The Financial Markets

In most economies around the world, markets are used to carry out

this complex task of allocating resources and producing goods and ser-

vices. What is a market? It is an institution set up by society to allocate

resources that are scarce relative to the demand for them. Markets are

the channel through which buyers and sellers meet to exchange goods,

services, and resources.

There are essentially three types of markets at work within the eco-

nomic system: (1) factor markets, (2) product markets, and (3) financial

markets. The factor markets allocate factors of production—land, labor,

and capital— and distribute incomes in the form of wages and other pay-

ments to the owners of productive resources. People use most of their

income from the factor markets to purchase goods and services in prod-

uct markets. Food, shelter, automobiles, books, theater tickets, gasoline,

and swimming pools are among the many goods and services sold in

product markets.

The financial markets channel savings. They are composed of the

money markets and the capital markets. Money markets are the markets

for debt securities that pay off in the short term (usually less than one

year). Capital markets are the markets for long-term debt and for equity

shares.

The term money market applies to a group of loosely connected mar-

kets. They are dealer markets. Dealers are firms that make continuous

quotations of prices for which they stand ready to buy and sell money-

market instruments for their own inventory and at their own risk. Thus,

the dealer is a principal in most transactions. This is different from a

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stockbroker acting as an agent for a customer in buying or selling com-

mon stock on most stock exchanges; an agent does not actually acquire

the securities.

The financial markets can be classified further as the primary market

and the secondary markets. The primary market is where securities are

initially issued: a bank lends a household $100,000 to buy a house; the

U.S. Treasury raises money by selling a $10,000 bond; a new corpora-

tion issues stock. In each case, a financial record of the transaction is

created, showing the existence of debt or equity.

If these records of debt or equity are then sold to others, this subse-

quent trade is said to occur in the secondary market. There are two kinds

of secondary markets: the auction markets and the dealer markets.

The equity securities of most large firms trade in organized auction

markets, such as the New York Stock Exchange, the American Stock

Exchange. The New York Stock Exchange (NYSE) is the most impor-

tant auction exchange. It usually accounts for more than 85 percent of

all shares traded in auction exchanges. Most debt securities are traded

in dealer markets. Many bond dealers communicate with one another

by telecommunications equipment. Investors get in touch with deal-

ers when they want to buy or sell, and they can negotiate a deal. Some

stocks are traded in the dealer markets. When they do, it is referred to as

the over-the-counter (OTC) market.

In February 1971 the National Association of Securities Dealers

made available to dealers and brokers in the OTC market an automated

quotation system called the National Association of Securities Dealers

Automated Quotation (NASDAQ) system.

Look through the text once again and say which statements are true.

Correct the false ones.

1. There are two main types of markets: product market and financial

market.

2. The factor markets allocate factors of production.

3. The financial markets channel goods and services.

4. Money markets are the markets for long-term debt and for equity

shares.

5. Dealers make quotations of prices.

6. Stockbroker is a principal in most transactions.

7. Market can be classified as the auction markets and the dealer

market.

8. Most debt securities are traded in dealer markets.

9. Subsequent trade occurs in the primary market.

Text 5

Read the English and Russian versions of the following texts. Compare their structure

and the information given in them. Find out what is common and in what they differ;

write down the key terms from each text and compare their definitions.