Fiscal system is a mechanism where economic exchange activities can be done. The economic activities can be done through the interaction between fiscal establishments and the fiscal market. The intents of this interaction are to mobilise fund and supplying payment installations for the funding of commercial activities. With the outgrowth of Islamic finance, the double fiscal systems being introduce. In double fiscal system the conventional fiscal systems runing side by side with the Islamic fiscal systems.
The Islamic Financial system consists of the function of four indispensable mechanisms: The Islamic banking establishments, Takaful, Islamic Capital Market and Islamic Money market. The construction of this fiscal system may dwell of specialised and non-specialized fiscal establishments, of organized and unorganised fiscal markets, of fiscal instruments and services which facilitate transportation of financess. It besides comprises of processs and patterns adopted in the Islamic fiscal markets. The operation and mechanism of the fiscal system is scrutinized by Bank Negara Malaysia consultative board and Securities Commission Syariah Advisory Board to guarantee conformity of Islamic regulations and ordinances.
The Islamic fiscal establishments which are govern and control under Bank Negara Malaysia are the organisations that mobilize the depositors ‘ nest eggs, and supply funding, moving as creditor or in the signifier of capital venture or funding in the signifier of net income and loss sharing ( PLS ) . They besides provide assorted fiscal services to the community, peculiarly concern organisations. The activities will be covering in fiscal assets such as sedimentations, loans, securities or covering in existent assets such as machinery, equipment, stocks of goods and existent estate. The activities of different fiscal establishments may be either specialise or their map may be overlap. They may be classified base on the footing of their primary activity or the grade of their specialisation with relation to rescuers or borrowers with whom they customarily cover or scope of activity or the type of ownership are some of the standards which are frequently used to sort a big figure and assortment of fiscal establishments which exist in the economic system.
Fiscal establishments are divided into banking and non-banking establishments. The banking establishments traditionally participate in the economic system ‘s payments mechanism, i.e. , they provide minutess services, their sedimentation liabilities constitute a major portion of the national money supply, and they can, as a whole, make sedimentations or recognition, which is money and Banks, capable to legal modesty demands, can progress recognition by making claims against themselves. Fiscal establishments are besides classified as mediators and non-intermediaries. As the term indicates, mediators intermediate between rescuers and investors ; they lend money every bit good as mobilize nest eggs ; their liabilities are towards the ultimate rescuers, while their assets are from the investors or borrowers. Non-intermediary establishments do the loan concern but their resources are non straight obtained from the rescuers. All banking establishments are mediators. Many non-banking establishments besides act as mediators ) and when they do so they are known as Non-Banking Financial Intermediaries.
The Evolution of Financial Intermediaries in Malaysia
In this subdivision, our undertaking is to study the landscape and place the institutional participants. By depicting what fiscal mediators look like today, it is besides uncovering to see how fiscal mediators have evolved over the last century.
The banking system in Malaysia, which is the major constituent of the fiscal sector, consists of Bank Negara Malaysia, commercial Bankss, Islamic Bankss, International Islamic Bankss, Investment bank, other non bank establishments and money agents. Which are all regulated and supervised by Bank Negara Malaysia.A A A The other non-bank establishments are supervised by other authorities bureaus. These establishments can be divided into four major groups, dwelling of the development finance establishments, the economy establishments, the provident and pension financess, and a group of other fiscal mediators, consisting of edifice societies, unit trusts and belongings trusts, renting companies, factoring companies, recognition item companies, venture capital companies, particular investing bureaus and several fiscal establishments such as the National Mortgage Corporation ( Cagamas ) and Credit Guarantee Corporation.
The traditional banking system function has been to do long-run loans and fund them by publishing short-run sedimentations.[ 1 ]But banking systems are prohibited from prosecuting in securities market activities such as securities subventioning or the sale of trust financess. Therefore, the current design of non-bank fiscal establishment are allowed to cover in the securities market a portion of supplying services which are similar to the banking system.
