4.4 - The Financial Sector Flashcards
Financial markets
Where buyers and sellers can buy and trade a range of services
or assets that are fundamentally monetary in nature
Roles of the financial market
- Facilitate saving
- Lend to businesses and individuals
- Facilitate the exchange of goods and services
- Provide forward markets
- Provide a market for equities
Forward markets
Where firms are able to buy and sell in the future at a set price, for example if a farmer wants to sell the crop they are growing at a guaranteed price in a month’s time. The forward market exists for commodities and in foreign exchange and helps to provide stability
Examples of market failure in the financial sector
- Asymmetric information
- Externalities
- Moral hazard
- Speculation and market bubbles
- Market rigging
Speculation
Act of buying or selling assets (such as stocks, bonds, commodities, or currencies) with the hope of making a profit from future price movements. Speculators take on high risks, betting on the direction in which the market will move, rather than holding assets for long-term use or investment
Market bubbles
When the price of an asset, such as real estate, stocks, or commodities, rises far beyond its intrinsic value, driven by speculative demand rather than fundamental factors. Eventually, the bubble bursts, and prices rapidly fall back to more realistic levels, often causing significant financial losses for investors
Market rigging
Where a group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market, such as insider trading
Roles of the central bank
- Implement monetary policy
- Banker to the government
- Banker to the banks (lender of last resort)
Financial regulation
The set of rules, laws, and guidelines established by government authorities or regulatory bodies to oversee and manage financial markets, institutions, and systems. The goal is to ensure the stability, fairness, transparency, and integrity of financial markets, protect consumers and prevent financial crises
