Each country has its own specific financial institutions, which may differ in many ways: by type of activity, size, and the range of services provided. But at the same time, all institutions of this kind have a number of common functions, which does not depend on distances and local specifics: with their help, the economy develops and international relations are established.
The market for loan capital or the financial market is a kind of mechanism that ensures the redistribution of capital between borrowers and lenders with the help of intermediaries. The financial market has an organizational form - a complex of credit institutions that redirect funds from borrowers to owners and vice versa.
Financial market: essence and functions
Loan capital is the basis on which the financial market rests, since the main “commodity” in the financial market is money, it is sold, bought and taken in the form of loans. The financial market consists of the money market (which, in turn, includes the interbank market, the accounting market and the foreign exchange market) and the capital market (it consists of the securities market, and the medium-term and long-term loans market). The money market is represented by short-term credit operations (up to a year). The capital market “deals” with stocks, bonds, medium and long-term loans. The credit market provides long-term investment resources for the government, banks and corporations.
The interbank market is an integral part of the loan capital market; in this market, temporarily free money is placed between banks in the form of interbank deposits for short periods. In the accounting market, the main instruments of circulation are very mobile and liquid - these are bills and short-term obligations. Foreign exchange markets deal with international payment turnover and monetary obligations of individuals (legal and physical) of different countries.
The main function of the financial market is the transfer of temporarily inactive funds to loan capital. The financial market, like all markets, performs a number of other functions:
- mobilization and accumulation of temporarily free cash. The financial market offers various ways of investing money. In order to receive income from temporarily free cash funds, you can invest them in securities or open a deposit account with a bank. In the future, to raise funds, it is enough to sell securities or take a loan from a bank.
- distribution of free financial resources. The financial market provides the movement of capital between different industries. The market provides investments with the capital necessary in terms and structure. Free money is combined into large amounts sufficient for investment, and then converted into loan capital.
- redistributive function. As soon as all the money has been mobilized and distributed, the main task for the financial market is to ensure the constant movement and distribution of funds.
- improving the efficiency of the economy. The economy can function normally only with constant cash flow between firms, individuals, banks, enterprises and the state. The main mechanism ensuring this constant flow of capital is the financial market.
In addition to the redistribution of funds, the redistribution of risks also occurs in the financial market. For example, if you give your friend a loan, and he does not repay it to you, the risk of default will be yours entirely, and you will not receive not only any profit, but also your own money. But if you put money in a deposit account with a bank, and your friend takes a loan from this bank, then the risk of default will also be distributed to the bank. And you will additionally receive income in the form of interest from the placement of temporarily free cash.