Essay topic the role of financial market

TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN … 0O0… ESSAY Topic: THE ROLE OF FINANCIAL MARKET Class : Banking EEP 63 Group :3 Group member: Lương Thị Thúy Hiền - 11212150 Phạm Minh Anh - 11210693 Hoàng Diệu Trang - 11215763 Nguyễn Hà Trang - 11215810 Nguyễn Vân Hà - 11211939 Ngô Ngọc Huyền -11218780 VJ Thị Ngọc 䄃Ānh Instructor: PhD Tran Phi Long Ha Noi – 4/2023 - 11210883 TABLE OF CONTENTS INTRODUCTION A FINANCIAL MARKET I Definition………………………………………………………………………….4 II The factors contributing to the financial market’s formation………………….…4 III Participants …………………………………………………………………… IV Types of financila market……………………………………………………… Debt and Equity Markets……………………………………………………… Primary and Secondary markets…………………………………………………7 3.Exchange traded maket and over the counter market………………………….…9 Money market and Capital market…………… ……………………………… 11 Official market and Unofficial market……………………………………… 14 B THE ROLE OF FINANCIAL MARKET I Funtions of financial market…………… ……………………………………….16 II Roles of financial market……………………………………………………… 17 II.Financial market in Viet Nam…………………………………………………….19 CONCLUSION…………………………………………………………….…… 20 REFERENCE……………………………………………………………………….21 INTRODUCTION It can be said that the financial market is becoming increasingly important, playing a decisive role in the development of countries, especially in the context of the current market economy The advent of financial markets made all financial activities of the economy diversified, contributing to the great advances that were decisive for the history of human civilization by promoting promote trade and economic activities to develop and at the same time is also an effective tool to help the state effectively manage the economy The financial market is a place to mobilize idle capital in the society and allocate it to investment projects to bring great benefits to society To understand this issue, the essay focuses on analyzing "the role of the financial market in the economy" Errors in the implementation process cannot be prevented because this is a very intriguing topic and has a wealth of extremely deep knowledge It is thus anticipated that the professor will contribute to making the essay better Sincerely thank! A FINANCIAL MARKET I DEFINITION  A financial market serves as an avenue for the buyers and the sellers to be involved in the trade of assets such as equities, bonds, currencies and derivatives  In economic parlance, it is a system which allows people to easily buy and sell financial securities, commodities, and other items of value at low transaction costs and at prices that reflect the efficient market hypothesis II THE FACTORS CONTRIBUTING TO THE FINANCIAL MARKET’S FORMATION Factors To form the financial market, there are three important factors that affect:  The conflict between supply and demand in the economy leads to a request to be resolved  Demand for transfer, purchase and sale of securities between owners  Flexible forms of capital mobilization in the diversified commodity economy The conditions for the formation of financial markets Diversified, developed commodity economy and sustainable currency:  Rich and diversified financial instruments  Financial intermediaries were formed and grew  A solid legal basis for professional practice  Build a spacious and solid technical infrastructure  A team of traders and managers with deep knowledge of financial markets III PARTICIPANTS The operation of the financial market takes place on a large scale, so the owners participating in this market are also very diverse:  The principal lender-savers are households, but business enterprises and the government sometimes also find themselves with excess funds and so lend them out  The most important borrower-spenders are businesses and the government, but households and foreigners also borrow to finance their purchases of cars, furniture, and houses  Financial intermediaries are intermediaries of financial services with the aim of making financial transactions safer and easier to access for clients IV TYPES OF FINANCIAL MARKET Debt and Equity Markets Capital is the most important condition for the existence and development of a firm They can obtain funds in a financial market in two ways: use debt instruments and stocks With different forms of capital mobilization, financial markets include debt markets and equity markets 1.1.Debt market a Definition The debt market is a financial market where participants can issue new debt, or buy and sell debt securities b Instrument  The most common method is through the issuance of a debt instrument, such as a bond or a mortgage, which is a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date, when a final payment is made  The maturity of a debt instrument is the number of years (term) until that instrument’s expiration date A debt instrument is short-term if its maturity term is less than a year and long-term if its maturity term is ten years or longer Debt instruments with a maturity term between one and ten years are said to be intermediate term c Characteristic  Debt markets offer a fixed rate of return that is predetermined by the holder of the debt instrument committing to future fixed loan payments