The part of each non-bank fiscal establishments: insurance companies and pension financess ; they receive investing financess from their clients, both of these establishments place their money in a assortment of money-earning investings. Renting companies ; they purchase equipment/asset and so rent to concerns for a set figure of old ages. Factoring companies ; supply specialized signifiers of recognition to concerns by doing loans and buying histories receivable at a price reduction, normally assumes duty for roll uping the debt, specialise in measure processing and aggregations and to take advantage of economic systems of graduated table. Market shapers ; as an agent that offer to purchase or sell security ( trading in securities ) ,[ 2 ]storage the securities and insured the securities against loss, supply border recognition,[ 3 ]hard currency direction history services.[ 4 ]
Trust financess ; pool the financess of many little investors and buy big measures of securities, offer a broad assortment of financess designed to appeal to most investing schemes, allow the little investors to obtain the benefits of lower dealing costs in buying securities and cut down the hazard by diversifying the portfolio. The National Mortgage Corporation ; is to advance the secondary mortgage market in Malaysia, with the issue of secondary mortgage securities, Cagamas Berhad performs the map of an intermediary to convey together the primary loaners of lodging loans and investors of long-run financess.
The development of fiscal intermediation in Malaysia is reflected in Table 1. Table 1 shows the major fiscal mediators by assets and besides by per centum portion ( in parentheses ) from 1960 to 2000. To the extent that we can see the gait of fiscal intermediation as a Equus caballus race, there seem to be a clear victors and also-rans. For illustration, in footings of comparative importance the victors are unit trust, Cagamas Berhad, renting companies, factoring companies and venture capital companies. Commercial Bankss and finance companies are also-rans.
These findings raise some interesting inquiries. First, what caused the alteration in the mix of fiscal mediators? In this subdivision, we will analyze this evolutionary procedure via three factors.
Deregulation of Interest Rate
Interest rate deregulating that affects loan pricing takes its earliest signifier.[ 5 ]Canada, in 1960, was the first to deregulate its involvement rate. Other states deregulated in the 1980s or thenceforth.[ 6 ]This deregulating allows more freedom and activity to the Bankss and other establishments to publish new depositary merchandises every bit good as diversified short and long term recognition instruments.[ 7 ]Leightner and Lovell ( 1998 ) province that some relaxation to the Bankss ‘ portfolio were portion of the liberalisation that enables bank to diversify investing to private every bit good as the foreign equity.[ 8 ]This made possible with the constitution of the foreign exchange market and the enlargement of the underwriting activities of the fiscal mediators. Liberalization in Japan and Germany for case, brings new paradigm to the functions of the banking establishments. The bank in Germany and Japan is no longer to be a creditor, but can besides be the equity holder and in the board of managers and direction. Liberalization of the banking industry, for illustration in Malaysia and some other states, take banking establishment into a new dimension that is the constitution of Islamic banking.[ 9 ]The increasing demand on the involvement free banking offer by the Islamic fiscal establishments leads many conventional Bankss to offer Islamic counter or instead known as double banking. This development happens to Muslim and non-Muslim states.
The consequences show that the persons prefer to diversify their investing other than sedimentations. In peculiar, they invest in securities such as stocks, bonds and unit trusts. Therefore, new investing in unit trust for the little rescuer altered for good the fiscal landscape.
The Institutionalization of Financial Markets
Institutionalization refers to the fact that more and more financess in Malaysia have been fluxing indirectly into the fiscal markets through fiscal mediators, peculiarly pension financess, trust financess and insurance companies instead than straight from rescuers. As a consequence, these “ institutional participants ” have become much more of import in the fiscal markets relative to single investors.
What caused institutionalization? Quite merely, it was driven by the growing of these fiscal mediators, peculiarly pension and unit trust.[ 10 ]Pension fund growing was encouraged by authorities policy. Tax Torahs, for case, encourage employers to assist their employees by replacing pension benefits for rewards. This is good for employees because they do non pay revenue enhancements on their pension benefits until they are received after retirement.
Unit of measurement trusts gained well from these alterations in pension program Torahs. Defined part programs were allowed to include unit trust on the bill of fare of assets for which program members could take. In add-on, the increasing attraction of specialised financess such as bond financess and index financess has besides fueled unit trust fund growing.
The Transformation of Traditional Banking
The fact that Bankss are exposed to the non-performing loans that stood at 9.1 % for the periods of 1997 to 1999 and it seems to us that banking is a worsening industry. However, foremost, the alleged diminution of commercial banking is limited to a diminution in the comparative importance of commercial banking. As shown in Table 1, the diminution of commercial Bankss ‘ assets as a fraction of entire intermediated assets from 43.4 % in 1980 to 41.3 % in 2001. Table 1 besides shows that banking industry assets really increased between 1960 and 2000. In other words, bank assets have really increased – merely non every bit fast as the assets of other fiscal mediators. Second, many of the new advanced activities in which Bankss engage are non reflected on bank balance sheets as assets even though they add significantly to bank gross.[ 11 ]These include, for illustration, trading in involvement rate and currency barters, selling derivative instruments and publishing recognition warrants.
