Financial market

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Financial market

  1. 1. Financial marketA financial market is a market in whichpeople and entities can trade financialsecurities, commodities, and otherfungible items of value at low transactioncosts and at prices that reflect supply anddemand. Securities include stocks andbonds, and commodities include preciousmetals or agricultural goods.There are both general markets (wheremany commodities are traded) andspecialized markets (where only onecommodity is traded). Markets work byplacing many interested buyers andsellers, including households, firms, andgovernment agences, in one "place", thusmaking it easier for them to find eachother. An economy which reliesprimarily on interactions between buyers
  2. 2. and sellers to allocate resources is knownas a market economy in contrast either toa command economy or to a non-marketeconomy such as a gift economy.DefinitionIn economics, typically, the term marketmeans the aggregate of possible buyersand sellers of a certain good or serviceand the transactions between them.The term "market" is sometimes used forwhat are more strictly exchanges,organizations that facilitate the trade infinancial securities, e.g., a stockexchange or commodity exchange. Thismay be a physical location (like theNYSE, BSE, NSE) or an electronicsystem (like NASDAQ). Much trading ofstocks takes place on an exchange; still,
  3. 3. corporate actions (merger, spinoff) areoutside an exchange, while any twocompanies or people, for whateverreason, may agree to sell stock from theone to the other without using anexchange.Trading of currencies and bonds islargely on a bilateral basis, althoughsome bonds trade on a stock exchange,and people are building electronicsystems for these as well, similar to stockexchanges.Financial markets can be domestic orthey can be international.Types of financial marketsfinancial markets can be divided intodifferent subtypes:
  4. 4. • Capital markets which consist of: o Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. o Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.• Commodity markets, which facilitate the trading of commodities.• Money markets, which provide short term debt financing and investment.• Derivatives markets, which provide instruments for the management of financial risk.• Futures markets, which provide standardized forward contracts for
  5. 5. trading products at some future date; see also forward market. • Insurance markets, which facilitate the redistribution of various risks. • Foreign exchange markets, which facilitate the trading of foreign exchange.The capital markets may also be dividedinto primary markets and secondarymarkets. Newly formed (issued)securities are bought or sold in primarymarkets, such as during initial publicofferings. Secondary markets allowinvestors to buy and sell existingsecurities. The transactions in primarymarkets exist between issuers andinvestors, while in secondary markettransactions exist among investors.
  6. 6. Liquidity is a crucial aspect of securitiesthat are traded in secondary markets.Liquidity refers to the ease with which asecurity can be sold without a loss ofvalue. Securities with an activesecondary market mean that there aremany buyers and sellers at a given pointin time. Investors benefit from liquidsecurities because they can sell theirassets whenever they want; an illiquidsecurity may force the seller to get rid oftheir asset at a large discount.Raising capitalFinancial markets attract funds frominvestors and channel them tocorporations—they thus allowcorporations to finance their operationsand achieve growth. Money marketsallow firms to borrow funds on a short
  7. 7. term basis, while capital markets allowcorporations to gain long-term funding tosupport expansion.Without financial markets, borrowerswould have difficulty finding lendersthemselves. Intermediaries such as bankshelp in this process. Banks take depositsfrom those who have money to save.They can then lend money from this poolof deposited money to those who seek toborrow. Banks popularly lend money inthe form of loans and mortgages.More complex transactions than a simplebank deposit require markets wherelenders and their agents can meetborrowers and their agents, and whereexisting borrowing or lendingcommitments can be sold on to otherparties. A good example of a financial
  8. 8. market is a stock exchange. A companycan raise money by selling shares toinvestors and its existing shares can bebought or sold.The following table illustrates wherefinancial markets fit in the relationshipbetween lenders and borrowers: Relationship between lenders and borrowers Financ Financial Lender ial Intermedia Borrowers s Marke ries ts Individu Banks Interba Individuals als Insurance nk Companies Compan Companies Stock Central ies Pension Exchan Governme
  9. 9. ge Money nt Market Municipali Funds Bond ties Mutual Market Public Funds Foreig Corporatio n ns Exchan geLendersWho have enough money to lend or togive someone money from own pocket atthe condition of getting back theprincipal amount or with some interest orcharge, is the Lender.Individuals & Doubles
