The financial market provides monetary turnover, without which no economy would function. Its origins date back to ancient Greece and Rome, where all kinds of goods and services began to be traded. The development of money also contributed largely to the creation of the financial system. From this entry you will learn what the financial market is and what types of financial instruments there are in Poland. You will also learn the basic goals of financial investments.
What is the financial market and how does it work?
The Polish financial market is a place where various financial transactions take place. It covers both buying, selling and exchanging. It ensures the flow of funds between people who have them and entities that need them. To put it simply: one person needs capital to be able to achieve a specific goal, and the other person gives it to him – because he has a surplus. This forms the basis of money circulation in free market economies.
Transactions involving financial assets are concluded on the financial market. These financial assets include: shares, bonds, derivatives and currencies. This applies to both short-term and long-term capital.
What is the purpose of the financial market? Basically, the idea is that it allows investors and institutions to gain access to capital. Thanks to it, investors can diversify their portfolio of assets. Moreover, it enables risk management, or more precisely, its reduction.
What is the Polish Financial Supervision Authority?
The Polish financial market is supervised by institutions that were established specifically for this purpose. In Poland, this is handled by the Polish Financial Supervision Authority, which was established in 2006. It is the main body regulating and supervising the activities of the financial sector in Poland.
Her tasks include:
- supervision of the banking sector,
- supervision of payment institutions (and payment service offices),
- supervision over the cooperative funds sector,
- supervision over the capital, insurance and pension markets,
- supervision of electronic money institutions.
What else does the Polish Financial Supervision Authority do?
- performs activities aimed at the proper functioning of the entire financial market,
- carries out educational and informational activities regarding the functioning of the financial market,
- performs activities that influence the development of the financial market and its competitiveness,
- can amicably resolve disputes between financial market participants,
- participates in the development of draft legal acts (related to financial market supervision),
- imposes penalties in the event of violation of regulations,
- performs other tasks specified in individual acts.
Broadly speaking, financial market supervision seeks to achieve several objectives. The first is to ensure the proper functioning of the market – its transparency, security and stability. The second concerns ensuring the protection of the interests of individual participants of this market. The next one involves citizens’ trust in the financial market.
Segments of the financial market in Poland
There are four segments of the financial market. Belong to them:
- capital market,
- currency market,
- money market,
- futures market.
Each of the above-mentioned segments performs different tasks. However, all of them are directly related to servicing individual market participants, as well as its general functioning. We will discuss each of them later in the article.
The capital market includes transactions in instruments with a maturity period of more than one year. Maturity date means the date on which the time to settle the obligation expires.
The capital market allows you to obtain funds from people or entities that have surplus funds. They are used to finance long-term projects.
Interestingly, on this market it is possible to conclude transactions for a period that we choose. This more or less means that we can determine the time for which we want to invest our savings. The advantages of this market definitely include liquidity, which is usually high. This is because stock exchanges create a public market.
The instruments of this market include equity and debt securities.
Equity securities include:
- investment certificates.
Debt securities include:
- corporate bonds,
- municipal bonds,
- treasury bonds and NBP,
- mortgage bonds.
The currency market is the space where currencies are traded – both sales and purchases. Due to the existence of supply and demand, the exchange rates of specific currencies are determined – on the basis of the relationship between the price of one currency and another. This applies to transactions that take place on the interbank market. It is worth remembering that these are always coins from different countries. That is, the price of a given currency determines its value in a foreign currency.
Transactions conducted on the currency market perform the following functions: speculative, payment or hedging.
The segments of the foreign exchange market are:
- spot market – where the delivery of currencies takes place in real time,
- futures market (also known as the derivatives market) – the purchase price is determined in advance and the transaction takes place in the future.
In the case of the currency market, its most important participants are financial institutions. They form a group that we call market creators. In addition, the following also participate in the currency market:
- speculators and arbitrageurs,
- currency brokers,
- bank and non-bank dealers,
- central banks,
- state treasury administration,
- natural persons and companies conducting investment activities.
The money market is a segment of the financial market within which various transactions are carried out. They are settled either in cash or non-cash, and their maturity period is a maximum of one year.
