Posted: March 23rd, 2023
Developed and smoothly operated financial markets have a pivotal role in contributing to the growth and stability of an economy. There is a correlation between the operations of financial markets and the economic growth of a particular country. Financial markets enhance the efficient flow of revenues and investments in an economy, thereby facilitating the accumulation of capital. Similarly, the production of goods and services within the manufacturing sectors are influenced by the power of financial markets. However, for the attainment of reasonable growth and the impacts of the financial market, it is necessary that combinations and simulations are agreed upon by two financial markets for shared operations and complimenting the forecasted growth. Borrowing is an important part of the financial market. Thus, the majority of large financial markets have developed financial instruments and products that target a wider array of borrowers and lenders, which is projected to lead to better economic growth. Therefore, the discussion focuses on the concept and the role of financial markets in economic development both from a local and international context.
The Financial Market as a Wheel for Global Economic Development
The degree of exchange rate flexibility affects the global economy. Given that the financial market is controlled closely by the exchange rates, flexible rates play a countercyclical role in managing output volatility. This implies that they are important, particularly in lessening incentives for currency borrowing as they manage any mismatches. Aghion et al. explain that exchange rate flexibility has potentials to affect economic growth if it impacts the productivity growth (500). Theoretically, the undervaluation of exchange rates can improve growth levels, especially if the tradable goods sector is affected disproportionately by institutional and market weaknesses. Similarly, the depreciation and appreciation trends equally have severe negative implications on direct foreign investment in industries. Blanco agrees with this position, arguing that creating a limitation to the flexibility of the exchange rate can impact on the traded products (180).
The financial market has several determinants that enhance to its stability and influence the economic growth potentials. Underdeveloped financial markets, according to Enders et al., lack hedging possibilities that reduce the weakness, which create volatility in the money market (160). Brunetti et al. concur that the volatility of the financial market has strong connections with economic growth. International trade is conducted on the global platform of the financial money market (1546). The volatility of the financial market, therefore, has the potential to impact either positively or negatively on the international trade, especially for nations that rely on intraregional trade. The trends in the financial market affect global commodity prices. For instance, costs of raw material from the Chinese market will be affected by the global money market either to an increase or a decrease, leading to improved or reduced commodity prices after manufacturing (Manikas and Kroes 4571). When the interest rates are dynamic and flexible, the financial market experiences optimum stability, while production and investment experience growth. Currency mismatches are a common problem in the financial market because they come up as a result of the relationship between the exchange rate flexibility and the structure of the balance sheet. The aspect is known to affect purchases due to challenges of price fluctuations of local currencies.
Table: 1. financial market influence to raw material costs.
The Secondary Financial Markets
Several financial sector activities occur in the secondary financial markets, involving trading of securities. Such activities are simulated on the financial market without actual capital flowing into the trading companies. Darwish et al. explain that the stock market is the archetypal reference point to lay attention and resources on for the majority of developed and developing economies (262). The majority of managers have laid ultimate attention on the performance of companies on the stock market. It is expected that such attention are guided by the influences of the stock markets and how major companies, conglomerates, or multinationals can be affected by the level or rate of how money flows into them. This concentration is equally seen through the mainstream media like international television stations, websites, and live radio streams globally.
One may ask how secondary financial market prices are plausible with no effects on real-time decision given their concentration on future cash flows and performances. Even though secondary markets do not influence a direct injection of cash into the companies trading on the platform, their actions are imperative since they affect the decision-making process of companies. Therefore, they carry a level of relevance in influencing economic growth and decision-making points.
Speculations that take place in the financial market with the various individuals carrying information can either bring profits to them or the institution they represent. Real decision making from capital providers, regulators, and managers among stakeholder in the financial industry gather and apply decisions affecting cash flows based on the information on the money market. This makes the platform the principal factor in the economic development of the global trade. Accordingly, Seru agrees that the financial market is a source of qualitative and quantitative information used to make financial decisions on the quality, value and cash flows aspects of conglomerates among other local companies (391).
The importance of the secondary markets sets up the climate for international engagements and global trade. This is viewed through the stability of companies seeking an entry into the global commerce. Belleflamme, Omrani, and Peitz explain that proponents of behavioral finance favor the secondary market since the prices on the platform have real influence on the economic activity due to the strict following from economic drivers and individual with high influences in the economy (12). Therefore, it can be assumed that the primary reason that informs the focus of such decision makers on the financial money market platform is based on the information and the public signal contained in the prices.
