International Financial Markets Essay Example | Topics and Well Written Essays - 1750 words

International Financial Markets - Essay Example In the broader perspective, it is a place where in the investors (who have surplus funds) and security issuers (who require funds) can meet and fulfil each others’ requirements (Bailey, 2005, p.34). Stock exchanges provide investors the opportunity to invest in a broad range of securities such as stocks, bonds, commodities, derivative instruments, and so on. These exchanges also provides conveniences for issue and redemption of financial instruments and other securities including payment of dividends and other fixed bearing returns such as coupon interest (Madura, 2012, pp.3-5). It is important to understand that the stock exchanges have multiple roles to play for the development of economy by proper channelization of capital. But one of the most important functions is raising and mobilising capital for businesses. Stock exchanges provide these services and facilities by selling ownership shares to public. The process is also known as the initial public offering or IPO that al lows incorporated companies to list their shares in stock markets and allow external investors to invest in the company. The might require capital for expansion of existing facilities, launching new product or services, or diversifying products and services geographically. Whatever may be the reason for raising capital, irrespective of that the investors get the opportunity to mobilise their savings for investment (Samuel, No date, pp.26-31). For instance, when general public draw their savings and invest in shares of companies through IPO, the process actually leads to allocation of scarce resources of funds in most rational manner. This is because if the investors prefer to keep their surplus funds with them or idle deposits with banks, then the resources are stuck in the economy and is not utilised in best possible manner. But, when the investors prefer investing the funds trading in stock markets then their funds are redirected to help the management of the companies or respecti ve finance boards of the organisations. The benefit of such investment and mobilisation of funds is not only limited to the issuing companies and the investments benefit several other sectors in the economy that are linked to each other indirectly. The mobilisation of fund to different sectors such as agriculture, industry, and commerce ultimately results into higher productivity at all level of firms and promotes stronger economic growth (Bradley and Teweles, 1998, pp.329-348). The stock markets may be broadly classified into primary market and secondary market. The main function of the primary market is facilitating issue of new securities. Organisations, both in public and private sector have the opportunity to tap the primary market where they can offer their shares to public and raise capital. The securities are not limited to ownership capital or equity capital but business entities may also issue bonds through primary. The issue of security by any business entity would depend on the business strategy and the target capital structure that the management decides in the best interest of the shareholders. If the management prefers not to dilute ownership stake and retain significant control over the key management decisions then the entity is likely to prefer bonds over equity instruments. On the other hand, if the companies prefer to increase the earnings per share of the shareholders by leveraging their existing capital structure, then it might choose