1. Unit - 1
Overview of Financial
Markets and Institutions
Sitaram Dhakal

2. Overview
• Functions of Financial Markets
• Regulation of Financial Markets
• Role/Importance of Financial markets

3. Functions of Financial Markets
a. Transfer of funds
b. Providing of liquidity
c. Securities pricing
d. Resource allocation

4. Transfer of Funds
• Facilitate the transfer of funds from savers and investors
to spenders.
• Funds are transferred from a surplus spending units
(SSU’s) to deficit spending units ( DFU’s )
• These funds transfers occur in the primary financial
markets.
– SSU = net saver
– DSU = net spender
3 Major Sectors
•Households - typically net SSU’s
•Business - typically net DSU’s
•Government - almost always net DSU’s

5. Providing Liquidity
• Liquidity is usually defined as the ease with which
we can sell an asset on short notice without a loss in
its value.
• Provide liquidity for sellers of securities in the
secondary market.
•Assets with good liquidity:
•Stock issues included in the Dow Jones Averages or the
NASDAQ 100 index
•Options on popular stocks
•Gold coins
•Treasury Bills, Notes, and Bonds
•Assets with poor liquidity:
•Common Stock with poor transaction turnover
•Russian bonds issued by the Czar in 1905

6. Securities pricing
• Facilitate pricing of various financial securities.
• Securities pricing is accomplished through the
supply-demand forces in a potential market.
• Individual investors make decisions about what
they feel are the intrinsic values of different
financial assets.
• Where the supply and demand curves meet the
market arrives at an equilibrium price.

7. Resource allocation securities are sold by
• In the primary financial markets,
businesses and government entities that are raising
money.
• Firms raising money for investment purposes must
compete with other security issuers ( public and private )
for available money.
• Since the investors who provide these funds are
interested in earning the highest return for a given level
of risk, they have an incentive to evaluate these different
investment opportunities and choose the best
investments.
• Through this process, they channel available investment
funds in the economy to their highest and best possible
uses.

8. Regulation of Financial Markets
• Subject to regulations imposed by regulatory agencies
such as Securities and Exchange Commission (SEC) in
US and Securities Board of Nepal.
• The primary purpose is to regulate and develop securities
market and protect investors’ rights.
– To ensure that investors have full and accurate (fair)
information available at time of making securities trade
(disclosing information).
– To compel to register securities of public companies
– To force to provide legal document ‘prospectus’ to users.
– To monitor trading at exchange centers to ensure that market
participants do not trade securities based on insider
information.
– To impose regulations of FMs to stabilize in security price (i.e.
circuit breakers in organized exchange)

9. Role/Importance of Financial markets
• Facilitate the efficient allocation of funds.
• Allow investors to invest in financial securities and earn
a reasonable rate of return.
• Facilitate financial transactions through the creation,
sale and transfer of financial securities.
• Facilitate Companies and governments to raise capital.
• Computing total return for overall stock market.
• Create an index portfolio or tracker fund.
• Calculate market risk .
• Technical analysis.

10. Thank You