The financial services industry is impacted by a number of government regulations, albeit the precise implications vary depending on the regulation's nature. When laws grow, financial services professionals typically bear a greater burden because it requires time and effort to adjust organizational operations in order to adequately comply with the new regulations.
Overseeing the securities markets and shielding investors from fraud and poor management are the responsibilities of the Securities and Exchange Commission (SEC). Congress passed the Sarbanes-Oxley Act in 2002 as a reaction to multiple financial scandals involving major corporations such as WorldCom and Enron. These businesses were mandated by the act to set up internal controls in order to stop fraud and abuse in the future. Although putting these regulations into place was expensive, the act provided more security for investors in financial services, which can boost investor confidence and encourage corporate investment in general.
In an ideal world, regulations of this nature would encourage more investment and support the stability of financial services companies. The 2007 financial crisis provided proof that things aren't always as they seem. The SEC has relaxed its net capital rules, allowing major investment banks to carry significantly more debt than equity. There are other types of rules that serve interests unrelated to business and that don't benefit asset management or financial services. Environmental restrictions are a typical illustration of this. The Environmental Protection Agency (EPA) regularly requires firms and industries to update their machinery and use more expensive techniques in an effort to reduce their environmental effect.
These kinds of regulations often have a domino effect, causing the financial sector to be volatile and the stock market to be turbulent when they are being implemented. Government regulation has also been used in the past to save businesses that might not have survived otherwise. Overseeing the Troubled Asset Relief Program gave the US Treasury the authority to stabilize the US financial sector during the 2007 and 2008 financial crises. The government serves as a middleman between brokerage companies and customers. Excessive regulation can impede innovation and drive up costs, whereas insufficient regulation can lead to bad management, corruption, and collapse. Ralph Nelson Elliott established Elliott Wave Theory in the 1930s.
This makes it difficult to anticipate exactly how government legislation will affect the financial services sector, even though these consequences are typically significant and long-lasting.
One kind of financial market is the stock market. When individuals purchase and sell financial items, such as stocks, bonds, currencies, and derivatives, financial markets are created. To guarantee that prices are set in a way that is both appropriate and efficient, financial markets rely significantly on informational transparency.
While certain financial markets, such as the New York Stock Exchange (NYSE), exchange trillions of dollars' worth of assets every day, others are tiny and barely active. A financial market that allows investors to purchase and sell shares of publicly traded corporations is the equities market, sometimes known as the stock market. New stock issues are sold on the principal stock market. Any further stock trading takes place in the secondary market, where buyers and sellers of securities that investors already possess transact. The money markets are known for their high degree of safety and comparatively lower interest returns when compared to other markets. They typically deal in securities with highly liquid short-term maturities (less than one year).
The money markets involve high volume trades between dealers and institutions at the wholesale level. These include money market accounts opened by bank clients and money market mutual funds purchased by private investors at the retail level. Buying short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills are a few alternative ways that individuals might participate in the money markets. Futures contracts are listed and sold on futures exchanges. The futures markets are well-regulated, employ clearinghouses to settle and confirm contracts, and use standardized contract specifications in contrast to forwards, which trade over-the-counter.
Similar to this, options markets list and oversee options contracts. One example of this is the Chicago Board Options Exchange (Cboe). Exchanges for futures and options may list contracts on a range of asset types, including commodities, fixed-income securities, stocks, and more. The stock market, bond market, FX market, commodities market, and real estate market are a few instances of financial markets and their functions. In addition, capital markets, money markets, listed versus OTC markets, and primary versus secondary markets can be distinguished within the financial markets. The money, participation, and liquidity that financial markets offer are critical for both economic stability and growth.
Financial markets are necessary for the efficient allocation of capital, yet they also significantly reduce the amount of economic activity that includes trade, investments, and growth opportunities.
The stock and bond markets are used by businesses to raise funds from investors, making markets a vital component of the economy. Speculators make directional bets on future prices by looking to different asset classes. Hedgers utilize the derivatives markets to offset different risks at the same time that arbitrageurs try to profit on mispricings or anomalies seen in different markets. In order to get paid a commission or other charge, brokers frequently serve as middlemen between buyers and sellers.
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