What is the purpose of financial markets ?

7 22 2017 - No comment
ProRealTime

Financial markets help to finance the economy

Financial markets allows companies to finance themselves by raising capital, either by issuing bonds (debt securities) or shares (titles of property). This allows them to finance business growth and their projects, by having access to long-term finance, rather than short term finance such as bank loans. For investors (whether individual savers, institutions, banks, etc.), financial markets offer the opportunity to invest capital in exchange for a return called a "dividend", and the prospect of added value if their assets appreciate. In summary, financial markets put companies that need money in contact with players who have funds to invest.

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What is the purpose of financial markets ?

Financial markets are thus a real means of financing the economy. For example, to encourage investors to finance businesses, the French Government, in 1992, created the plan d'épargne en actions (PEA), which offers a more attractive tax regime when there is long-term capital investment in French companies.

There are two types of market: the primary market, which is the part that deals with issuing and listing shares. It is also referred to using the term, initial public offering (IPO). This is where financial markets enable companies to finance themselves. Once these shares are in circulation, they can be negotiated on a daily basis on the “secondary” market. This is how several billion euros worth of exchanges take place daily on the London stock market, some investors sell shares and others buy them.

Financial markets help to finance States

States tax investors on the revenues obtained from their investments in financial markets, either through tax on financial transactions (FTTs) or tax on dividends and capital gains. Although some investments offer tax benefits, investors using simple securities accounts are taxed at a relatively high level on their profits, namely at their income tax rate.

Beyond this tax revenue for the State, financial markets also enable States to finance themselves by issuing government bonds; in France, the Agence France Trésor (AFT) issues and manages the debt, known as Obligation Assimilable du Trésor (OAT). Savers lend money to the State for fixed remuneration, in the form of a coupon, with longer or shorter repayment maturities.

Financial markets help to provide liquidity

Financial markets are places where supply meets demand, and therefore they offer a significant level of liquidity. They are the reference markets for international investors to invest their capital: each day buyers and sellers throughout the world carry out their transactions. It is this high level of liquidity which benefits both companies and States, because it is an indispensable means of funding, offering extensive output.

Financial markets, a protective instrument

Financial markets allow all investors in the market to protect themselves against a multitude of risks (currency risk, interest rate risk, risk of price reductions, etc.), in particular through derivatives. For example, businesses use currency SWAPs to protect themselves against exchange risks, or interest rate SWAPs to protect themselves against the interest rate risk. Other derivatives such as futures, options or forward contracts are used as part of risk management, whether it is banks managing their exposure or companies protecting themselves against the price variations in the raw materials they need for their business (oil for an airline for example).

Financial markets, a communication tool

Multinationals now use financial markets as a communication tool, especially through advertising effects. Although the majority of market players use financial markets for the traditional function of raising funds, large global companies such as Google and Facebook use them to impress the competition. Indeed, Facebook’s initial public entry offering created a lot of talk, a story that certainly made even the most hesitant about new communication techniques aware of this company’s strength. The respective takeovers of Tumblr and Instagram by Yahoo and Facebook, for overvalued prices, was primarily a communication strategy to impress market players and spread their financial power.

Financial markets may also enable medium-sized companies to make themselves known internationally through IPOs. In addition, a publicly traded company is subject to a number of tax obligations, regulations, etc. which reassure investors and customers by making the company more trustworthy.

What is the purpose of financial markets ?
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