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Financial markets provide an avenue for selling and exchanging physical assets, and many businesses go into these markets to raise capital and make investments. The markets have five major components; the derivative market, equity market, debt market, foreign-exchange market, and mortgage market (Sobti, 2018). The derivative market is a component of a financial market where imitative contracts such as futures, options, forwards, and swaps are traded. A derivative is a contract between two parties, and its value is derived from a known underlying asset. The derivative market is relevant to Jagdambay Exports since it helps them manage risks in the most effective way possible. The debt market is where key debt instruments such as bonds and mortgages are traded. These instruments are a form of asset payable to the title-holder at a later specified date, usually at an interest. The debt market is relevant and important to organizations such as Jagdambay Exports since it helps them finance their operations.
The equity market is the place where stocks and shares of companies are traded. This market is also referred to as the stock market, and trading can be done using the over-the-counter method or through physical exchanges. Like the debt market, the stock market is relevant and important to Jagdambay Exports since it helps them raise capital for their operations. This market will likely play the most pivotal role should the exporter opt to go public. Borrowers who want to build homes or invest in real estate can assess funding through the mortgage market, a component of financial markets. The mortgage market is important to Jagdambay Exports because, at some point, the company has to build stores that it will use as warehouses. The final component of the financial systems is the foreign exchange market which deals with exchanging currencies. Since Jagdambay Exports is involved in many foreign markets, this component is key to its operations in understanding how to take advantage of foreign exchange rates. The exporter can identify a niche that helps minimize transactional costs by mastering the foreign exchange market component.
The Chief Financial Officer (CFO) for Jagdambay Exports needs to understand that financial markets differ from physical assets. A financial asset is a non-physical asset that cannot be seen, felt, or touched, and its presence is expressed in the form of documentation (Succar & Poirier, 2020). Some common financial assets are stocks, cash, bank deposits, and mutual funds. On the other hand, physical assets are those assets that can be seen and touched and include buildings, tools, minerals, cars, and childrens garments. Another key difference between these two types of assets is that financial assets do not lose their value through wear and tear, and as such, they are not depreciated. Their value, however, may reduce by them losing their interest rates of any other expected form of return. Physical assets lose their value through depreciation, which is calculated by accountants using various methods such as straight line or reducing balance method.
Since Jagbambay Exports is considering going public, the difference between understanding how both markets operate and the pros and cons of each is imperative. After Jagdambay Exports becomes a publicly traded company, the CFO will have to deal with both financial and physical assets. The company will have to issue its stocks during the initial public offering. Thus, the CFO needs to be aware of how they operate. The company should be optimistic about this initial entry as the US investors are quite speculative, and raising capital in the form of stock is a very popular method in the country. The company may also have to issue bonds and debt instruments to help it raise capital for its operations in the US. Knowledge of the physical asset market in the US will help Jagdambay Exports know the required amount of capital for fixed assets and raise it.
Money and capital markets are relevant to any organization as they offer two alternative ways of gaining capital and investing. Money markets are usually short-term and mature in less than one year, and investors use them to maintain wealth (Cartelier, 2018). Examples of money markets include treasury bills, certificates of deposit, commercial paper, and trade credit. Money markets are characterized by low risk and low volatility and are very liquid by nature. In contrast, capital markets are a long-term form of investment, normally more than a year, and the main objective of the investors who use them is to generate wealth. These markets are characterized by high levels of risk, volatility, and low liquidity. Common examples of money markets include stocks, debentures, shares, and bonds. Both of these markets are relevant to Jagdambay Exports since the company must use different investment strategies at different times. However, it will vary according to the organizational goals and objectives for the market to invest immediately.
Capital markets have two categories; primary and secondary, where primary markets are issued to the public while secondary markets are issued to traders. If the company decides to issue additional common stock, the CFO needs to consider the best way to issue the stock as both have advantages and disadvantages. If he chooses the primary market, raising the common stock will be cost-effective, and it will be easy to trade, thus high liquidity. If he opts for the primary market, the stock will be exposed to high risk. On the other hand, issuing the stock through the secondary market is that the company will enjoy constant access to stock buyers. However, constant price fluctuations in the secondary market may result in the stock unexpectedly losing its value.