Third, Bankss have a strong comparative advantage in loaning to persons and little concerns.[ 12 ]Finally, Bankss have joined forces with a figure of other types of fiscal mediators.[ 13 ]For illustration, Bankss have combined with unit trust financess, merchandiser Bankss, insurance companies and finance companies. Bank acquisitions of non-bank fiscal mediators are portion of broader consolidation of the full fiscal services industry.
Fiscal markets are the centres or an agreement that provide installations for purchasing and merchandising of fiscal claims and services the corporations, fiscal establishments, persons and authoritiess trade in fiscal merchandises in these markets either straight or through agents and traders on organized exchanges or off-exchanges. The participants on the demand and supply sides of these markets are fiscal establishments, agents, agents, traders, borrowers, loaners, rescuers, and others who are interlinked by the Torahs, contracts, compacts and communicating webs. Fiscal markets are sometimes classified as primary ( direct ) and secondary ( indirect ) markets. The primary markets deal in the new fiscal claims or new securities and, hence, they are besides known as new issue markets. On the other manus, secondary markets deal in securities already issued or bing or outstanding. The primary markets mobilize nest eggs and provide fresh or extra capital to concern units. Although secondary markets do non lend straight to the supply of extra capital, they do so indirectly by rendering securities issued on the primary markets liquid. Stock markets have both primary and secondary market sections.
Very frequently fiscal markets are classified as money markets and capital markets, although there is no indispensable difference between the two as both perform the same map of reassigning resources to the manufacturers. This conventional differentiation is based on the differences in the period of adulthood of fiscal assets issued in these markets. While money markets deal in the short-run claims ( with a period of adulthood of one twelvemonth or less ) , capital markets do so in the long-run ( adulthood period above one twelvemonth ) claims. Contrary to popular use, the capital market is non merely co-extensive with the stock market ; but it is besides much wider than the stock market. Similarly, it is non ever possible to include a given participant in either of the two ( money and capital ) markets entirely. Commercial Bankss, for illustration, belong to both. While exchequer measures market, name money market, and commercial measures market are illustrations of money market, stock market and authorities bonds market are illustrations of capital market. Keeping in position different intents, fiscal markets have besides been classified into the undermentioned classs: ( a ) organized and unorganized, ( B ) ball and informal, ( degree Celsius ) functionary and analogue, and ( vitamin D ) domestic and foreign. There is no precise intension with which the words unorganized and informal are used in this context. They are rather frequently used interchangeably. The fiscal minutess which take topographic point outside the well-established exchanges or without systematic and orderly construction or agreements constitute the unorganised markets. They by and large refer to the markets in small towns or rural countries, but they exist in urban countries besides. Interbank money markets and most foreign exchange markets do non hold organized exchanges. But they are non unorganised markets in the same manner the rural markets are. The informal markets are said to normally affect households and little groups of persons imparting and borrowing from each other. This description can non be purely applied to the foreign exchange markets, but they are besides largely informal markets. The nature, significance, and range of activities of these types of markets will be discussed subsequently in the book.
As mentioned earlier, fiscal systems trade in fiscal services and claims or fiscal assets or securities or fiscal instruments. These services and claims are many and varied in character. This is so because of the diverseness of motivations behind adoption and loaning. The phase of development of the fiscal system can frequently be judged from the diverseness of fiscal instruments that exist in the system. It is non possible here to discourse separately the nature of assorted fiscal claims that exist in the fiscal system.
The fiscal assets represent a claim to the payment of a amount of money sometime in the hereafter ( refund of principal ) and/or a periodic ( regular or non so regular ) payment in the signifier of involvement or dividend. With respect to bank sedimentation or authorities bond or industrial unsecured bond, the holder receives both the regular periodic payments and the refund of the principal at a fixed day of the month. Whereas with respect to ordinary portion or ageless bond, merely periodic payments are received ( which are regular in the instance of ageless bond but may be irregular in the instance of ordinary portion ) . Fiscal securities are classified as primary ( direct ) and secondary ( indirect ) securities. The primary securities are issued by the ultimate investors straight to the ultimate rescuers as ordinary portions and unsecured bonds, while the secondary securities are issued by the fiscal mediators to the ultimate rescuers as bank sedimentations, units, insurance policies, and so on. For the intent of certain types of analysis, it is besides utile to speak about ownership securities ( viz. , portions ) and debt securities ( viz. , unsecured bonds, sedimentations ) . Fiscal instruments differ from each other in regard of their investing features which, of class, are mutualist and interconnected. Among the investing features of fiscal assets or fiscal merchandises, the following are of import: ( I ) liquidness, ( two ) marketability, ( three ) reversibility, ( four ) transferability, ( V ) minutess costs, ( six ) hazard of default or the grade of capital and income uncertainness, and a broad array of other hazards, ( seven ) adulthood period, ( eight ) revenue enhancement position, ( nine ) options such as call-back or buy-back option, ( x ) volatility of monetary values, and ( eleven ) the rate of return-nominal, effectual, and existent.