However, the owners of these debt instruments not have the right to participate in the use of capital of the debt instrument issuer  The lender does not have any responsibility for the results of the use of funds In all cases, the borrower of the loan instrument must be responsible for payment according to the commitment specified in the loan contract d Function The debt market is one of the important markets, which keeps the economy running It channelizes the funds in a productive way and benefits the issuer and the investor Starting from Government to Corporate uses this market as a source of finance For investors, it acts as a fixed-regular source of income 1.2.Equity market a Definition An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets b Instrument  The second method of raising funds is through the issuance of equities, such as common stock, which are claimed to share in the net income and the assets of a business Document continues below Discover more from: Corporate finance 328 documents Go to course 107 Test Bank for Fundamentals of Corporate Finance 10th Edition by Ross Corporate finance 31 97% (66) Test Bank Fundamentals of Corporate Finance 12th edition Chapter Corporate finance 100% (17) TN1 corporate finance 38 Corporate finance 100% (12) Brooks Answers Introductory Econometrics for Finance 56 18 Corporate finance Corporate-Finance-Note-Chapter to Chapter 6, online note with full of useful information Corporate finance 148 94% (17) 100% (7) Ebook Tài doanh nghiệp (Lý thuyết & thực hành quản lý ứng dụng cho doanh nghiệp Việt Nam) Phầ… Corporate finance 100% (7)  Equities often make periodic payments (dividends) to their holders and are considered long-term securities because they have no maturity date In addition, owning stock means that you own a portion of the firm and thus have the right to vote on issues important to the firm and to elect its directors c Characteristic  We can predetermine the debt market's income But for equity markets, it is not possible to determine  The advantage of holding equities is that equity holders benefit directly from any increases in the corporation’s profitability or asset value because equities confer ownership rights on the equity holders  The main disadvantage of owning a corporation’s equities rather than its debt is that the corporation must pay all its debt holders before it pays its equity holders d Function It is one of the most vital areas of a market economy It gives companies access to capital to grow their business, and investors a piece of ownership in a company with the potential to realize gains in their investment based on the company's future performance Primary and secondary markets The stock market after issuance will be traded on different markets Based on the process of issuance and circulation of financial instruments, financial markets include the primary market and secondary market 2.1 Primary market a Definition The Prymary market, also known as the primary market, is a financial market in which the purchase and sale of securities issued for the first time takes place b Characteristic Commodities such as stocks, corporate and government bonds, when first issued, are sold in this market The purchase and sale of securities on the high market usually takes place through intermediaries, which are investment banks, securities companies or insurance companies An important type of financial institution will underwrite the issuance by guaranteeing a fixed price of securities That is, they will directly spend money to buy all lots of securities at the agreed price (usually lower than the announced price), then sell them right on the market to other investors at a higher price to make a profit c Function The first-tier market creates goods and is the basis of operation for the second-tier market, and at the same time, the stock price is also determined as the reference basis for the second-tier market 2.2 Secondary market a Definition Secondary market, also known as a secondary market, is a financial market in which the resale and purchase of issued securities (old securities) takes place b Characteristic  If the primary market is considered a wholesale market for securities, the secondary market is considered a retail market The difference between the primary market and the secondary market is that the operation of the primary market increases capital for the economy, i.e.issuers will be financed directly from this market, while the operation of the secondary market only ensures the ability to transfer ownership of securities holders  When an individual buys a security in the secondary market, the individual, who just sold it, receives the money to sell the security, but the company that issued the securities for the first time will no longer make any money A company is entitled to gain capital only when its securities are first sold on the tier one market Buying and selling in the secondary market is usually done through brokerage firms c Function  The secondary market makes it easy to sell financial instruments for cash, i.e it makes these financial instruments "liquid" The extra "liquidity" of financial instruments makes them more popular and thus makes it easier for issuers to sell