Price efficiency in financial economics is the extent to which the market prices provide relevant, timely, and correct information about the value of the traded asset on a platform (Manikas and Kroes 4575). Financial experts and other financial sector players have urged that the efficiency of prices enables higher levels of decision making. Belleflamme, Omrani, and Peitz indicate that the desirability of price efficiency is achieved when market prices guide decision making on aspects like global investments (14). For instance, this aspect supports global business structures that are reliant upon price information from the offshore financial market to make investment analysis. Equally, it allows investment decision leading to improved economic developments in such regions.
Market prices for the traded securities provide to the world accurate signals for correct resource allocations for conglomerates that wish to make production matched investments in several varied markets. Islam concurs with this argument adding that if prices were efficient and the summative information from the several sources on the financial market follow a similar trend, quality investments are made leading to improved global economic developments (295). This covers an important aspect of the global trade since technological advancement on the financial market has improved financial information sharing. In this case, companies are able to access information about global trade and players in real time. Belleflamme, Omrani, and Peitz confirm that such aspects increase investor protection mechanism and faster adjustments, especially in the event investments decisions were channeled to a relatively volatile market (16). Such adjustment has previously protected investors from a wrong investment decision or occasioned an investment delay that worked to stabilize the market leading to better growth prospects.
Implications of Financial Market on Corporate Finance
Implications generated from the feedback may affect the financial markets, which are making real decisions. Indeed, it is believed that financial markets have real effects on a corporate decision. The paradox of regulators or company executives manipulating the aspect of short selling in financial markets is a challenge to the corporate. Such speculators have previously influenced the downward price of the stock through short selling. The result of such activities might force the stakeholder to implement restrictions on the selling activities in various countries, which further leads to poor performances. Manikas and Kroes explain that such concerns have the difficulty of attaining relevance since the impacts generated cannot create manipulation as well as an equilibrium phenomenon (4575). Seru states that given that the price forces the manipulator to sell at the reasonably low price and subsequently buy at a higher price, then money is lost in the process (392). This scenario directly affects cash situations and profitability levels of a company or an individual buyer. The purchase and selling on the financial market have real effects on the direct cash plans and liquidity situations of a company or an individual seeking investment opportunity.
Several financial analysts have endeavored to provide relevant examples of market speculations for reduced and improved activity based on manipulations. For example, considering that a manager of a company receives information from the stock prices of a profitable investment project, the feedback effect may bring about increased manipulation causing an equilibrium phenomenon. When a speculator in the market realizes this situation, there is a possibility of driving down the stock prices, irrespective of the quality of the information available for such deals. The ripple effect would encourage the manager to cancel the investment since he or she may have a reason to believe that the decreased prices have been occasioned by negative information. As such, the general value of the company goes down, leading the speculator to profit from his or her short position. Armour and Cheffins argue that the effects can never work in the opposite direction. In the event the speculator purchases without information, there is a likelihood of over-investment, which has negative effects to the company, but equally might lead to the speculator losing from his or her long position (761). This situation underscores the importance of correct and relevant information on the financial market, which leads to healthy engagements and an increase in profitability for companies.
Corporate outfits and their finances are, therefore, directly affected by the influences of the financial markets. Therefore, this calls for systematic reviews and accelerated look into the operations of such important global resources. Worth noting is that such approaches are likely to rid of the activities that cause a systemic error in decision-making, which might lead to massive losses in the financial market. To ensure that companies do not lose investments in the global financial markets, several measures have been put in place to caution firms from the adulterations of information relevant to the platform. However, the various technological gaps and global information distortions have made the financial market a highly delicate platform that requires higher information and financial education to manage. In addition, the systems of the financial markets should be monitored for correct decision making, especially for the trading companies.
Previous Perceptions of Financial Market
Traditionally, companies sell their stocks to raise money. This reason explains the importance of the stock market information since the majority of company manager’s care more about getting higher prices. Once a company trades stocks in the secondary market, the price variances do not directly influence on the company (Armour and Cheffins 761). This explains the fact that the falling of stock prices for companies operating on the financial market bears no consequential effect on the issuing company. The activities of many companies have traditionally been run by an executive who typically owned shares in the same company thus wishing them to increase in prices. This perhaps explains why counter trading situations have been in existence in the financial market, leading to several losses.
Previous perceptions have promoted varied outlines and situations of trading in the financial market. Various theoretical foundations and research on the financial markets have treated multinational as exogenous. Even though the models used by market speculators on the global financial market had similar intentions, Büyükşahin and Robe indicate that the extent to which the information was correct suffers the limitations of literature exposition (39). Earlier literature has revealed scenarios where insider trading was organized among a specified range of players while reducing price efficiency. This was based on the fact that the limiting insider trading situations, reduces the price efficiency and adverse selection. Thus, outsider possibilities to trade is improved. All these situations summed together leads to an increase in the efficiency of the prices and, therefore, have an impact on economic development.