DEFINITION AND SCOPE OF A CAPITAL MARKET ( THE ECONOMIC FUNCTIONS OF FINANCIAL INSTITUTIONS )
The old subdivision gave a brief overview of the major types of fiscal instituAtions. To understand why fiscal establishments exist and the economic services that they provide, it is of import to understand the different ways in which financess are transferred within an economic system between concerns, authorities, and families ( economic entities ) that need to borrow financess ( borrowers ) and those that have surAplus financess to impart ( investors ) . In a really simple economic system without fiscal establishments, minutess between, different borrowers and loaners are hard to set up. Borrowers and rescuers incur important hunt and information costs seeking to happen each other. Minutess beAtween borrowers and rescuers may besides be limited, because few fiscal contracts inAvolve merely two parties. Similarly, hazards are great, since single entities have small or no cognition of each other and small ability to supervise each other ‘s actions. Besides, the minutess costs may be so high that little entities may be unwilling to provide financess. Investors besides have small ability to diversify their hazard, due to the high cost of many fiscal contracts.
Supplier of financess: excess ( nest eggs ) units
Lenders: Housesolders, companies, authoritiess, remainder of the universes
Demand of financess: shortage unit
Borrowers: Housesolders, companies, authoritiess, remainder of the universes
Fiscal establishments help to cut down minutess, hunt, monitoring, and inforAmation costs. They provide hazard direction services and allow investors to diversify their hazard and keep portfolios of fiscal assets by making ways of indirect funding. Financial establishments besides play of import functions in an efficient payment system beAtween entities and in pull offing pure hazard ( insurance ) . The upper panel of Figure 1 shows the function of fiscal establishments as intermediAaries between borrowers and loaners.
The term primary securities refers to direct fiscal claims against persons, authoritiess, and non-financial houses. A simple economic system without any fiscal instiAtutions would suit merely direct fiscal claims or fiscal contracts. In efAfect, a borrower gives an investor a fiscal contract or direct fiscal claim or seAcurity that promises a interest in the borrower ‘s company ( i.e. , portions of stock ) or future payments returning the sum invested plus involvement ( i.e. , a bond, or some other kind of IOU ) . These are illustrations of direct or primary securities. As an economic system develops, markets emerge for merchandising direct securities. Some map as auction markets, where trading is carried out in one physical location, as occurs on the New York Stock Exchange ; others function as nonprescription marAkets, where trading is carried out by distant contacts, possibly over the phone and computing machine, as on the National Association of Security Dealers Automated Quotation ( NASDAQ ) system. Loans made straight with borrowers are another illustration of a primary or direct security, where a direct contract is made between a borrower and a bank or other single loaner. Table 1.2 provides illustrations of primary securities in the first column. The fiscal assets owned by Bankss, insurance companies, and muAtual financess, such as loans, bonds, and common stock, are all direct securities, where the loaners give financess to the borrowers, and the loaners receive fiscal contracts vouching refund of financess plus involvement or portions of ownership in the borArower companies.
Investors lend financess in return for a direct or primary security. Secondary securities, in contrast, are fiscal liabilities of fiscal instituAtions-that is, claim against fiscal establishments. In Table 1.2, fiscal instituAtions ‘ liabilities-deposits, policyholder modesty duties, and common fund shares-are secondary securities or claims against fiscal establishments. In consequence, fiAnancial establishments created secondary securities that offer advantages over primary securities or direct fiscal claims.
Examples OF PRIMARY AND SECONDARY SECURITIES
Certificates of sedimentation
Insurance policyholders militias
Common fund portions
Corporate common stock
Pension fund militias
Table 1.2 shows this type of indirect funding.