them in the primary market  The secondary market determines the price of the securities that the issuer sells in the tier one market Securities firms in the tier one market only pay the delivery company at the price they think the secondary market will accept The higher the price of securities in the secondary market, the higher the price the issuer will receive in the tier one market and so the issuer receives the higher the total investment It is for this reason that when studying financial markets, people often focus on studying how the secondary market behaves rather than the first-tier market Exchange traded market and Over the Counter market According to the mode of Organizational Structure, the financial market includes Exchange traded market and Over the Counter market 3.1 Exchange traded market a Definition Exchange traded market is a market in which the securities trading and trading are organized centrally at a certain time and place This fixed place is called a stock exchange, this is also the place where market participants conduct transactions with securities that are allowed to be listed and traded on the market Examples of fixed exchanges: New York Stock Exchange, Hanoi Stock Exchange, etc b Characteristic  The first feature is that the exchange traded market has a fixed trading location The fixed trading place here is the stock exchange or the securities trading center  The trading method of this market is mainly auction or order matching to form the best competitive price  The Exchange traded market operates on the principle of intermediaries, in order to ensure that the securities traded are real securities, ensuring the interests of investors  The Exchange traded market is regulated by strict legal regulations  The Exchange traded market is highly organized Subjects are limited market participants c Function  Through the Exchange Traded Market, the issued securities are traded continuously, increasing the liquidity and marketability of the securities Issuers can issue to raise capital through the stock market, and investors can easily buy or sell listed securities easily and quickly  The function of determining fair prices is extremely important in creating a continuous market The price is not imposed by the Stock Exchange or its members but is determined by the Stock Exchange on the basis of matching buy and sell orders for securities Prices are determined only by supply and demand in the market Thereby, the new Exchange traded market can create a free, open and fair market Moreover, this market can provide accurate and continuous reports on securities, performance of listed organizations and securities companies 3.2 Over-the-counter (OTC) Market a Definition Over-the-counter market is a market in which securities trading activities are distributed in different places and times b Characteristic  The OTC market is organized in a decentralized form, with no centralized trading place between buyers and sellers The market will take place at transaction locations of banks, securities companies and convenient locations for buyers and sellers  The pricing mechanism in the OTC market is mainly implemented through negotiation and bilateral agreement between the buyer and the seller, which is different from the centralized auction mechanism on the Stock Exchange The form of order matching in the OTC market is very uncommon and is only applied to small orders  Securities traded on the OTC market include types: 10  The majority are securities that are not eligible to be listed on the Exchange but meet the liquidity and minimum financial requirements of the OTC market, in which mainly securities of small and medium-sized companies, high-tech companies and have growth potential Therefore, the risk level will be greater than that of securities listed on the Stock Exchange  The securities listed on the Stock Exchange  The Market has the participation and operation of market makers, that is, trading brokerage companies These companies can trade in two forms: First, they buy and sell securities for themselves, with the company's capital - that is trading The second is to act as a securities broker for clients to receive commissions - that is brokerage activities  Use a wide-area electronic computer network to link all market participants  OTC market management includes: State management level and self-management level c Function  Support and promote the stock market to focus on development  Limit and narrow the free market, contributing to ensuring the stability and soundness of the stock market  Create a market for securities of small and medium-sized companies, securities not yet eligible for listing  Create a flexible and favorable investment environment for investors Money market and Capital market 4.1 Money market a Definition Money market is a financial market in which only short-term debt instruments (generally those with original maturity terms of less than one year) are traded Money market has become a component of the financial market for buying and selling of securities of short-term maturities, such as treasury bills and commercial papers b Instrument 11  Treasury Bills  Certificate of Deposit (CD)  Commercial Paper  Banker’s Acceptance  Repurchase