Global Financial Markets And Global Financial Theory Finance Essay

The recent Global Financial Crisis has made all persons cognizant of the function that Financial Markets drama in an economic system. A fiscal market is a market where an investor can purchase fiscal trade goods such as stocks and bonds. A fiscal market helps raise capital, cut down hazard and reassign financess such as currency markets. It helps to make stableness and solvency in the economic system. It helps to modulate financial and pecuniary policies that assist in keeping the debt and equity ratios of concern organisations. The coming of the free market system has led to the creative activity of a planetary fiscal market. This market is strongly linked and integrated with major fiscal and concern centres of the universe. Any fluctuation in a individual fiscal market can do reverberations in other parts of the universe. Fiscal markets exist in order to accomplish smart and prudent financial and pecuniary policies.

The most common type of fiscal market that exists around the universe is the stock exchange, where these securities can be bought and sold. This is merely one illustration ; there are many subcategories of fiscal markets, which are:

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Capital Markets aa‚¬ ” Stock markets and Bond Markets

Commodity Markets

Money Markets

Derived functions Market

Insurance Markets & A ;

Foreign Exchange Markets

The planetary fiscal theory

Charles H. Dow was the individual behind The Wall Street Journal, the most honored fiscal diary in the universe. Dow has a acquaintance with the stock exchange which has helped him with his theory, now known as the Dow Theory. The Dow Theory provinces that there is a relationship between the stock market norms and other concern activity that takes topographic point in the state.

After analyzing finance and looking at how the markets operate we now know that concern activity is related to the stock market norms. The Dow Theory is a tool which can assist us do a determination about their investings from a concern position. Another of import part to the planetary fiscal theory by Charles H. Dow is the Dow Jones Indexes.

The Dow Jones Indexes provide the investors with a list of companies. It helps them track different companies without holding to put in them. This is because all companies on this index are controlled by clear and systematic criterions.

Joseph Schumpeter was an economic expert and a political scientist. During his life-time he worked on many undertakings and gave us many theories. One thought that Joseph Schumpeter gave was that if we continued utilizing gold as a medium of currency so it would free its value, therefore the medium of exchange that we have now can be credited to him. In this manner, even though money looses its value but gold does non. He besides introduced the concern rhythm which was more relevant to the inventions being made in the industrial sector instead than the banking sector. ( Mogg, W. R. 2008 )

Nikolai Kondratiev was a Russian economic expert, who came up with The Kondratieff Cycle. Harmonizing to him there are 50-70 twelvemonth rhythms in market economic sciences. In the first portion of the moving ridge there is inflationary force per unit area while in the 2nd half there is deflationary force per unit area. The moving ridge starts when the recognition degrees are really low, steps and stairss are taken to increase the recognition degrees, this lasts for a period of 60 old ages and ends with really high recognition degrees. At the terminal of this clip period, there is a recession because of the really high recognition degrees. ( Theroxylandr )

The fiscal analysts of today have non taken the long sight when doing determination which has resulted in the crisis that we have experienced. Looking at the current conditions we need to believe about the long term and maintain in head the Kondratieff Cycle or Wave.

Most of the theories and tools that these theoreticians came up with are still widely used and studied by all fiscal pupils today. The new engineering and tools that are being widely used today are based on their thoughts and difficult work.

Efficient Market Hypothesis

The Efficient Market Hypothesis says that investors should non be able to crush the market as all information will be reflected in the stock monetary value ; this is because of the efficient operations of the stock market. In other words, the stock monetary value will ever be just and it can non be under or over-valued at any clip.

In world, this is non the instance. We have witnessed many investors being able to crush the market and there have been incidents which have proved that stock does divert from the just monetary value that it should hold. ( Investopedia )

The Efficient Market hypothesis consists of three degrees of market efficiency: weak signifier, semi-strong signifier and strong signifier efficiency. Some empirical research was conducted on all three types of efficient markets and it was found that the weak signifier and the semi- strong signifier of market efficiency can still be beaten. It is normally investors who have inside information who beat the market more frequently than the mean investor. ( Brigham, E. F. & A ; Ehrhardt, M. C. 2003 )

Harmonizing to the neo-liberal positions which have been expressed by Kevin Rudd in his article, the markets are efficient it is external factors which force the markets to go inefficient. These external factors can be the authorities intercession and jobs within the system. In the neo-liberal point of position, if a job does be within the market it will self-correct, therefore doing the market efficient. ( Rudd, K. Feb. 2009 )

From the above statement we can state that planetary fiscal markets are efficient if they are left to be operated on their ain. Intervention from external factors consequences in inefficiency which causes crises like the one the universe has merely experienced and is still atoning the reverberations.