Unfortunately, like most Fieldss, finance sometimes uses confounding nomenclature. Readers should carefully avoid confounding the usage of the words primary and secondary in this disAcussion with their usage in other contexts. For illustration, pupils who have antecedently studAied corporate finance or investings may hold encountered the footings primary and secAondary markets ; primary markets are those for originally issued securities, and secondary markets handle resale of securities. In the context of this chapter, primary and secondary distinguish between issuers of securities and non between alterations in securities ownership.
PRIMARY AND SECONDARY MARKET
In a market economic system the being of fiscal markets can greatly ease the procedure of interchanging loanable financess for fiscal claims. A house that wants to borrow money can travel to the market in the cognition that those with financess to impart will be at that place. The procedure is made easier still if specialist bargainers are known to be actively take parting in the markets, purchasing and selling fiscal claims on their ain history, thereby smoothing over yearss on which trading is thin or when there is an surplus of possible borrowers or loaners. Further economic systems are achieved if agents or agents can be employed to come in the market stand foring the client to purchase and sell securities. The being of the market serves borrowers and loaners likewise by cut downing the hunt costs which each has to incur to acquire in touch with the other, and besides maintains assurance in market monetary values. Markets do non ever have a physical location. A market for loanable financess might dwell of nil more than a list of known traders who can be contacted by missive or telephone. The International Stock Exchange is the Centre of the securities market. It has both a physical trading site which is used for a really little figure of securities, and a extremely developed system of trading which takes topographic point in a figure of locations via computing machine linkages. The price reduction market is another traditional fiscal market, but one which operates without a physical site at all.
This market operates by representatives of the price reduction houses keeping close day-to-day contact with the taking Bankss, either by telephone or personal visits, to find where trading chances are. Two types of fiscal markets exist for existent and fiscal assets, and it is of import to separate between them. A primary market for fiscal assets trades in new issues of all types of loanable financess. Minutess in primary markets result either in the creative activity or in the extinction of fiscal claims. The creative activity of a new loan causes the transportation of hard currency from a loaner to a borrower in exchange for a fiscal claim on the latter. The claim is extinguished when the hard currency, normally involvement and principal, has been repaid to the loaner. A secondary market is a market in old issues. Minutess in secondary markets do non make or snuff out fiscal claims. Cash does non go through between borrowers and loaners, but bing issues merely alter custodies. The borrower remains unaffected by the dealing while the loaner transfers the right of refund to another. The chief economic map of the secondary markets is to back up the operations of the associated primary markets for new issues by supplying liquidness to loaners. In the absence of a developed secondary market an single rescuer might be really unwilling to impart out money for long periods of clip, except at rates of high involvement excessively high to be attractive to borrowers. If the opportunities of doing a sale when necessary are intolerably low, no loaner would perpetrate financess. Therefore an active secondary market is indispensable for an active primary one. However, there is no warrant that the loaner will have back in sale returns the full sum at the clip they are sold, since markets fluctuate all the clip, and monetary values are non changeless.
Secondary markets besides contribute to the efficiency of the primary market by supplying pricing information. In the portion market, for illustration, the current monetary values of traded securities significantly cut down the job of puting a monetary value on new issues with similar hazard profiles, and information from the secondary market will besides act upon the attitude of possible participants in primary markets. Figure 3.2 illustrates the connexions between primary and secondary markets. Not all primary markets have secondary markets associated with them and some securities are issued for which there are no secondary markets, that is, the securities are non negotiable. Conversely, for every secondary market at that place must be, or have existed, an associated primary market. The differentiation between primary and secondary markets is non alone to fiscal markets. The same is true in the markets for physical goods. There is both a market for new and for used autos. In the primary auto market, freshly manufactured autos are sold, and in the secondary market, frequently in a different location and affecting another group of participants, used autos are bought and sold. On the other manus, a haircut is an illustration of a good, or in this instance a service, bought in a primary market, but for which a secondary market does non be. It is possible for a physical good to be sold or a fiscal security to be issued in a primary market which later ceases to work, go forthing the secondary market merely. Examples are to be found in the markets for farm land and the pictures of old Masterss. The creative activity of new farm land is limited to states still working once fresh land, whereas in the UK, there has been a significant and continuing loss of farm land to other utilizations. In the instance of the pictures of continued to be actively traded. The mismatch in activity degrees of the primary and secondary markets for securities is non normally rather so pronounced, but it is considerable. Another illustration is that of ECU denominated bonds where the market efficaciously disappeared during 1992/3 and so recovered. Trading in new issues of ordinary portions, for illustration, is variable in frequence and may be capable to distortionary pricing. But trading in bing corporate issues is really active, although the pecuniary value of money minutess is non ever really great.
