. After company finalizes the manufacturing of different products packaging starts
for different segments to fill the shelves. During the production there are people or robotics in
place to check the quality of the production and also keeps the production environment at the
best hygiene level so product is not affected and infects are minimized.

Conclusion;

In general terms target of human resources is to keep the engine running so company can
produce successful products that is desired by the market. In banking human resources targets
to have best desired employees so that they serve to the needs of the market to create
sustainable success.

Banking should understand that credit packages or deposit rates are not products. The
branches are not work places. All these are the side materials or places you ease your
employee condition to create sustainability with the market. I believe employees in a branch
or call center are not only representing the bank but also s/he is the “bank”. When they talk to
a customer in reality the bank is talking to the customer as in when we see a well known
product on the shelf we don’t only look at it as a product but also remember the company
values behind it.

1. There should be a strategy of the bank that feeds strategy of the human resources
2. Define what is the “focus”. Is it every single employee or selected ones? I would say
in order to get to the selected ones we need to see each single employee as our main
focus and treat them the same way in all areas so that we select the successors from
that population. Without focusing the whole you cannot achieve a healthy assignment
and succession planning, talent management program.
3. the programs , processes or any type of activity HR decides to do should support and
improve the production line
4. Expenditure of training, development, talent management or similar activities are not
cost, they are investment. So banks need to invest in these areas without “cut budgets”
in a well-structured way.
How and Why are Financial Markets Different from Product Markets?
A Financial market would trade in financial assets such as stocks, bonds, commercial paper,
options, etc. that represent an ownership or similar value position in a company, rather than
consumer markets/products, sometimes referred to as "real" assets.