Day 195 The structure of financial market

The structure of financial market

Finance is a discipline divided from economics, and to be conclusive, the four fundamental concepts of finance are profit/loss and risk/return. Similar to the economics, the core guideline for this subject is still the cost/benefit analysis. As a financial manager, either the investment decision, finance decision or dividend decision share one common goal. Which is to maximize the value of the company, and consequently, maximize the shareholder's wealth.

Rather than real asset, finance deals with the intangible asset. These financial assets are traded in the financial markets.  There are many several different types of financial market. Distinguished by the term of maturity, there are money and capital market. Where short-term financial assets such as commercial paper, bills of exchange and banker’s acceptance are circulating in the money market. On the other hand, the long-term financial instruments are traded in the capital market. Stocks, bonds and debentures are the typical instruments in the capital market, since they have either unlimited or long maturity term over one year. Moreover, the financial market may also be divided by the scale of dealing quantities. The wholesale financial market and the retail financial market are differentiated by the extent of the transaction. Furthermore, various forms of the financial products create different financial markets. The equity market is where shares/stocks are traded; The debt market trades debts securities, including bonds and debentures; The property market is where the land and property are purchased/sold; The foreign currencies are transited in the foreign market; At last, the derivatives, which can be generally summarized as the agreement to purchase a financial asset on a specific date with the acknowledged price. And the derivatives like the forward and future contract are traded in the derivative market.

Although there are many types of financial institutions, such as commercial bank, hedge funds, unit trust, finance companies and credit unions, the regulators in the market make sure these institutions perform in ethical standard. For instance, the Australian security and investment commission monitors the activities of financial participants and enforces financial service laws to protect investors. Besides that, the APRA Australia Prudential Regulation Authority takes the part to ensure financial service providers to act prudently. Which oversees these institutions will remain able to meet their financial promises and obligations to investors. Both ASIC and APRA are government departments, hence they are granted by the power to enforce actions.