Open Market

Activities synonymous to free trade and interbank trade of securities are known as Open market. Such a market which is considered to be open is accessible to all economic participants with equal opportunity of entry. This is against protected market whose entry is restricted by financial and legal requirements. Any market is judged for its openness, by checking the government regulations which are prevalent, scope for competition and the local cultural customs and their impact on the trade. Such market which is open is absent of economic constraints. Such market is criticized to be open only to those with enough income, money or assets. When people lack enough money, they are prevented from participation. Those who use enough funds to participate in one market do not have enough funds to participate in another.

The functioning of Open markets

The free competition and concept of openness are thus questioned in open market. In banking and finance, open market refers to the bonds traded between the central bank and other bank decides to buy or sell government bonds in an open market, it is known as open market banks. When a central operations. In such an operation central bank buys bonds from other banks through exchange of cheques. In these markets, shares are repurchased though a firm may or may not announce its repurchase. These repurchase may extend to months or years.  An initiative taken by an investor to trade securities is known as Open market transaction.

Open market value is the price at which sale of asset is done unconditionally assuming the presence of a willing seller, a specific time has passed before the date of valuation, the state of market and level of values and circumstances are same on the day of valuation and neither party involved in the any compulsion.

Effects of Open Market Operations

The many effects of open market operations would include effect on interest rate, operation policy during inflation and policy during depression. The quantity of money supply in the economy and the rates of interest are affected due to these operations. When the central bank purchases the securities, the increased money supply would result in fall of interest rates in the market.

When a central bank sells securities to the public during inflation, commercial banks get short of cash reserves. Since commercial banks are restricted from giving credits, the general price level falls. During depression central bank purchases securities and deposits in commercial banks increase. Credit capacity of banks increase and this is followed by more loan provisions and investment options that give more employment and output.

Questions:

• What is open market?
• What are the effects of open market operations?