Agreements c Characteristic  It is fund-term market funds  It is maturity period is up to one year  It trades with assets can be transformed into cash easily  All the transactions take place through phone, email, text  The components of a money market are the Commercial Banks, Non- banking financial companies and Central Bank, etc d Function  Financing Trade The money market provides financing to local and international traders who are in urgent need of short-term funds, it provides a facility to discount bills of exchange, and this provides immediate financing to pay for goods and services  Central Bank Policies The central bank is responsible for guiding the monetary policy of a country and taking measures to ensure a healthy financial system Through the money market, the central bank can perform its policy-making function efficiently For example, the short-term interest rates in the money market represent the prevailing conditions in the banking industry and can guide the central bank in developing an appropriate interest rate policy Also, the integrated money markets help the central bank to influence the sub-markets and implement its monetary policy objectives  Commercial Banks Self-Sufficiency The money market provides commercial banks with a ready market where they can invest their excess reserves and earn interest while maintaining liquidity Short-term 12 investments, such as bills of exchange, can easily be converted to cash to support customer withdrawals 4.2 Capital Market a Definition The capital market is the market in which longer-term debt instruments (generally those with original maturity terms of one year or greater) and equity instruments are traded b Instrument  Equities  Debt Securities  Derivatives  Exchange Traded Funds  Foreign exchange instruments c Characteristic  Unites entrepreneurial borrowers and savers  Deals with long- term investments  It is controlled by government rules and regulations  Deals in both commercial and non-commercial securities d Function  Economic Growth Capital market helps to accelerate the process of economic growth It reflects the general condition of the economy The capital Market helps in the proper allocation of resources from the people who have surplus capital to the people who need capital So, we can say that it helps in the expansion of industry and trade of both public and private sectors leading to balanced economic growth in the country  Stable and Systematic Security prices Apart from the mobilization of funds, Capital Markets help to stabilize the prices of stocks Reduction in speculative activities and providing capital to borrowers at a lower interest rate help in the stabilization of the security prices  Availability of Funds 13 Investments are made in Capital Markets on a continuous basis Both the buyers and sellers interact and trade their capital and assets through an online platform Stock Exchanges like NSE and BSE provide the platform for this and thus the transactions in the capital market become easy Official market and Unofficial market 5.1 Official market a Definition The official market is a financial market in which all activities such as mobilizing, supplying, and trading financial resources are carried out according to the principles and institutions prescribed by the state b Characteristic  Regulated: The official market is regulated by the government or a regulatory body that oversees the buying and selling of securities in the market  Transparency: The official market provides transparency on the pricing and valuation of securities, which helps investors make informed decisions  Formal structure: The official market has a formal structure, rules and regulations governing it, and a proper system for trading and settlement of securities  Large volume: The official market deals with a large volume of securities, including stocks, bonds, and derivatives  Reliable: The official market is considered to be more reliable than the unofficial market, as there are safeguards to prevent fraud and manipulation c Function  The official market is often regulated by government agencies and closely monitored to ensure transparency and fairness in transactions On the official market, listed companies on the stock exchange must meet requirements for financial reporting and comply with legal regulations  The official market is considered an important infrastructure for the economic growth of a country It allows businesses to seek a large source of capital to develop and expand their operations The official market also contributes to the 14 motivation of people involved in investing in securities to the economic growth of a country 5.2 Unofficial market a Definition The unofficial market is a financial market in which all activities such as mobilizing, supplying, and trading financial resources are not carried out according to the principles of the state b Characteristic  Unregulated: The unofficial market is not regulated by any government or regulatory body and operates outside the purview of the law  Lack of transparency: The unofficial market lacks transparency, and the pricing and valuation of securities can be manipulated by insiders and brokers  Informal structure: The unofficial market has an