Some contention surrounds the economic map of the secondary markets. The fact that there is active trading in these markets, sometimes in fortunes where the associated primary market appears to hold disappeared, frequently leads fiscal observers and others to reason that the activities of these secondary markets are conveying about a misallocation of resources. But consider the picks open to rescuers who wish to put. They can put in the markets, either straight or through an intermediary. The rescuer has the pick of either imparting straight to a shortage unit via the primary markets or of buying an bing security in the secondary markets. If an bing security is purchased, the old holder of that security will have hard currency which can be used either to pass on ingestion goods and services or reinvested in the fiscal markets. Merely if the money is spent on imported goods, or in the acquisition of foreign assets are the returns lost to the economic system. Finally it is desirable that markets should run in such a manner that nest eggs are directed to the most productive houses, or be allocatively efficient. This is attractive to single loaners, as it leads to maximum return and lower limit hazard, the optimum tradeoff confronting the investor. If directors in fiscal establishments consisAtently place loaners ‘ financess with borrowers giving low returns or high default records, investors will either take their financess elsewhere, increase the involvement compensation they require, or enforce terrible limitations on the sorts of concern in which they will put.
Allocative efficiency may besides be desirable from a societal point of position and nest eggs should flux to the most productive houses to profit the economic system as a whole. The job gets more complicated when viewed from this angle because the definition of productiveness from a societal position may be different from that taken by loaners. Lenders may non care whether the houses to whom they lend are monopolizers, pollute the ambiance or engage in illegal activities, but other groups in society might. Clearly, it is possible for there to be struggle between the aims of the single decision-makers and the wants of society. This job can even be within a individual group of investors. Pension financess, for illustration, put money in order to supply pensions for their members but may happen that some of their members demand that the financess are non invested overseas or in a viing house in the same sector. Whilst these determinations may. if sufficiently widespread, impact the comparative issue costs, it is non clear that the consequence should be interpreted as being allocatively inefficient. This thought that investors should hold a strong position about the utilizations to which their financess are put is going progressively of import and is taken earnestly by fund directors, and many fiscal establishments use ethical or environmental factors in their selling. In a pecuniary economic system, the differentiation between salvaging and investing is a existent 1. Savingss can ever be held in the signifier of hard currency and near-cash assets, such as cherished metals. To impart is to waive liquidness. In order to excite long-run loaning it is necessary to supply the agencies by which loaners can reconstruct liquidness without naming in their loans. This is the map of the secondary markets.
DESIRABLE CHARACTERISTICS OF MARKETS
Whenever financess change custodies as a consequence of voluntary exchanges, fiscal markets can be said to be, but some markets function better than others. It is helpful to hold standards which can be used to measure the effectivity of these markets. To get down with primary markets, the most urgent demand of users is that they should be able to make concern with each other at low cost. If minutess costs, such as securities firm fees, are a important proportion of the financess borrowed so the effectual rate of involvement paid on loans will be really high, cut downing the demand for loanable financess. So one trial of the economic value of a primary market is the mean proportion of the borrowed financess consumed in dealing costs. It is besides good to be confident about the being of a healthy secondary market, and be certain that securities are genuinely negotiable. The chief value here is in understating the involvement compensation sought by loaners. It follows that a primary market should run in such a manner that it minimises breaks to the secondary markets. Suppose each new issue of loans caused dramatic falls in the monetary values of old issues, possibly because each new issue more than marginally increased the entire stock of a peculiar type of security. The consequence of new issues might so be diminish the monetary value and sabotage the value, and therefore the liquidness, of old issues, in bend negatively impacting the primary market. Therefore, it is desirable that minutess in the secondary market should be much greater in value and volume than those in the primary 1. There are bounds to the extent to which it is possible for markets to convey about the optimum allotment of financess. Mistakes occur because determinations are made with imperfect information, but the costs of deriving more information are greater than the benefits. The extra information may be known to transactors in the secondary market, and if so, the status and chances of borrowers will be monitored at that place. To now see secondary markets, it is of import to retrieve that the intent of a secondary market is to enable holders of securities to change over them into hard currency without undue loss. Therefore one desirable feature of this market is for it to be an active 1.