Financial Markets PRESENTED BY : DHAVAL DEDHIA (08)UNDER THE GUIDANCE OF : N.S.SUBRAMANIAN
AGENDA• What is Finance• Financial System• Indian Financial System• The Capital Allocation Process• Financial System: Flow of Funds• How is capital transferred between savers and borrowers ?• What is Market ?• The Importance of Financial Markets to Economic Growth• Types of financial markets• Brief Introduction Of The Constituents of Financial Markets.• References.
What is Finance• Finance is the study of how people allocate scarce resources over time. – Decisions are made across time – Decisions are made in an environment of uncertainty – Decisions are made in the context of a financial system
Financial System• The financial system is the set of markets and other institutions used for financial contracting and the exchange of assets and risks. – Markets for stocks, bonds and other financial instruments. – Financial intermediaries such as banks and insurance companies. – The regulatory bodies that govern all of these institutions.
The Capital Allocation Process• The financial system allows for the transfer of funds from surplus units (such as savers) that have excess resources to deficit units, such as businesses that need resources.• This can happen either through the market, as when an individual uses his savings to buy shares issued by a corporation.• Or through intermediaries, as when an individual deposits money in his banking account, and the bank then lends this money to a firm.
Financial System: Flow of Funds Markets Surplus Units Deficit Units Intermediaries
How is capital transferred between savers and borrowers ? • Direct transfers – stocks and bonds, securities • Investment banking house - Underwriting • Financial intermediaries – banks and mutual funds
What Is Market?• A market is a venue where goods and services are exchanged.• A financial market is a market in which people and entities can trade financial securities, commodities, and other items of value at low transaction costs and at prices that reflect supply and demand.• Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
The Importance of Financial Markets to Economic Growth• Well-functioning financial markets facilitate the flow of capital from investors to the users of capital. – Markets provide savers with returns on their money saved/invested, which provides them money in the future. – Markets provide users of capital with the necessary funds to finance their investment projects.• Well-functioning markets promote economic growth.• Economies with well-developed markets perform better than economies with poorly-functioning markets.
Types of financial markets• Physical assets vs. Financial assets• Money (short) vs. Capital (long)• Primary (proceeds go to firm) vs. Secondary Mkt. for outstanding securities• Spot (cash) vs. Futures• Public (exchange-traded) vs. Private (banks)• Derivatives – Futures and options• Foreign Exchange – Currency
Types of Market• Money Market : The Money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs.• Capital Market : The Capital market is a market for financial investments that are direct or indirect claims to capital. It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument.
Types of Market• Securities Market : The Securities Market, however, refers to the markets for those financial instruments/claims/obligations that are commonly and readily transferable by sale.• The Securities Market has two interdependent and inseparable segments, the new issues (primary) market and the stock (secondary) market.
Types of Market• Primary Market : The Primary market provides the channel for sale of new securities. The issuer of securities sells the securities in the primary market to raise funds for investment and/or to discharge some obligation.• Secondary Market : The Secondary market deals in securities previously issued. The secondary market enables those who hold securities to adjust their holdings in response to charges in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs.
Types of Market• This secondary market has further two components.• Spot Market : the spot market where securities are traded for immediate delivery and payment.• Forward Market : The other is forward market where the securities are traded for future delivery and payment.• This forward market is further divided into Futures and Options Market (Derivatives Markets).