informal structure, and trading is conducted through word-of-mouth or private transactions  Small volume: The unofficial market deals with a small volume of securities and is limited to a few participants  Unreliable: The unofficial market is considered to be unreliable, as it is prone to fraud and manipulation, and investors may not get a fair price for their securities c Function  The unofficial market is not monitored by any agency and often cannot meet legal requirements as on the official market However, this market allows investors to participate in more diverse transactions  The unofficial market plays an important role in increasing the liquidity of the stock market It allows those with small capital and not qualified to participate in the official market to also participate in trading markets The unofficial market is 15 also often used for speculation and trading according to traditional customs and practices of underdeveloped economic regions B THE ROLE OF FINANCIAL MARKET I FUNCTIONS OF FINANCIAL MARKET Price Determination The prices at which the financial instruments trade in the financial market are determined by the market forces such as demand and supply Investors are the supplier of the funds, while the industries need the funds Thus, the interaction between these two participants and other market forces helps determine the price Fund channel (basic function) This function is to channel funds from savers who have an excess of funds to spenders who have a shortage of funds Financial markets can this either through direct finance, in which borrowers borrow funds directly from lenders by selling them securities, or through indirect finance, which involves a financial intermediary that stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other This channeling of funds improves the economic welfare of everyone in society Because they allow funds to move from people who have no productive investment opportunities to those who have such opportunities, financial markets contribute to economic efficiency In addition, channeling of funds directly benefits consumers by allowing them to make purchases when they need them most Easy access Industries require the investors to raise funds, and the investors require the industries to invest their money and earn profitable returns Financial markets provide a venue for potential buyers and sellers to meet, interact, agree, and deal This feature of the financial market not only helps in saving resources like time and money but also makes trading much easier 16 Risk sharing The financial market performs the function of risk sharing as the person who is making the investments is different from the person who is selling their assets/fund Here, the risk is transferred from the person who is selling the investments to those who are buying the assets Further, it can be liquidated from the buyer to the next buyer of the financial security Hence, risk sharing is swiftly completed between parties Reduction in transaction costs and provision of the information It takes a lot of effort and time to operate in a typical market where people trade The financial market provides complete information regarding the price of securities, availability of relevant derivatives, and cost of various financial securities Investors and companies not have to spend much on resources for getting any kind of information as it is readily available in financial markets Usually, any trader requires various types of information for doing the transaction of buying and selling the securities, which is obtained with the disposal of time and money Here, the financial market helps provide every type of information to the traders without the requirement of spending any money by them, hence reducing the cost of the transactions II ROLES OF FINANCIAL MARKET Financial market is a supreme part of a nation's economy which controls all aspects of the commodity economy It also has a significant contribution to the social-economic development of a nation Promoting the accumulation and mobilization of capital to meet the needs of the economy’s infrastructure Without financial markets, the mobilization of capital for the construction of infrastructure works for the government and local authorities will not be enough to meet the construction and expenditure’s needs In addition, the social production capacity is increasingly developing on a larger scale, so, if only depending on borrowing from traditional banks, it will not be able to meet it in terms of time and quantity Therefore, when the financial market is fully developed, companies and localities can issue bonds or shares through it in order to mobilize large amounts of capital to meet demand quickly 17 Increasing the efficiency of capital use This is important not only for people with savings, but also for people who borrow money to invest People are always aware of the time value of the money they are holding Money will not be profitable if left in a safe, but money will earn interest from savings, loans or buying shares Normally, the interest earned through investment in corporate bonds will be higher than the interest on bonds issued by the government or deposited in savings banks Therefore, borrowers in the