What are securities markets?

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May 25, 2014

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What are securities markets? Securities market is part of the financial market, in which securities are traded. Securities exist there as instruments of credit. The purchase of security is tantamount to granting a loan to the seller. A security is an instrument, a form by means of which the transfer of capital occurs. In other words: money in exchanged for security. Securities transactions as a form of granting credit are so much more convenient compared to the loan commonly understood as traditional, that is a form of high standardization (unification). Negotiations are reduced to a minimum. Terms of credit determine the characteristics of a particular security options, such as face value, exchange, payment terms for repayment, interest rates, the issuer (borrower) etc. Securities market, like the financial market, is divided into money market securities and capital market securities. These are markets in a narrower meaning than previously highlighted (money market and capital financial market financial as a whole), as they relate to securities transactions.

Why securities markets provide liquidity?

The money market is a market for securities, which are short-term credit instruments (for one year). The capital market is the market for securities trading, being the credit instruments which are medium-and long-term (over one year). Financial market trades equity and this trade can take many forms. It may be less formalized or haughty. In the securities market trading is just more formalized, and thus simplified. With the acquisition of securities it is known in advance, with no additional arrangements, what you get in return. The idea of ​​the existence of financial markets is to mobilize, processing and transfer of capital. Financial markets allow a realistic assessment – verification of capital. They serve the correct, efficient allocation of resources in the scale of economy. Some say the method of valuation of capital in the financial market is not the most perfect, but so far better’s not been found.

Free capital can be invested in a variety of values. Each value (security) has a different orbital period (maturity date), other security, and other income from capital invested in it. In a word, it is characterized by a set of characteristics distinguishing it from the other financial assets. Investor performs operations according to his own strategy. When analyzing the operation he takes into account the investment criteria: liquidity (cash exchange), risk and profitability. By purchasing the value he determines for it most favorable mutual relation of liquidity – the risk – profitability. Quick and reliable determination of this relationship provides high liquidity, standardization and formalization of the securities market. This means that any financial instrument on securities market (share, bond, promissory note, voucher) has fixed characteristics, and mode of transaction, i.e. its conclusion is also unified in different parts of the market. Based on the standardized characteristics the investor knows the conditions under which capital is transferred. A particularly noteworthy is the concept of “marketability” of asset which is the mode of acquisition – sale of security. Procedure is fixed in advance. The greater marketability – easiness to resell, the safer it is for the investor.

What securities markets do? Financial instruments of the securities market act as loans. It is a credit different from the traditionally understood. Bank although participates in the securities market operations as an intermediary and an issuer, however, its mediation is already different. It has a different character. This is not like the acceptance of deposits and lending money.

When company wants to raise needed capital, it has a choice:

– to issue securities

or

– take a loan at the bank.

Issuing of securities means the resignation of the bank as a traditional broker. The bank remains as an intermediary in the issue of securities ​​and their trading. The bank can also be the issuer of its own securities. Distribution of financial market takes place according to the criterion of time periods, for which the capital is granted, i.e. one year and over the year. In practice, money market and capital market are subject to processes of integration. A major counterparty in the securities market are the government and the central bank, as well as the local authorities. Based on the financial market, ie securities market, entities are pursuing through financial instruments its own functions and some operations performed are crucial for the economy.

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