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Financial Markets - Arushi Sharma & Hisham Ahmed Rizvi

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  • In market economies the economic rationale for the existence of institutions and instruments is related to transaction costs, thus the surviving institutions and instruments are those that have the lowest transaction costs.The key attributes determining transaction costs are asset specificity, uncertainty, frequency of occurrence.
  • National Association of Securities Dealer Automated Quotation System (NASDAQ)
  • Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.
  • Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions.Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.Commercial paper - short term usanse promissory notes issued by company at discount to face value and redeemed at face valueEurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States.Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months.Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.Short-lived mortgage- and asset-backed securities
  • To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions.To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry.To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy.To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy.Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this dose not leads to increases in the prices.
  • Supervision of stock exchangesExchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.[5][6][edit]Supervision of listed companiesFinancial regulators ensures that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.[7][8][9][edit]Supervision of anti-money launderingThe anti-money laundering supervision ensures that criminal activities does not threaten the reputation and financial strength of an institution, or also endanger the integrity and stability of the whole financial market. All companies concerned need to have policies in place which prevents transactions with criminal background.[10][edit]Supervision of investment managementAsset management supervision or investment acts ensures the frictionless operation of those vehicles.[11][edit]Supervision of banks and financial services providersBanking acts lays down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.[12][13]
  • Supervision of stock exchangesExchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.[5][6][edit]Supervision of listed companiesFinancial regulators ensures that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.[7][8][9][edit]Supervision of anti-money launderingThe anti-money laundering supervision ensures that criminal activities does not threaten the reputation and financial strength of an institution, or also endanger the integrity and stability of the whole financial market. All companies concerned need to have policies in place which prevents transactions with criminal background.[10][edit]Supervision of investment managementAsset management supervision or investment acts ensures the frictionless operation of those vehicles.[11][edit]Supervision of banks and financial services providersBanking acts lays down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.[12][13]
  • Transcript

