Free Global Financial Markets Essay Sample
Primary market is the first category of investors, who buy new issues of securities. It is comprised of insurers and first-time buyers of securities. The rest of the activities take place in the secondary market. Underwriting in the stock market is a process, whereby the primary market provides services on how securities are sold to first-time traders of securities. The first market can always be very volatile in comparison with the secondary market, since it might be a problem to determine the value of a new share in the market. The primary market may only account for a part of trade on a specific day of trading (Murado, 2010).
The major function of the primary market is to enable capital growing by allowing traders to convert their savings into investments (Nouriel, 2010). It also facilitates companies to provide new securities for raising capital directly from households to expand their businesses. Through issuing new shares in the market, companies can also meet their financial needs. The primary market provides channels, through which the government can raise funds from civilians to offer financial support in regard with different projects in the public sector (Ortega, 2006).
This is a market for all security investors apart form first-time buyers, to whom a share is sold. It also comprises all security buyers and sellers apart from the insurer together with members engaged in buying shares from the customer. The secondary market is less volatile than the primary market, since it is simpler to identify the value of a share after it starts trading. Most trading securities take place in the secondary market (Roberts, 2010).
Functions of Stock Market
The stock market has several functions. One of them is the economic function. It also enables facilities for capital transfer from investors to capital users. It enables corporations to seek expansion to raise funds from different investors in the primary market. Afterwards, they provide environment that allows for trading between buyers and sellers of shares through the secondary market (Tversky & Kahneman, 2003).
The other function of the stock market is to set continuous prices of shares in the market. The market feature allows interested groups to access information relating to the price of securities in the market. Quotes of prices can easily be accessed through radio, television and financial websites. This is quite helpful to share holders, since they can understand the value of their share in the market at every minute of the day (Nicholas & Ian, 2011).
It is important to note that the best function of the stock market is FAIR PRICING. Market pricing makes it possible for sellers and buyers of shares to get the best prices for securities. Fair pricing comes about because of the competition between several sellers and buyers, who carry out operations through the stock market on a daily basis (Morris & Shin, 2000).
There are several stock markets, which exist in the USA. Well-known stock markets in the USA are the New York Stock Exchange (NYSE) and the NASDAQ (Shiller 2005). Stock-trading in the amount of billions dollars takes place in the two markets every day drawing great attention of the media and making them observe their activities closely. The NASDAQ and NYSE both list mostly U.S. stocks, although the NASDAQ is preferred by technology organizations. The diagram below shows share prices of different companies (see Diagram 1). This is according to the NASDAQ pricing (Migliaccio, 2011).
The primary and secondary stock markets can perform the same functions, although they operate differently. The NASDAQ is an electronic market place, which match buying and selling of orders by using computer systems (Wachman, 2010). On the other hand, the NYSE can maintain a real floor of individual dealers, who completely buy and sell orders in a live session. The NYSE has incorporated the use of the electronic trading structure, which handles huge daily trading of orders (Matussek, 2011).
For all investors to be protected against crimes, the stock market requires all corporations that intend to list their securities on exchange to make all financial statistics available to the public promptly (Mandelbrot & Hudson, 2006). The stock markets demands that corporations must fulfil some financial requirements before they are listed in the market. Companies, which are listed and then fail to meet economic and lucidity requirements of the stock market, are de-listed immediately from it (Tremlett, 2010).
The European crisis relates to regions fighting to repay debts that have increased in the recent years. The most affected countries include Greece, Ireland, Spain and Portugal. Spain has failed to attain the ability to repay bondholders, which should be a guarantee (Nicolas & Firzli, 2010). Nevertheless, the five countries were taken to be under an immediate risk of a possible default. The problem has extended outside the countries’ borders to other countries. To be specific, the Bank of England looked at it to be the most severe economic crisis from 1930s until 2011 in October (Simkovic, 2009). This is among crucial economic problems facing the world and these problems are hard to understand.