An statement which can be presented in favour of the Efficient Market Hypothesis is that the markets may be efficient to some extent but if the investors knew this so they would non seek and crush the market and merely accept the monetary values as they are. This would ensue in the market being inefficient, therefore the market is efficient because the investors are seeking to invariably crush the market. ( Investor Home )

The markets remain efficient because of the investors who are invariably seeking to surpass the market. There is no market in the universe which is merely efficient or merely inefficient. All markets are both to some extent, when a market is less efficient so investors who are more experient and keep more cognition can easy surpass the investors who are less experient.

From all the above information, planetary fiscal markets are efficient to some extent and they can besides be inefficient because of the intercession of external parties, as per the neo-liberalists theory.

We have experienced many fiscal crises over the past century and each clip the market did non self-correct itself, it required external forces to assist it confront the crises and draw it out of the sand. On the other manus, the efficient market hypothesis can non be scrapped that easy. It has provided the market with an penetration that was antecedently non-existent. The theory should non be used but can be referred to when speech production of the markets theoretically. ( Rudd, K Feb. 2009 )

Could the Global Financial Crisis have been predicted or prevented?

The current planetary fiscal crisis has been termed as the worst economic recession since the 1930s when the Great Depression occurred. The crisis has witnessed the razing and laying waste of the fiscal sector. It has besides witnessed the rise in rising prices and cost of life. Further consumer disbursement has plummeted as 100s of 1000s of people have lost their occupations. The reverberations have been felt in about every major economic system of the universe. An on-going argument between analysts is as to whether the planetary fiscal crisis could hold been predicted or prevented. The planetary fiscal crisis which has hit the universe for about 2 old ages now has affected many things around the universe. It has non merely affected the fiscal markets but besides the labour and nutrient markets. Peoples have lost their occupations and due to the rising prices the hapless have non been able to buy nutrient. Around the Earth, the low income groups have been pushed to dire conditions of life.

The crises has resulted in many concerns shuting down and investings all around the universe has ab initio come to a base still while many people were drawing their money out from the markets. The state of affairs has improved somewhat but still the conditions are non really profitable to do new investings. Those people who are embarking into new concerns are taking a really large hazard.

When we look back at the events which resulted in this fiscal crisis, we see that it could hold been prevented or at least stopped before it impacted and affected the whole universe. There were a few failures which resulted in the current crisis, which were: the failure to pull off the U.S. trade shortage which resulted from giving off inexpensive loans at low involvement rates ; the big sum of mortgage funding that was issued without any money to endorse the loans ; many new fiscal instruments were created because of the deregulating of the fiscal sector. Initially lone Bankss were allowed to give out mortgage loans but after the deregulating, investing Bankss and besides non-bank establishments created these loans and so farther sold them to other investors in bundles known as Collateralized Debt Obligations ( CDOs ) . ( Multinational Monitor )

Another ground for the failure of the fiscal sector was that the evaluation bureaus did non rate the CDOs which resulted in investors puting in them without really cognizing precisely how hazardous they were. The last and concluding job was that the loaners were taking advantage of the borrowers. They would supply such footings and conditions of the loan which were non suited for the borrower but yet the borrower still had to accept.

All these failures tell us that ordinance or at least proper cheques and balances could hold prevented this crisis from taking topographic point. Besides, the people who were really coming up with fiscal inventions could hold predicted the terminal consequence, had they been thorough in their research. Besides it has been suggested that the fiscal sector should hold been regulated in order to forestall planetary crisis and recession. Such a scheme would hold reduced or mitigated the losingss caused by the current planetary fiscal crisis. The planetary fiscal crisis has prompted policy shapers to oppugn the basicss of the capitalist and free market system. There have been concerns that the unseeable manus of the market can non be used to rectify the defects in the free market system. Governments worldwide have responded by nationalising troubled mortgages and assets. They have besides taken over fiscal establishments in order to advance fiscal stableness and solvency. Some analysts have even predicted the autumn of capitalist economy while others have called for authorities ordinance in order to bail out companies confronting the recognition crunch.

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