Lesson 1: Intro to Financial Markets
Financial markets consist of various participants such as agents,
brokers, institutions, and intermediaries who engage in buying and
selling securities. Financial institutions act as intermediaries in
financial transactions and can be classified based on their primary
activities. These institutions provide services like accepting deposits,
granting loans, facilitating investments, and offering financial advice.
Financial markets and institutions contribute to the economy by
providing services such as time preference, risk distribution,
transactions economy, transmutation of contracts, and financial
management. They play a crucial role in mobilizing savings, allocating
capital, and supporting economic growth.
RISK DISTRIBUTION
Financial markets distribute economic risks by creating and
distributing financial securities. This allows the risks associated with
employment and investment to be shared among many investors. For
example, if a mobile phone manufacturer fails, the losses are divided
among numerous investors, reducing the impact on each individual's
wealth. This helps investors manage risk while still having income from
other investments and employment.
DIVERSIFICATION OF RISK
Financial markets enable individuals to diversify their
investments, reducing risk. Diversification involves combining
securities with different attributes into a portfolio. A diversified
portfolio is typically less risky than one consisting of just a few similar
securities. This is because losses in some investments can be offset by
gains in others. The availability of large, diversified financial markets
with low transaction costs and minimal regulatory interference allows
investors to easily buy and sell securities, making diversification
possible.
