Financial Crises Theory and Practice

Question: Discuss about the Financial Crises for Theory and Practice. Answer: Introduction: Financial market is a market where the people are involved in doing business of financial securities, goods including the fungible commodities at low transaction cost and at a cost which reflects the supply and demand. In economics, we can say that market is the aggregate of all the possible buyers and sellers of a particular commodity or services and as well as the place where the transaction takes place. It is also referred to as exchange including stock exchange or commodity exchange in between two or more organizations or companies. Since financial markets are associated in making money better to raise finance (Brigham and Ehrhardt 2013). Diagram depicting the understanding of the financial market: Source: (created by author) As per the question the financial market is broadly classified into five different categories: Capital market Money market Currency market Commodities market Derivatives market Capital market: Capital market include the stock markets which helps in providing finance through shares or common stocks thereby carrying out the subsequent trading. It raises capital on a long term basis basically over a year. Under the capital market comes the primary and the secondary market which can be categorized into two sub groups: Bond market which provides finance by accumulating debt through the issuance and trading of bonds .Stock market provides finance by sharing the ownership of a company by bond issuing and trading. The two basic instruments are the debt and equity (Claessens and Kose 2013). The issuers are the listed companies and the stock exchange and the intermediaries are the brokers involved in the trading. Primary market: Issues which are newly formed such as initial public offerings and are bought and sold , here the bonds are created and traded for the first time without any intermediary and are therefore called 'new issue market'. The company make direct interaction with the willing investors in the primary market. Secondary market: In the secondary market, the investors deals with the securities that have already been issued by the company and is listed in the stock exchange. Here in this case the investors purchase previously issued securities like bonds, stocks, any future options from other investors rather than issuing it from the company itself .Consequently these markets are termed as 'aftermarket'. Money market: Money market which comes under the category providing short term debt financing and investments. It enables the economic units in managing their liquidity positions by lending and borrowing of short term loans under one year. The various instruments are treasury bills, commercial paper, certificates of deposits. The players in this market are financial institutions, commercial banks, governments. Commodity market: It manages the exchange or better trading in primary products which takes place in about fifty major commodity markets where the financial exchange increasingly outstrip the physical purchases which are to be delivered . Commodities may be categorized into two subgroups: Raw goods which are hard goods like gold , oil , rubber .Agricultural products which are soft goods including sugar, coffee ,wheat. 'The players on this market are issuers andstockholders. Derivatives markets: In derivative market, the value of the assets are derived using the index of prices. It assists in providing the finance by carrying out the trade in terms of financial instruments like future contracts or some options which helps to control the financial risk. The forward, options, swaps, future contracts are some of the derivative market instruments. The players are the speculators, hedger and arbitrators. Currency market which is better known as the foreign exchange market: It abets the foreign exchange trading. It is the largest, and the most liquid market in the market world with an average traded value of more than $5 trillion per day. It also includes all the different currencies round the world and any individual or country can take an active part in it. The exchange traded fund, swap, and future and forward are the instruments. The central bank is the most vital player followed by the importers and exporters. References: Brigham, E.F. and Ehrhardt, M.C., 2013.Financial management: Theory practice. Cengage Learning. Claessens, S. and Kose, M.M.A., 2013.Financial crises explanations, types, and implications(No. 13-28). International Monetary Fund. Madura, J., 2014.Financial markets and institutions. Nelson Education.