The World of Finance
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The financial services sector
The scale of the global financial services sector is undoubtedly enormous, and some of the statistics involved are so vast that the numbers become almost incomprehensible. For example, according to statistics from the Bank for International Settlements (BIS), daily turnover in the foreign exchange market can exceed $6 trillion, while the total value of stocks listed on global stock exchanges exceeds $109 trillion as of the end of 2020, according to the World Federation of Exchanges.
The growth of financial services around the world has been greatly aided by the extraordinary development and technological changes resembling the industrial revolutions in various countries between 1760 and 1900. The combination of rapid technological change and globalization has resulted in low inflation. strong growth and rapid spread of the bond and stock markets. Technology has also heralded major changes in societies driven by urbanization, growing income inequality and changing consumption patterns, particularly in developing countries, as exemplified by China and India, leading to their financial services needs.
Some people around the world leave their livelihood to have disposable income for leisure and to save and invest for the future and other generations. Therefore, some form of financial management is required, be it a simple bank account for life insurance products. Governments are also investing huge amounts in infrastructure, so capital has to be raised from the financial markets.
Financial firms play an important economic function in matching those who have money to invest (for growth or future revenue) with corporations and governments that need capital to invest, expand, or fund their ongoing operations require.
The financial services sector plays a critical role in developed and developing economies, bridging the gap between organizations that need capital and organizations that have capital available for investment. For example, an organization that needs capital may be a growing business, and the capital may be provided by people who are saving into a pension fund for their retirement. It is the financial services sector that routes invested money to those organizations that need it and that provides transfer, payment, advisory and administrative services.
The role of the financial markets
Financial markets are best described in terms of the functions they perform. The main functions of financial markets are:
Raise capital for companies. This function is performed by exchanges.
Providing cash conversion by channeling short-term savings into longer-term business investments.
Bring buyers and sellers together in highly organized marketplaces to reduce search and transaction costs and facilitate pricing so securities and other assets can be objectively valued. This function is performed by stock exchanges, futures exchanges and other marketplaces.
Allocate capital efficiently from low-growth to high-growth areas.
Risk transfer from risk-averse to risk-seeking investors. This function is assumed by the derivatives markets, but also by the insurance market, which draws the risk from a large number of insurance contracts. However, it is not a function of exchanges or stock exchanges.
Providing credit and loan facilities to connect excess funds to investment opportunities. Banks and stock exchanges perform this function.
The Stock Exchange
An exchange is an organized marketplace for the issuance and trading of securities by members of that exchange. Each stock exchange has its own set of rules and regulations for companies seeking a listing and continuing obligations for those already listed. All exchanges offer both a primary and a secondary market.
Primary markets exist to raise capital and allow excess funds to be combined with investment opportunities, while secondary markets allow the primary market to function efficiently by allowing buyers and sellers to trade back and forth in issued securities.
Secondary markets also reduce the cost of issuing securities in the primary (or new issue) market by allowing liquidity into otherwise illiquid long-term investments. Very few people would invest if there was no market through which to sell their investments.
However, these tasks can only be carried out efficiently if accurate and transparent information is made available to the markets, so that securities can be valued objectively and investors can make informed decisions. This is particularly important if capital is to be efficiently allocated from perceived low-growth to high-growth areas for the benefit of the wider economy. A lack of transparency and an inability to properly interpret information was evident in the way capital flowed from the so-called old economy to the perceived new economy during the dot-com boom. More recently, due to past financial crises, regulators are examining how to improve price transparency and valuation of securities, for example in the bond and derivatives markets.
The Forex Market
The foreign exchange (FX) or forex market serves a variety of needs, from businesses and institutions buying foreign assets denominated in currencies other than their own, to satisfying the foreign currency needs of business and leisure travelers.
The increasing globalization of financial markets has led to an explosive growth in international capital movements, with over US$5 trillion flowing through the world's foreign exchange centers every day, with over a third of this turnover passing through London alone. Despite the introduction of the euro, the US dollar remains the world's most heavily traded currency, the world's main reserve currency.
The forex market does not have a centralized marketplace. Instead, it encompasses an international network of major banks and currency dealers, each making up a market for a range of currencies in a truly internationalized market. Forex trading became a 24-hour trade as it could take place in the different time zones of Asia, Europe and America. London has grown into the world's largest foreign exchange market. Other major centers are the US, Japan and Singapore.
If you, as a user in social trading, not only copy the portfolios of successful signal providers, but also closely observe their development, social trading offers you a good opportunity to better understand how the financial markets work and to gain your own experience.
The Forex market is open 24 hours a day, although it is not always active all day. The forex market can be divided into four major trading sessions – the Sydney session, the Tokyo session, the London session and the New York session. The table below shows the opening and closing times for each session. (Note: these change throughout the year for those countries that observe daylight saving time during the winter.)
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