The participants of the money market in Poland include:
- National Bank of Poland,
- The State Treasury (which puts Treasury bills into circulation),
- individual investors,
- companies (that issue trade vouchers),
- commercial banks,
- institutional investors (including funds and insurers).
While on the topic of the money market, we also need to discuss the basic purpose of the National Bank of Poland. It concerns primarily maintaining an appropriate level of financial liquidity in the banking sector. This is possible thanks to the use of financial loans, open market operations and the so-called reserve requirement. The latter determines the amount of cash that commercial banks must keep at the central bank. It is created partly from funds deposited in banks.
The basis of open market operations is the unconditional and conditional purchase or sale of short-term securities and currencies. In addition, their operation is also based on the issue of their own debt securities, i.e. money bills.
The futures market is used to trade derivatives. Their prices are based on the prices of basic assets – they are directly related to them.
This market allows for the following transactions: speculative, arbitrage and hedging. Speculating investors care about changes in commodity prices because they assume part of the risk associated with it. Arbitrage trading allows you to make money on price differences between the same types of assets, except that they occur in separate markets.
In turn, hedging transactions serve to protect both investors and individual transactions against financial risk. They are an irreplaceable type of transaction due to the fact that financial markets can be volatile and even completely unpredictable. Thanks to them, investors are able to achieve stable profits.
Derivative instruments include:
- interest rates,
- stocks and bonds,
- futures contracts,
- currency and interest rate swaps,
- commodity and currency options,
- FRA futures transactions,
- forward currency transactions.
FRA transactions (i.e. Forward Rate Agreement) are based on determining the interest rate that will apply to counterparties in the future. They concern a specific amount expressed in a given currency for a pre-planned period.
A forward currency transaction (TTW) is a transaction in which the parties agree to exchange two currencies. This takes place on a previously scheduled date. The exchange rate is fixed at the time of transaction.
Definition and types of financial instruments
Financial instruments are securities applicable on the financial market. From a legal point of view, it is a contract between at least two parties that creates financial assets for one of them and liabilities for the other.
We can also name investments that allow us to make money this way.
Among the financial instruments we can distinguish:
- depositary receipts,
- subscription rights,
- mortgage bonds,
- rights to shares,
- investment certificates,
- derivatives for shares and bonds,
- other instruments entitling them to purchase or take up.
Some of the financial instruments present do not belong to securities. These are:
- money market instruments,
- commodity derivatives,
- options to buy or sell financial instruments,
- currency options,
- interest rate options,
- participation titles in institutions where collective investments are made,
- financial futures contracts,
- forward interest rate agreements,
- equity swaps,
- interest rate swaps,
- currency swaps,
- other financial instruments that are settled in cash.
It is worth adding that there will also be other instruments. What? Those admitted to trading on the regulated market of one of the European Union countries. This also includes instruments for which someone is known to be applying to be admitted to trading.
Financial investments and their goals
The subject of financial investments are the so-called Financial instruments. This means that we invest in something that does not have a material form, such as real estate or works of art. In other words, the object of a financial investment has no use value, only monetary value. Therefore, we cannot use it to satisfy consumption needs.
This type of investment can generate periodic income – depending on the yield of a given instrument during the investment period. Benefits may also come from an increase in the value of our investment.
The purposes of financial investments include:
- multiplying funds – i.e. we set ourselves the goal of obtaining the highest possible investment value,
- liquidity – the ability to quickly convert a given financial instrument into cash,
- raising capital for a specific (consumer) purchase – we have a specific final investment value, which usually corresponds to the price we have to spend on a given product,
- permanent income – the goal is to obtain systematic income, but not always permanent,
- security – the goal is to protect against loss of funds.
The financial market is a very important sector of the Polish economy. It is a place where all kinds of financial transactions are made. Each segment of the financial market is associated with specific institutions. Depending on the country, individual institutions differ not only in their names, but also in the way they function. There are also significant differences in the technologies used.
An effectively functioning financial market can lead to faster economic growth. It plays a significant role in the decision-making process in a given financial institution. Thanks to it, decision-makers can obtain verified information that is invaluable, for example when predicting changes in the economic situation.
Are you interested in finance? Then be sure to check out our post on the evolution of forms of money.