Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Financial Markets The financial market is a market that brings together parties who have excess funds (savers, investors) and those who need funds (companies, the government) in the form of securities such as stocks, bonds, and others. The financial market consists of the money market and the capital market. 1. Money market The money market is a market in which funds are borrowed or lent in the short term, usually less than one year. Transactions in the money market include time deposits, commercial paper and certificates of deposit. The money market also functions as a place where banks obtain funds which are then used to extend credit. The central bank also plays an important role in the money market by setting benchmark interest rates to control inflation and influence economic activity. 2. Capital market The capital market is a market where stocks, bonds and other securities are traded with a maturity of more than one year. The capital market has two types, namely the stock market and the bond market. • Stock Market: The stock market is the market where shares of publicly traded companies are traded. Shares are sold in sheets and can be purchased by anyone. Shareholders benefit from dividend distribution and capital gains if the share price rises in the future. • Bond Market: The bond market is the market where government and corporate bonds are traded. Bonds are debt securities issued by companies or governments as a way to raise funds. Bondholders benefit in the form of interest. The financial market has a very important role in the economy, namely: 1. Improve Resource Allocation: Financial markets enable companies and governments to obtain funds from investors to finance productive projects. Financial markets also enable savers to invest their funds in a productive manner. 2. Accelerating Economic Growth: Financial markets accelerate economic growth by enabling companies to develop productive projects quickly and efficiently. Financial markets also provide wider access to finance and assist in job creation. 3. Improving Societal Welfare: Financial markets allow individuals to invest their funds in investment instruments that have the potential to provide long-term returns, such as stocks and bonds. This can help improve the welfare of society through increasing the value of individual wealth. 4. Helps Stabilize the Economy: Financial markets help maintain economic stability by enabling the flow of funds in the economy. For example, when interest rates rise, investors will tend to move their money from riskier investments to safer investments, such as government bonds. This can help stabilize financial markets and prevent excessive volatility. 5. Provides Liquidity: Financial markets provide a means to obtain liquidity in the short term. This can help companies and governments meet immediate financial needs without having to wait a long time for funding from other sources. However, financial markets also have risks and weaknesses, such as: 1. Market Risk: Price changes in financial markets can cause investment values to increase or decrease sharply in a short period of time. This can lead to significant losses for investors. 2. Credit Risk: Credit risk is related to the ability of borrowers to repay their loans. If the borrower defaults on the loan, the investor may suffer losses. 3. Liquidity Risk: Liquidity risk is related to the ability to sell investments in a reasonable time. If financial markets experience a liquidity crunch, investors may not be able to sell their investments at a fair price. 4. Reliance on Information: Investors must rely on available information to make investment decisions. However, such information may be inaccurate or incomplete, which may cause investors to make wrong decisions. In conclusion, financial markets play an important role in the economy by accelerating economic growth, increasing people's welfare, and helping to maintain economic stability. However, financial markets also have risks and weaknesses that investors need to be aware of. Therefore, it is important for investors to understand the risks and benefits of investing in the financial markets before making an investment decision.