The CFO needs to know that there are three primary ways in which capital may be transferred between savers and borrowers. The three include; using a financial intermediary, investment banking, or direct transfer (Duffie, 2019; Fuchs et al., 2021). Financial institutions include banks, insurance companies, and pension funds, among others. Here, people deposit their money for different purposes and transfer it from one person to another. They take risks for transferring the monies, but they enjoy interest rates when the money is returned. This method is a form of indirect transfer, and thus, it is less risky. The disadvantage of this method is that the rate of returns is little due to interest rates incurred.
Capital can also be transferred indirectly using investing banking institutions. In this transaction, money flows from the saver to the borrower through an investment banker known as an underwriter. Stocks or bonds traded also follow the same process from the seller to the buyer. The main advantage of using investment banking is that they help both parties with the decision-making. The disadvantage is that a fee must be paid for the transfer to be done. For the direct transfer, capital will flow directly from savers to investors without passing through an intermediary. The transfer can be done over the counter, but most means of transfer in the recent past have been electronic. The main advantage of direct transfer is that the cost is lower compared to the two indirect methods discussed above, and it is also less risky. Unlike investment banking and using a financial intermediary, the indirect transfer method gives the borrowers and savers no expert opinion.
Securities can be traded either over the counter or through physical exchanges. The trading stock started by use of physical exchange locations like the NYSE. Over the years, many locations for trading stocks have been established worldwide. Over time the physical exchange locations evolved and began to play pivotal roles in the exchange, such as setting rules and regulating information flows about trading. Electronic trading has also eliminated the need for physical trading; most stocks today are traded physically using electric means. Over-the-counter trading is done through dealers who decide on the price to buy stocks (bid) or the prices to sell them (offer). The best advice for the CFO would be to adopt physical exchange to using the over-the-counter exchange. This is because the physical exchange market is more stable in comparison. Dealers in OTC are known to quote different prices to buyers and sellers. Since Jagdambay Exports will be a new entry into the US market, physical exchange markets will offer fewer barriers. They will be going for physical exchange to avoid being quoted unfavorable prices since they are not well known.
The US financial system is one of the most organized and largest in the world, and Jagdambay Exports could reap many benefits if they use it well. It has great diversity, is constituted by many small banking institutions, and is controlled by well-set laws to shield against inefficiency. It leads the world in many areas in terms of financial innovation. Financial institutions in the US include many small commercial banks, Thrift and depository institutions, finance companies, insurance companies, pension funds, mutual funds, investment banks, and dealers. The system has a long history of gaining its root back in the late 1970s (Quinn & Turner, 2020). It possesses the worlds two largest stock exchange markets, the NASDAQ and the New York Stock Exchange (NYSE), which are well known worldwide.
Based on my advice, I would expect that Jagdambay Exports achieve its target of becoming well established in the US financial market in a period of one to two years. This is possible since the organization has managed to survive in more restrictive financial markets like the Indian. The physical market is likely to respond positively to the exporter since its balance sheet as of now reflects that of a stable organization. The CFO should, however, be aware that several unforeseeable challenges may limit the smooth entry; hence they should be patient. I learned from this assignment that the US financial system is fragmental, diverse, and has many credits extended in the form of securities. Additionally, I understood how the physical exchange system and the over-the-counter systems work. Finally, I learned the process that a person should follow when buying securities and the processes organizations follow when going public or issuing additional stock.
References
Cartelier, J. (2018). Money, markets and capital: The case for monetary analysis. Routledge.
Duffie, D. (2019). Prone to fail: The pre-crisis financial system. Journal of Economic Perspectives, 33(1), 81-106.
Fuchs, S., Kachi, A., Sidner, L., & Westphal, M. (2021). Aligning Financial Intermediary Investments with the Paris Agreement. World Resources Institute. Web.
Sobti, N. (2018). Domestic Intermarket linkages: Measuring dynamic return and volatility connectedness among Indian financial markets. The Decision, 45(4), 325-344.
Succar, B., & Poirier, E. (2020). Lifecycle information transformation and exchange for delivering and managing digital and physical assets. Automation in Construction, 112, 103090.
Quinn, W., & Turner, J. D. (2020). Boom and bust: A global history of financial bubbles. Cambridge University Press.
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