Saltanat Izbagambet

KBTU

Assel K. Jumasseitova

Candidate of economic sciences

(Phd)

The nature of the financial market

A financial market is a market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in financial markets when one party purchases financial assets previously held by another party. Financial markets facilitate the flow of funds and thereby allow financing and investing by households, firms, and government agencies [1].

Different types of financial markets:

Ø Capital market - consists of primary market and secondary market. In primary market newly issued bonds and stocks are exchanged and in secondary market buying and selling of already existing bonds and stocks take place. So, the Capital Market can be divided into Bond Market and Stock Market. Bond Market provides financing by bond issuance and bond trading. Stock Market provides financing by shares or stock issuance and by share trading. As a whole, Capital Market facilitates raising of capital.

Ø Money market facilitates short term debt financing and capital.

Ø Derivatives market provides instruments which help in controlling financial risk.

Ø Foreign exchange market facilitates the foreign exchange trading.

Ø Insurance market helps in relocation of various risks.

Ø Commodity market organizes trading of commodities.

Financial markets are essential for fund raising. Through financial market borrowers can find suitable lenders. Banks also help in the process of financing by working as intermediaries. They use the money, which is saved and deposited by a group of people; for giving loans to another group of people who need it. Generally, banks provide financing in the form of loans and mortgages. Except banks other intermediaries in the financial market can be insurance companies and mutual funds. But more complicated transactions of financial market take place in stock exchange. In stock exchange, a company can buy others' company's shares or can sell own shares to raise funds or they can buy their own shares existing in the market [2].

Borrowers of the financial market can be individual persons, private companies, public corporations, government and other local authorities like municipalities. Individual persons generally take short term or long term mortgage loans from banks to buy any property. Private companies take short term or long term loans for expansion of business or for improvement of the business infrastructure. Public corporations like railway companies and postal services also borrow from financial market to collect required money. Government also borrows from financial market to bridge the gap between govt. revenue and govt. spending. Local authorities like municipalities sometimes borrow in their own name and sometimes govt. borrows in behalf of them from the financial market.

Lenders in the financial market are actually the investors. Their invested money is used to finance the requirements of borrowers. So, there are various types of investments which generate lending activities. Some of these types of investments are depositing money in savings bank account, paying premiums to insurance companies, investing in shares of different companies, investing in govt. bonds and investing in pension funds and mutual funds [3].

Financial market is nothing but a tool which is used to raise capital. Just like any other tool, it can be beneficial and can be harmful too. So, the ultimate outcome solely lies in the hands of the people who use it to serve their purpose.

There has been no lack of views about what lessons should be learned from the continuing problems in global financial markets.  These have come from the affected jurisdictions and from international financial institutions and forums.  The views expressed so far have been insightful and sometimes quite complex but, understandably, they have mainly been from the perspectives of the developed markets.

The main focus of these views has been what was not sufficiently understood in the run-up to the problems that emerged in the third quarter of last year, and whether the responses by the international community have been adequate and appropriate.  From the perspective of the emerging markets, we think the emphasis is rather different, in part because the emerging markets were somewhat behind the developed ones in the kind of financial innovation that gave rise to the problems – fortunately as it turned out.  Rather more relevant to them we suspect are how best to tackle financial innovation and, possibly for those with less open financial markets, how best to programme financial maximizing.

We certainly hope that the current turbulence in the developed markets – which is the result of financial innovation getting out of control – does not result in an indiscriminate shunning of financial innovation generally, although we fear that it has, arguably, provided emerging markets with a very bad example.  Obviously financial innovation has to be properly harnessed, first by making sure that its benefits clearly take the form of more efficient financial intermediation (in other words, a lowering of the intermediation spread, rather than just serving the interests of financial intermediaries through large compensation packages for the financial engineers, which actually increase the intermediation spread) and secondly by prudently managing the risks arising from financial innovation.

Central banks and others responsible for financial stability should perhaps adopt a more pro-active attitude to financial innovation, through monitoring and perhaps even steering the process, and getting involved early on in identifying and managing the associated risks.

It is obviously difficult to keep up with investment bankers, who may also be a strong political lobby in some jurisdictions, but it is in the public interest that the authorities should at least try, if necessary making use of their authority to seek information, require public disclosure, or even to approve financial arrangements, moral hazard notwithstanding.  The thing that must always be borne in mind is the overriding public interest in maintaining financial stability.  We also need to be alert to the possibility of distortions to incentives in the financial system creeping in, leading to the erosion of credit standards, as happened with maximizing and credit-risk transfer through the originate-and-distribute model.

It is important to maximizing the potential conflict between the public interest in efficient financial intermediation and the – perfectly legitimate from their point of view – private interests of the financial intermediaries in maximizing profits.  The market, regrettably, has so far not provided a solution to this conflict, at least not a solution that does not involve financial turmoil, with the apparent initial narrowing of the intermediation spread being inevitably followed by a sharp step increase, as we are seeing now.  The authorities are more often than not left to deal with the problems arising from the conflict when problems set in.  Some are more successful than others in pre-empting problems, for example by firmly, some say stubbornly, exercising supervisory authority to safeguard against the erosion of credit standards.

We support the many initiatives by the international financial community that have been implemented or are being discussed, aimed at making the financial system more resilient.  They are very comprehensive and, rightly, very focused.  However, to what extent they can address the general issue of the conflict we mentioned being an inherently unstable factor in the financial system, often manifested in distortions to incentives that are sustained in the short term by arrangements that compromise prudential standards, only time will tell.

There was great expectation that Kazakhstan would be able to rapidly develop active and vital financial markets immediately after independence. A decade after independence, however, those expectations have not proved well-founded. Kazakhstan’s capital markets and stock markets have not proved attractive to foreign investors. Foreign direct investment has been concentrated in a few sectors, particularly oil, gas, and minerals development. Kazakhstan’s offering of government bonds has met with interest from investors primarily because investors have confidence that the Kazakhstan government, with its long-term expected revenues from the oil, gas, and mineral sectors, will continue to make good on its promise to pay off its state debt.

References:

1 Jeff Madura (2008): Financial Markets and institutions, 8^th edition, USA

2 E.F. Fama (1976): Foundations of Finance, Basic Books Inc., New York

3 E. Copeland, J.F. Weston (1988): Financial Theory and Corporate Policy, Addison-Wesley, West Sussex