financial market must also use that loan appropriately to pay back the lender, and at the same time generate income and accumulate for themselves Thus, the financial market contributes to improving the productivity and operational efficiency of actors in the economy, thereby stimulating innovation, application of science, and advanced technology to increase investment efficiency, also promoting socio-economic growth and development Helping the government to implement open-door policy and economic reform The financial market helps the government and the central bank to implement fiscal and monetary policy through the purchase and sale of securities in the market, thereby achieving certain goals in each period For example, through financial markets, governments or central banks carry out fiscal and monetary policy by buying and selling Treasury bills or government bonds to overcome the problem of budget deficits and to regulate money supply In general, financial markets react quickly to changes in economic activity In addition to fostering favorable conditions for economic growth, it also serves as a reliable indicator of economic activity Valuing and increasing the liquidity of financial assets The values of stocks and bonds are set by the financial markets because they reflect the link between supply and demand for commodities on the market For instance, the market price of securities tends to decline if the supply of securities increases when businesses, banks, and governments issue more stocks and bonds At the same time, thanks to financial markets, these instruments are traded quickly over a wide range, which means that the liquidity of securities has increased The more liquid securities on the financial market are, the more participants are attracted to the market and help the financial owners 18 to easily convert their investment portfolios as required III FINANCIAL MARKET IN VIET NAM The market economy always requires a large and continuous financial resource, so the financial market constantly promotes the movement of money, thereby promoting economic development In 2021, The total capitalization of Vietnam's stock market reached about VND 7.75 million billion, equivalent to 95.6% of GDP - exceeding the target set for 2025 Also in that year, the average daily trading value of the market has increased by 3.6 times, reaching VND 24.7 trillion (for the stock market) and VND 11 trillion (for the debt market) Total capital mobilized through the stock market and debt market is estimated at VND 670 trillion, equivalent to about 45% of total outstanding loans in 2021 (VND 1.2 million billion) In the context that banks need to control the use of short-term capital sources for medium and long-term loans, the financial market, particularly capital market, will be the channel to mobilize medium and long-term loans instead of commercial banks With the private investors, The role of capital markets in the development of the private sector is proved by the 10-fold increase in the number of companies valued at over $1 billion in the past 10 years.Capital market development will promote State-owned enterprises to participate in capital mobilization and help reduce the proportion of commercial credit loans, reducing pressure to increase domestic fees; various forms of raising capital for additional capital.After over 20 years of development, Vietnam's capital market has grown rapidly in both width and depth; the legal framework is completed; scale, products, liquidity increased rapidly, contributing to mobilizing important financial resources for the economy; supporting and supplementing the traditional capital supply channel, which is bank credit 19 CONCLUSION The financial market has always had a significant impact All financial operations have become more varied and complex since the creation of the financial market As a result, it has a specific function in economic activity and develops into a useful instrument for the state to use in managing the economy Long-term, the growth of the financial sector is a crucial and strategic step toward developing a driving force for the economy Through this article, we hope that everyone will have a clearer knowledge of the function of financial markets in the economy Thank for reading! 20 REFERENCE Source  Textbook “The economics of Money, Banking, and Financial Market” by Frederic S Mishkin  Le Do (2022) “Thi truong von se cang dong vai tro quan trong”  Vu Nhu Thang (2022) “Dinh huong phat trien thi truong tai chinh Viet Nam giai doan 2021-2030”  Greenwald, B and Stiglitz, J E (1986), 'Externalities in Economics with Imperfect Information and Incomplete Markets', Quarterly Journal of Economics  Stiglitz, J E (1971), 'Perfect and Imperfect Capital Markets', paper presented to Econometric Society Meetings, New Orleans  Hellwig, M (1977), 'A Model of Borrowing and Lending with Bankruptcy', Econometrica, Vol 65,1876-906 Hirschleifer, J (1971), 'The Private and Social Value of Information and the Reward to Incentive Activity', American Economic Review, 67,561-74  Greenwald, B and Stiglitz, J E (1988a), 'Pareto Inefficiency of Market Economies: Search and Efficiency Wage Models', American Economic Review— Papers and Proceedings,78,351-5 21