In business, having a clear understanding of financial markets and institutions is essential for a company’s success. Today, managers are finding themselves needing to make financial decisions without having a solid foundation of this knowledge. In this article, we aim to provide a comprehensive breakdown of financial markets and institutions from a corporate perspective. We’ll cover where money is invested, how this process works, what types of instruments exist, and how companies can best leverage these structures to achieve their goals.
What are Financial Markets and Institutions?
Financial markets and institutions are essential components of economic systems. They define the ways in which money is used, allowing corporations to finance operations and investments. As thespruce.com explains, “Financial markets and institutions provide the platform where investors and corporations can go to buy and sell financial products.” As a result, they provide the resources and capacity necessary for businesses to strategically grow their assets and manage various funds.
Types of Financial Instruments
At their core, financial instruments are used to transfer and store value. They range from the most common, such as stocks and bonds, to derivatives and asset classes. Here is a list of the most common financial instruments and asset classes:
Stocks – A stock or “equity” is an ownership stake in a public or private company that is traded on organized markets.
Bonds – A bond is a loan made to a government or company from investors. It is a form of debt that gives the company that issued the bond the borrowing power to finance operations and projects.
Derivatives – Derivatives are complex financial instruments that are used to minimize risk and the uncertainty of economic and market fluctuations. They are based on an underlying asset, such as stocks, bonds, and commodities.
Asset Classes – Asset classes are collections of various investments and types of financial instruments that are typically grouped together due to their similar characteristics. Examples include stocks, bonds, real estate, and commodities.
Commodities – Commodities are tangible resources that are used in producing other goods or services and are usually bought and sold in the form of futures contracts. Examples include wheat, corn, oil, and gold.
The Benefits of Financial Markets and Institutions in Business
Financial markets and institutions are beneficial for businesses, both large and small. By leveraging these resources, companies can strategically manage their assets and insurance against potential losses. Additionally, financial markets and institutions provide stable sources of long-term financing and provide access to capital. Furthermore, because these markets involve widespread participation from investors and traders, companies are able to actively monitor and adjust to market demands, trends, and risks.
How Financial Markets Work
Financial markets have three main components that facilitate the transfer and storage of value among businesses and investors. These components are the primary market, the secondary market, and the derivatives market.
Primary Market – The primary market is where companies obtained the funding necessary to finance operations. This involves the sale of new stocks and bonds directly to investors, privatize placements, and initial public offerings (IPOs).
Secondary Market – The secondary market is where investors buy and sell securities between one another, rather than directly from the issuer. Common secondary markets include exchanges, such as the New York Stock Exchange, and over-the-counter markets such as the NASDAQ.
Derivatives Market – The derivatives market is a financial market that specializes in the trading of derivatives. These instruments are used to hedge against risk and speculate on the future value of the underlying asset. These derivatives include futures, options, and forward contracts.
How Institutions Facilitate Market Transactions
In addition to the markets, institutions also play a big role in facilitating transactions. These institutions can be divided into intermediary institutions and depository institutions. Intermediary institutions provide services directly to investors, such as trading, underwriting, and margin lending, as well as research and analysis. Meanwhile, depository institutions, such as banks and savings and loan institutions, act as agents and Facilitator of transactions between buyers and sellers.
In this article, we discussed financial markets and institutions from the perspective of businesses. Having an understanding of the various types of instruments and the process of how they work is essential for making informed decisions in business. We went over the various types of financial instruments, the benefits that these markets and institutions provide, how these markets operate, and how these institutions facilitate transactions. We hope that this article has been a useful resource, allowing businesses to gain a clearer understanding of financial markets and institutions.