The Financial Market as a Source of Global Capital
Economist strongly believes that there is a link between financial systems and economic growth. Challenges, however, like the design of the optimal financial system and how they should look like continue to exist in the market. Aghion et al. suggest that optimal financial system when managed together with well-developed legal systems can incorporate elements leading to direct market financing and indirect financing, capturing the aspects of bank-based finance (510). Armour and Cheffins agree that a well-developed financial system has the potential to improve the efficiency of the financing decision, leading to favorable and better allocations of resources for economic growth (761). Market and bank-based financial systems have several comparative advantages to the economy and the business communities within their jurisdiction. Every sector views the sources of financing from the perspective of the financial market or bank based on their positioning and objective of the investment where additional capitalizations are being organized. Financial market financing has been found to gather more relevance within companies’ experiencing technological improvements leading to low consensus or agreements on the models of the management system that should be applied. In fact, this aspect of business financing will stimulate economic growth and performance of the company.
Table II. Impact of financial market in financing business through IPO
The above table indicates the levels of capitalizations raised through an Initial Public Offering (IPO) on the various stock markets. These aspects support the position that financial markets are a major source of economic growth through capital acquisition.
The advantages of the financial market financing are the checks and balances it raises in the management systems of a company. The stock market, therefore, keenly checks on the presentations of the company to ascertain the viability of the production models proposed in the operations. Borrowing from banks has passed through several challenges and problematic situations to arrive at ratios that guide lending among other support services. Credit bureaus and information on credit scores and financial creditworthiness assessment of customers are some of the institutional mechanism by banks to ensure quality lending and capital borrowing is protected. Financial markets have equally established platforms that support lending to renowned and stable companies across the globe for capital improvements.
The absence of a properly developed and structured finance market within a country elicits several disadvantages in the economy. For the growth of innovative companies to be realized, equity is an essential component. Therefore, young and technological developed companies have the potential to get financing from the stock market. Idea forecast and funding is generally gaining momentum in the market. Whereas local financial organization may not have the expertise to audit the forecasted success of the idea due to the local technological limitations, the stock market comes as a hub for all the expertise to finance such advantaged innovative products that banks are not able to offer.
Market capitalization has improved over time due to equity financing. The concept of equity financing is advantageous to young companies with new markets that operate away from traditional business models. Given that banks develop reservations on financing companies venturing into new and emerging markets, equity financing involving the purchase of share on the financial market has become an important financing option. New and emerging market capitalizations have relied on the financial market for support over time. The platform has supported investors, who have previously been denied access to liquidity by commercial banks among other credit associated companies.
The Influence on Commodity Prices and Labor Markets
Commodity prices are influenced by the financial market operations. The majority of the retailer and household commodities are exposed to the manufacturing market that is affected by several sectors of the economy. The stock, therefore, becomes a basic determinant of the commodity prices, including foodstuffs among other products. Aghion et al. indicate that the influences of the financial market bring about the volatility of the world stock market (500). Petroleum is one such factor that influences to a larger extent the commodity prices on the global platform. The stock market volatility affects the price of petroleum and petroleum products affecting the manufacturing industries and thereby leading to commodity price fluctuations.
Table III. Influence of the money market to commodity prices.
The trends in the graph above reveal systemic effects of the activities of the financial market to the global commodity prices. The financial market, therefore, can influence upward or downward price trend, based on the costs of raw material on the global trade environment. The commodity prices were affected by the oil crisis of 1974, the Gulf crisis of the 1990, and the global recession period of 2008.
Similarly, the labor market is considerably influenced by the financial market and the international trade. Majority of expatriates and foreign labor force are reliant upon the money market to influence the market forces, which in turn enhances economic development. The UAE, for example, is among the countries facing the dynamism of multiculturalism on the global platform. The majority of payments received by the foreign expatriate are transacted through the international money market, leading to either stability of volatility.
The financial market plays a critical role in facilitating economic development locally and on the global platform. Global trade is reliant upon the financial market to access information relevant for business and investment options. Several businesses have turned to the financial market for capitalizations given the superior structures and approaches it offers to companies. Therefore, it is necessary that challenges realized in the platform are solved through strategic approaches in order to develop better securities and structures for global growth. Since volatility will always play out in the financial market, it is important that artificial forces that influence volatility are managed so that the organizations or individual can benefit. Every country has a responsibility to the financial market since trade and engagement are taking a global spectrum. Therefore, countries through their relevant government departments should strengthen legislation and policy frameworks to safeguard the financial market from illegal infiltrations. Similarly, operations on the financial market should work together with other institutions to develop systems that respond to the financial needs of the global populations.
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