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Analysis of the Problem
Short Review of the Reasons
The world economy experienced a low economic growth since the 2008-2009 U.S. crisis. It has undermined unsustainable economic policies of countries in Europe and the world at large. Greece spent several years and failed to adopt economic reforms (Nicolas & Firzli, 2012). This was one of the nations to experience a weak financial growth. When an economic growth reduces, it is possible that tax outcomes reduce alongside making very large budget shortfalls unsustainable (Perminov, 2008).
The outcomes of the crisis made George Papandreou, who was a new prime minister, announce that the preceding governments did not produce the real size of countries’ shortfalls. Greece deficits were just too large in the real sense. It exceeded the country’s entire economy and the nation could not wait any longer to reveal its problems (Leigh, 2011).
All investors demanded high yields on Greece securities, which in turn raised the debit of the nation. This burden enabled a sequence of bailouts on the part of the European Central Bank and European nations. The stock market started driving high bond yields in other indebted nations in the territory expecting similar problems that occurred in Greece (Elliot & Inman, 2012).
The main reason for raising bond yields in this case is that when investors cite a high problem for investing in bonds of the country, they will need outcomes to make compensations for the risks associated with investing. This brings about a cycle of increased expenses in the country. For instance, there will be increased lending rates, which may lead to another economic strain making all investors demand more increments on their bond yields. Generally, when investors lose confidence in trading on country’s securities, it affects the country’s economy and other nations (Kirchgaessner & Sieff, 2010).
European Nations’ Reactions
Actions taken by European nations require that all seventeen-member states should ascent all actions to help the most affected nations to improve their economic performance (Kowsmann, 2011). The main route to enable this was a sequence of bailouts for troubled European nations. During the spring season in 2010, the European Union and International The Monetary Fund distributed one hundred and ten billion Euros, which is the same as $163 billion to troubled Greece. The nation was in need of the second bailout in the mid of 2011 (Hatzinikolaou, 2012). This time round it amounted to $157 billion. This year on March, 9 Greece and its creditors entered into an agreement, which set a stage for another program of getting a bailout. Other nations, like Portugal and Ireland, got bailout funds in May 2011 and November 2010 respectively. Eurozone members also adopted the European Financial Stability Facility (EFSF) to give emergency loans to nations with fiscal stability (Hewitt, 2011).
The European Central Bank iss also involved in the issue, although it resists bazooka as an option of printing cash to enable buying of the area’s distorted debt. In August 2011, the ECB made a plan to buy government securities if possible to keep yields from spiralling to levels, which countries cannot control (Jolly, 2011). The European Central Bank provided $639 billion available for lending to banks troubled in the region. It followed by another transfer in February this year. The bank referred to this program as the Long Term Refinancing Program (LTRO) (Gavin, 2010). Several financial organizations had their debts to be paid in 2012, which caused them to remain with their capital instead of extending loans. A slow loan growth could also make the problem more serious. As a result of this, the ECB bank tried to boost all banks’ balance sheets to enable them to forestall the issue that was about to affect them. The banks’ reaction did not raise the real issue affecting nations, namely a high national debt leading to investors to cheer the design program to stimulate the region’s economy (Firzli & Bazi, 2011).
The actions of European policy definers helped to stabilize financial markets for a short term. On the other hand, they were greatly criticized to have been “kicking the can down the road” or delaying real resolutions at a later stage (Taleb 2008). Additionally, a greater issue becomes visible. The European Central Bank could rescue small nations, such as Greece, but it could be difficult for the bank to save large nations, like Spain and Italy. The dangerous position of the nations’ economy was the main issue in the stock market in the entire 2010- 2011.
The Impact of the Crisis on the Financial Market
The likelihood of a contagion caused the European debt problem to be a key point in the global financial market in the period from 2010 to 2011. According to the memories of the latest economic turmoil of 2008-2009, investors’ reactions to negative news in Europe were very fast (Bartha, 2011). They sold anything that appeared to be risky and bought government bonds in large amounts from financially stable nations. In general, the European bank was indicated to have very poor performance as compared to its world counterparts throughout the crisis period. The affected nations’ bonds also experienced poor performance, because of rising yields resulted in low prices. At the same period, the U.S. treasury became empty, which reflected investors’ flight for safety (Amedeo et al. 2010).