Financial Market and Institutions
Christopher Little
FIN/370
June 23, 2016
Steve Garrett

Financial Market and Institutions Report What comes to mind when you hear financial institutions? For most people, it is going to be a bank which is the most common type of financial institution. What about financial markets? A financial market is where buyers and sellers trade. An example of a well-known financial market is the New York Stock Exchange. This establishment trades trillions of dollars on a daily basis. Both financial markets and financial institution play a vital role within any economy. There are also primary and secondary markets as well as money markets and capital markets. We will take a look at the differences and what role they play in the economy. Let’s start with financial institutions and the example I gave earlier was a bank. A bank is the most common financial institution and is pretty straight forward. You give the bank money and they hold it for you. Then, you ask, how does a bank make money? A bank also lends out money to individuals that are looking to make a large purchase, such as a house. The bank uses the money people deposit to loan out to others and interest is paid on the loan. A bank allows consumers to take out loans for purchases, then with a set time frame, pay back the money loaned with interest. That is one reason the recession of 2008 hit so hard. The bank loaned many people money but then many of those people were not able to pay the money back. Another financial institution is an insurance company. You pay the insurance company a monthly payment and they cover damages done to your home or your car. Financial markets are quite different from financial institutions. A financial market is a term that describes a place where buyers and sellers trade assets such as equities, currencies, and bonds. As I mentioned before the New York stock exchange is an example of a financial market. The stock exchange has many trades done on a daily basis and a lot of money switches hands on any given day. Financial markets can also be very small and have only a few participants. There are other types of financial markets and they include money markets, futures market, and insurance markets, to name a few. Financial markets make it possible for companies to raise their capital and improve their cash flow. They make it possible for investors to put money into corporations which increases the corporation’s capital. This gives the firm the ability to make improvements within the company in order to become more profitable and attract more investors. Now that we have a basic understanding of financial markets, let’s take a look at primary and secondary markets, and the difference between the two. A primary market is where securities are created. This means that new stocks and bonds are created and become available to the public. For example, an initial public offering (IPO), is a private company that sells stock to the public for the first time. A secondary market is what we call the stock market. The stock market is where investors trade with one another instead of purchasing new stock form a newly public company. Another difference would be that primary markets only deal with newly created stocks and bonds while secondary markets deal with stocks and bonds that already have been introduced to the market. The reason companies issue new stocks and bonds is to raise capital. When a new stock or bond is purchased the issuing company receives the money directly. In the secondary market the company has already received the cash for the stock or bond, so investors are trading already issued stocks and bonds in the secondary market. Other types of markets that are important to our economy are the capital market and the money market. In a money market, short-term securities are traded. A capital market is where long-term securities are traded. In a money market short-term instruments are traded and they include trade credit and certificates of deposit. These instruments are highly liquid and can be sold for cash and must be sold within a year. The return on investment is low in a money market but the risk is also low. Capital markets are financial markets where the government or company securities are created and traded to raise funds in the long-term. The securities that are traded include stocks and bonds. Trading in the capital market can net you a larger return but the risk as going to much higher than a money market. Another difference in how the transactions are done. The capital market is very well-organized and very formal while money markets are not. The reason individuals and companies participate in this market is because they fulfill long term and short-term capital for individuals and firms. This is also good for the world economy as a whole. As we can all see, markets play a vital role in the economy. They give individuals the ability to expand the money they have to make large purchases which helps the economy. They also help business gain capital and enhance the cash flow of the business. Without financial institutions and financial markets it would make it very difficult to start a business or buy a home. In any economy, you want business to flourish and for individuals to have purchasing power. Imagine if there were no financial institutions. In order to buy a home you would have to have the money in total up front and that is not realistic for many people. It would lead to an economy where people are not buying and that would hurt everyone in the economy.

References
Surbhi, S. Difference Between Money Market and Capital Market. 2015. Retrieved from http://keydifferences.com/difference-between-money-market-and-capital-market.html
Primary vs Secondary Market. Retrieved from http://finance.mapsofworld.com/capital-market/primary-vs-secondary.html