    • 1. FINANCIAL MARKETS ARUSHI SHARMA [50240] HISHAM AHMED RIZVI [50269] BBS II-B SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES A Financial Management Presentation
    • 2. FINANCIAL SYSTEM An Overview
    • 3. WHAT IS A FINANCIAL SYSTEM? The financial system plays the key role in the economy by • stimulating economic growth, • influencing economic performance of the actors, & • affecting economic welfare. This is achieved by financial infrastructure, in which entities with funds allocate those funds to those who have potentially more productive ways to invest those funds. A financial system makes it possible a more efficient transfer of funds. FINANCIAL SYSTEM It is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level. Savers Borrower s FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 4. STRUCTURAL APPROACH TO FINANCIAL SYSTEMS According to the structural approach, the financial system of an economy consists of three main components: Each of the components plays a specific role in the economy. Financial Markets Financial Intermediaries Financial Regulators FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 5. FUNCTIONAL APPROACH TO FINANCIAL SYSTEMS According to the functional approach, financial markets facilitate the flow of funds in order to finance investments by corporations, governments and individuals. Firms Stock Market Bond Market Short term fixed securities market Banking Sector Government FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 6. CONCEPT OF AN ‘ASSET’ IN FINANCIAL SYSTEMS Financial assets, often called financial instruments, are intangible assets, which are expected to provide future benefits in the form of a claim to future cash. Any transaction related to financial instrument includes at least two parties: ASSET An asset is any resource that is expected to provide future benefits, and thus possesses economic value. Assets are divided into two categories: • tangible asset (physical form) • intangible asset (legal claim to some future economic gain) ISSUER INVESTOR The party that has agreed to make future cash payment The party that owns the financial instrument, and therefore the right to receive the payments made by the issuer. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 7. FINANCIAL MARKETS An Overview
    • 8. WHAT ARE FINANCIAL MARKETS? A financial market is a market in which people and entities can trade financial securities, commoditi es, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. MARKET In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 9. WHAT ARE FINANCIAL MARKETS? SECURITIES A security or financial instrument is a tradable asset of any kind. Securities are broadly categorized into: • debt securities (such as banknotes, bonds and debentures) • equity securities, e.g., common stocks; and, • derivative contracts, such as forwards, futures, options and swaps. COMMODITIES In economics, a commodity is a marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services. •It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market. A country's regulatory structure determines what qualifies as a security. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 10. ECONOMIC FUNCTIONS OF FINANCIAL MARKETS • Transactions between buyers and sellers of financial instruments in a financial market determine the price of the traded asset. Price discovery • Provides an opportunity for investors to sell a financial instrument since it is referred to as a measure of the ability to sell an asset at its fair market value at any time. Liquidity • The function of reduction of transaction costs is performed, when financial market participants are charged and/or bear the costs of trading a financial instrument. Reduction of transaction costs FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 11. FINANCIAL MARKETS Types – Primary and Secondary
    • 12. TYPES OF FINANCIAL MARKETS PRIMARY MARKET The market in which new, as opposed to existing, securities are sold. Investors who purchase shares in a new security issue are purchasing them in the primary market. Source: Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269] SECONDARY MARKET A market in which investors purchase securities or assets from other investors rather than directly from the issuing companies; exchanges such as the New York Stock Exchange and the NASDAQ are secondary markets. Source: Campbell R. Harvey
    • 13. PRIMARY MARKETS • The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM). • Securities are issued by the company directly to investors. • Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. • The primary market performs the crucial function of facilitating capital formation in the economy. • Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 14. METHODS OF ISSUING SECURITIES IN A PRIMARY MARKET Initial Public Offering A type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Rights Issuance A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders to buy a specified number of new securities from the firm at a specified price within a specified time. Preferential Issue A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 15. SECONDARY MARKETS Secondary markets trade existing securities (previously owned shares of stocks, bonds, and other financial assets). Secondary markets consist of both organized exchanges, such as the Bombay Stock Exchange, and over-the-counter or electronic markets, such as NASDAQ. Organized Stock Exchanges Organized stock exchanges are markets that are used to facilitate the trading of financial instruments between investors. The main organized stock exchange is the Bombay Stock Exchange (BSE) in India. Over-the- counter (OTC) market It is an electronic network that allows investors to execute trades without going through specialists or intermediaries. These trades are executed through the NASDAQ which links various dealers and brokers through a computer or telephone based system. Secondary markets trade existing securities (previously owned shares of stocks, bonds, and other financial assets). Secondary markets consist of both organized exchanges, such as the Bombay Stock Exchange, and over-the-counter or electronic markets, such as NASDAQ. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 16. FINANCIAL MARKETS Capital Market and Money Market
    • 17. CAPITAL MARKET
    • 18. CAPITAL MARKET Primary Market Secondary Market CAPITAL MARKET A market in which individuals and institutions trade long-term financial securities. • Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 19. CAPITAL MARKET Primary Market Secondary Market • New stock or bond issues are sold to investors. • The main entities seeking to raise long-term funds on the primary capital markets are governments (via bonds) and business enterprises (via equity and bonds). • The main entities purchasing the bonds or stock include pension funds, hedge funds, and less commonly • Existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. • The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 20. CAPITAL MARKET – INSTRUMENTS Equity Shares Preference Shares Government Bonds Corporate Bonds Perpetual Bonds FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 21. CAPITAL MARKET - FUNCTIONS Mobilization of Savings Capital Formation Provision of Investment Avenue Proper Regulation of Funds Service Provision Speed up Economic Growth and Development Continuous Availability of Funds FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 22. CAPITAL MARKET – EXAMPLES OF TRANSACTIONS A government raising money on the primary markets • When a government wants to raise long term finance it will often sell bonds to the capital markets. • It has been increasingly common for governments of the larger nations to bypass investment banks by making their bonds directly available for purchase over the Internet. A company raising money on the primary markets • When a company wants to raise money for long term investment, it can do so by issuing bonds or shares in the capital market. Trading on the secondary markets • On the secondary markets, there is no limit on the number of times a security can be traded, and the process is usually very quick. • It indirectly helps in raising finance on the primary market. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 23. MONEY MARKET
    • 24. MONEY MARKET • Money market means market where money or its equivalent can be traded. • Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. • It is better known as a place where large institutions and government manage their short term cash needs. • For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. MONEY MARKET Money market is a market where short-term obligations such as treasury bills, commercial papers and banker’s acceptances are bought and sold. Source: www.CAalley.com FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 25. MONEY MARKET – INSTRUMENTS Certificate of deposit Repurchase agreement Commercial paper Treasury bills Money funds Foreign Exchange Swaps FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 26. MONEY MARKET - FUNCTIONS Maintenance of monetary equilibrium. Promotion of economic growth. Providing help to Trade and Industry Helping in implementing Monetary Policy Helping in Capital Formation Providing non-inflationary sources of finance to government FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 27. MONEY MARKET IN INDIA FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 28. COMPARATIVE STUDY
    • 29. MONEY MARKET VS. CAPITAL MARKET MONEY MARKET CAPITAL MARKET Trading is through recognized stock exchanges Associated with high risk and high return Anybody can make investments through a broker. Often the purpose is to invest in additional physical capital goods. Raising of long term finance, such as loans not to be fully paid back for at least a year. Deals are transacted on phone or through electronic systems Relatively secure Individual players cannot invest in money market as the value of investments is large. Often used for general operating expenses. Short term lending and borrowing, typically a year. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 30. FINANCIAL MARKETS Financial Regulators
    • 31. FINANCIAL REGULATION BENEFITS: • Market confidence • Financial stability • Consumer protection • Reduction of financial crime FINANCIAL REGULATION Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 32. STRUCTURE OF SUPERVISION Supervision of stock exchanges Supervision of listed companies Supervision of anti-money laundering Supervision of investment management Supervision of banks and financial services providers FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
    • 33. FINANCIAL REGULATORS IN INDIA FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269] Securities and Exchange Board of India Reserve Bank of India Ministry of Finance Ministry of Corporate Affairs Insurance Regulatory Authority of India PFRDA
    • 34. THANK YOU arushi.sharma888@gmail.com | hisham.rzv@gmail.com

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