Financial Markets and Institutions Research Assignment

Financial Markets and Institutions
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Financial Markets and Institutions
Introduction
The Bretton Woods Conference of 1944 formally laid the foundation for the modern global financial system. The Conference was partly in response to the Second World War that was caused partly by economic strife amongst the belligerents of the world war. The agreements of this conference laid the basis for key bodies that have the mandate for shaping the modern financial system. These bodies include; The World Bank, The International Monetary Fund, and the World Trade Organization. The conference adopted the liberalization of national economies spearheaded by the then US Secretary of State Henry Morgenthau. The new global order would discourage the formation of trade blocs that had provided the economic component that led to the Second World War CITATION Doo05 \l 1033 (Dooley, Folkerts-Landau, & Garber, 2005). The Conference also began the exchange rate system that pegged global currencies against gold and the US dollar CITATION Bre \l 1033 (Bretton Woods Final Act, Section VII, n.d.). Financial Markets and Institutions are the fundamental blocks of the modern financial system. Thus, an understanding of these bodies is critical in gaining an appreciation of how the global marketplace works. The paper will, therefore, examine key financial markets and institutions in the modern era and their contribution to the stability of the financial system.
1 Financial Market
A market simply refers to a platform where buyers and sellers of a commodity can interact. Thus, a financial market is a mechanism or platform where long-term capital is provided by some entities e.g. venture capitalists to institutions that require the said capital. The following are some examples of financial markets in the global economy; capital markets, commodity markets, money markets, futures and derivatives markets and, foreign exchange markets. The paper will in this section concern itself with capital markets as an avenue of raising capital.
Capital markets can be divided into two namely; primary and secondary markets. Primary markets deal with shares that are issued for the first time by a company e.g. through an Initial Public Offering, placing of the share, etc. The secondary market deals with trading of shares amongst members of the public. The mechanism allows shareholders to divest from their shareholding without affecting the asset holding of the company that would result in a liquidity crisis CITATION Mic96 \l 1033 (McLindon, 1996).
The key mandate of a capital market is to provide long-term capital for business. They allow buying and selling of securities. Thus, a company can raise capital that is underwritten by the assets or equity of the firm. The company can also raise capital by offering to pay premium interest rates on loans offered to it through debentures. As such, capital markets are critical to the financial well-being of the American economy. The vibrancy of the capital markets systems can be used as an indicator of the global economic progress. During the 2007-2008 financial crisis, capital markets in the United States e.g. the New York Stock Exchange (NYSE), NASDAQ, Chicago Stock Exchange, e...