Financial market

Financial market is a generic term for all markets in which trading takes place with capital. The difference between the goods market is mainly in the future relatedness of acquired legal rights and that only cash payments - to be replaced - possibly complemented by other rights. The financial market is divided on the one hand in national and international financial markets and on the other hand, depending on the subject of the traded funds, in

• Money market,
• Credit and capital markets and the
• Foreign exchange market.

This classification is made, as various participants, and market conditions are present at the various submarkets. Financial markets are therefore markets in which capital in the form of securities, uncertificated rights, central bank money and loan and credit contracts are traded. A provider has the opportunity to invest his money or assets profitably in the financial market. The demand allows itself by trading in the financial markets to finance investments. Financial markets bring investors and investors directly, or indirectly through financial intermediaries together.

The money market

On the money market, the trading of securities and loans takes place. It distinguishes itself from other sub- markets based on its maturity. The traded here only loans have a maturity of 1 day to a maximum of 1 year ( for example, day or time deposit ). Money market instruments such as treasury bills or commercial paper traded regardless of their maturity. Trade in these papers has to cover the task of short-term liquidity bottlenecks before all things, and is mainly used by banks and the central bank in the strict sense. In a broader sense but are also non-bank participants of the market, such as large industrial companies. The interest rate at which banks can borrow money from other banks or companies located is called the Interbank rate.

The credit market

On the credit market those loans are traded, are not allocated to the money market. If the traded loans here you assign a term, then this is the medium to long term and is at least 1 year. Looking for the money market, however, only the interbank market and the ECB, trading in the credit market even through short-term loans ( Lombard, discount and bank overdrafts ) and discounted securities ( Commerical Papers, Certificate of Deposits ) of the banks supplemented with non-banks. The national credit market is very poorly organized and therefore transparent. Loans are very individual and therefore poorly exchangeable and tradable in the respective underlying purpose ( short to medium term bridge liquidity shortages or long-term financing of investment) determines their different timeframes.

The foreign exchange market

On the foreign exchange market, the exchange of foreign currencies will be held in book money. Two different versions are available - one for the execution of the transaction on the spot market in the immediate exchange for the domestic currency or the second option as currency futures business. Dealer to the international foreign exchange markets have a special contact system by which they can use at any rate fluctuations, the differences occurring by such transactions immediately ( arbitrage ). Foreign exchange transactions are carried out predominantly over the counter. This process is now running from only electronically. Because unlike loans, no interest is due, the payment is made by means of the difference between buying and selling rates.

Functions

Lot size transformation

An object of the financial markets is the lot size transformation. This means that for example if a market participant requests a relatively large amount of money, this is composed of smaller amounts of money the provider. A typical example of this is the accumulation of many small amounts of savings in order to finance large investments.

Maturity transformation

Another object of the financial markets is the maturity transformation. Its task is to coordinate the deadline interests of buyers and sellers together. There are two different types of maturity transformation:

• Transformation based on the capital commitment periods (also called maturity transformation ): The lock-in period from possible capital for use and invested capital differ.
• Transformation based on the remaining period: The period for which the interest of the available capital are determined differs from the fixed interest period of the invested capital. This interest rate risk may result.

Risk transformation

The third task of the financial markets is the risk transformation. Your task is to bring the different risk willingness of buyers and sellers on the capital market in line. Possibilities of this type of transformation are:

• Risk reduction: This is done by a plurality of individual borrowers are summarized and the existing risk is independently distributed on them. The reduction is made possible by the fact that the borrower has various contracts or new contracts created by combining payment obligations.
• Risk splitting: In order for the splitting is meant in a different structure contracts. The needs of borrowers and market participants are thereby reconciled.

Publicity transformation

The fourth and final task of financial markets thus is the publicity transformation. This means that capital providers and demanders never come into personal contact. A disclosure obligation only to banks. On the stock market, there are also prescribed information requirements for issuers.

General market functions

These general market functions fulfilled the financial market also have:

• Allocation function
• Coordination function
• Selection function

Financial Market Theory

Financial market theory focuses on the following core topics [ Patrick Wegmann, 2005]

• Pricing of capital assets
• Evaluation of investment projects of enterprises
• Questions about the optimal choice of investment portfolios ( portfolio theory )
• Market efficiency and information processing of market participants, which means that they, the question is whether the market can be beaten on schedule
• Raises the question of how the optimal capital structure and dividend policy of a company should look like ( Corporate Finance )
• Assessed the possibility of arbitrage, that is, the question arises whether there is a risk-free profit without capital investment
• Assessing how much an option to buy or sell an asset is worth ( option pricing theory )
• Examines the conflicts between ownership and management ( agency theory ) can be made and how they affect the value of investments

These issues will be addressed with econometric and statistical methods, with decision theories to situations under uncertainty and probability calculations.