Understanding Financial Markets, Intermediaries, and Corporate Finance

Posted on Dec 17, 2024 in Economy

Financial Markets: An Overview

Financial markets are a fundamental part of the financial environment. They are the place or mechanism by which financial assets are exchanged. The objective is the efficient allocation of savings to end users in the economy. Properties:

  • Amplitude (range of assets that are traded)
  • Transparency (availability and symmetry of information)
  • Freedom (accessibility for buyers and sellers and non-interference, public or private)
  • Depth (volume of trading in each asset)
  • Flexibility (ease of reaction to changes)

Ratings:

  1. Direct markets (in which supply and demand sides negotiate the transaction directly, but a “broker” may appear) and intermediary markets (at least one agent is an intermediary).
  2. Money or monetary markets (assets of short or long term) and capital markets (addresses long-term operations).
  3. Primary market (traded securities-ups) and secondary market (operating with second-hand titles; the most important is the stock market, but it also operates as a primary market for the issuance of securities).
  4. Free and regulated markets (governed by the laws of supply and demand or seized by the authorities).
  5. Organized markets (takes place in a specific and formalized space and time under rules (stock)) and non-registered markets (the parties operate by mutual agreement, setting conditions and without the intervention of a mediator).

The financial markets today are characterized by their complexity and dynamism. Changes include:

  1. Globalization and internationalization of markets, with growing interdependence between them.
  2. Deregulation, disintermediation, and financial innovation, with the emergence of new products and greater opportunities for direct contact between the parties in an increasingly interventionist environment.
  3. Acceleration of technological change: computing and telecommunications.
  4. Increase of international capital flows, by market liberalization and economic globalization.

Financial Intermediaries: A Detailed Look

Financial Intermediaries: A group of specialized institutions that mediate between lenders and ultimate borrowers in the economy. They provide confidence by endorsing their solvency and produce financial assets. Types:

  1. Banking intermediaries, whose liabilities are money.
    1. Private banks: commercial banks, savings banks, etc.
    2. Bank of Spain: central bank responsible for conducting monetary policy.
  2. Non-bank intermediaries, whose liabilities are not money and whose function is mediating.
    1. Business financing (leasing)
    2. Insurance Companies
    3. Companies and investment funds and pension funds.


External Finance for Companies

External finance for companies offers a greater number and variety of alternatives to the company, with different conditions in terms of cost, time, risk, etc. The choice of financing is an important decision because this is determined by its capital structure. The level of debt affects the market value of the company.

Own External Financing

Own external financing can come from the capital market through input gathered through the issuance of shares to be placed on the market when the company is founded or by making a capital increase.

Short-Term Foreign Finance

Short-term foreign finance:

  1. Spontaneous financing comes from the deferment of debt and there is no charge for the company.
  2. Loans and short-term bank loans have financing conditions that have to be negotiated and agreed upon by the company with the grantor agency.
  3. Trade discount: an operation which consists of the bank anticipating the value of the effects for the company before maturity.
  4. Factoring financing is an alternative whose use is increasing significantly.

Long-Term Foreign Finance

Long-term foreign finance:

  1. Issuance of fixed-income securities is to launch an offer of securities or representative securities. They are debt because the interest is agreed upon beforehand, although that interest may be different each year.
  2. Leasing: a leasing formula that is used for the purchase of capital equipment. It has financial, technical, and fiscal advantages.
  3. Credit and bank loans are a widely used source. The difference between a loan and credit is that the former receives a fixed amount in full at the start of the operation, while in the latter, the bank offers the company a certain amount and the cost is higher than the loan. In both, the interest may be fixed or variable. There is a large variety of loans.

Advantages and Disadvantages

The advantages and disadvantages have consequences:

  1. Prevents the shareholder from having to pay direct taxes on dividends.
  2. Ensures productive reinvestment of profits.
  3. Reduces transaction costs.
  4. May impair the financial picture of the company by missing the informative value.
  5. Unattractive to the small saver and that the retention is contrary to the spirit of the statutes.
  6. If it generates excessive liquidity, it can lead to ill-considered investments.
  7. Has an opportunity cost.