  10. 10. Many individuals are not aware that theyare lenders, but almost everybody doeslend money in many ways. A personlends money when he or she: • puts money in a savings account at a bank; • contributes to a pension plan; • pays premiums to an insurance company; • invests in government bonds; or • invests in company shares.CompaniesCompanies tend to be borrowers ofcapital. When companies have surpluscash that is not needed for a short periodof time, they may seek to make moneyfrom their cash surplus by lending it via
  11. 11. short term markets called moneymarkets.There are a few companies that have verystrong cash flows. These companies tendto be lenders rather than borrowers. Suchcompanies may decide to return cash tolenders (e.g. via a share buyback.)Alternatively, they may seek to makemore money on their cash by lending it(e.g. investing in bonds and stocks.)BorrowersIndividuals borrow money via bankersloans for short term needs or longer termmortgages to help finance a housepurchase.Companies borrow money to aid shortterm or long term cash flows. They also
  12. 12. borrow to fund modernisation or futurebusiness expansion.Governments often find their spendingrequirements exceed their tax revenues.To make up this difference, they need toborrow. Governments also borrow onbehalf of nationalised industries,municipalities, local authorities and otherpublic sector bodies. In the UK, the totalborrowing requirement is often referredto as the Public sector net cashrequirement (PSNCR).Governments borrow by issuing bonds.In the UK, the government also borrowsfrom individuals by offering bankaccounts and Premium Bonds.Government debt seems to be permanent.Indeed the debt seemingly expands ratherthan being paid off. One strategy used by
  13. 13. governments to reduce the value of thedebt is to influence inflation.Municipalities and local authorities mayborrow in their own name as well asreceiving funding from nationalgovernments. In the UK, this wouldcover an authority like HampshireCounty Council.Public Corporations typically includenationalised industries. These mayinclude the postal services, railwaycompanies and utility companies.Many borrowers have difficulty raisingmoney locally. They need to borrowinternationally with the aid of Foreignexchange markets.Borrowers having similar needs can forminto a group of borrowers. They can also
  14. 14. take an organizational form like MutualFunds. They can provide mortgage onweight basis. The main advantage is thatthis lowers the cost of their borrowings.Objective basis for theintroductionThe financial markets are inevitableproduct of market economy, theemergence and existence of thismarket comes from the objectiverequirements of the settlement of theconflict between demand and supplycapacity in major capital economicdevelopment. The economy hasalways existed two conflicting statebetween a demand and a party is theability of capital. This conflict wasoriginally settled by the banks
  15. 15. activities as an intermediary inrelations between the borrowedcapital and capital needs. When thecommodity economy is highlydeveloped, many forms of raisingnew capital raised and more flexibledevelopment, better contribute to thesolution of the balance betweensupply and demand for financialresources in society, as matchedfunding tools such as bonds, sharesof the business, government bonds ...- It is the papers of value, referred toas securities. And it appears from theneed to purchase, sale, transferbetween different owners ofsecurities. This causes theappearance of a market to balancesupply and demand for capital in theeconomy as the financial markets.
  16. 16. Therefore, the objective basis for theemergence of financial markets isresolved conflicts between supplyand demand for capital in theeconomy through financialinstruments, especially the types ofsecurities, give rise need topurchase, transfer of securitiesbetween the different stakeholders inthe economy. The development ofcommodity economy and currency isthe peak of the market economygives rise to a new market is thefinancial market.Financial market formation anddevelopment associated with thedevelopment of market economy.The development of market economygave rise to the entity to finance and
  17. 17. those who are able to providefinancial resources. As the economygrowing market, the activities on theissue and sale of securities alsodeveloped, formed a separate marketto make provision for financialresources to meet more easily andconveniently, that the financialmarkets.Tools of the financial marketsTo transfer the right to use thefinancial resources, the main toolused on the financial market assecurities. Securities are documentsor papers as indicated on the
  18. 18. electronic system confirm the legalrights of certificate holders for whichthe issuer; or stock certificates orbook entries, correct recognize thelegitimate rights and interests of theowner of such documents to theissuer.Securities are many different types;securities can be classified accordingto different criteria:Based on the time period:Short-term securities, for less than 1year;Medium and long term securities.Medium term from 1 to 5 years ismore than 5 years term.
  19. 19. Based on the subject of issue:Securities of central government andlocal;Securities of banks and creditinstitutions;Securities of corporation.Based on income:Stable income SecuritiesUnstable Income securitiesBased on legal standards:Beares securitiesRegistered Securities
  20. 20. Based on the nature of securities:Stocks (equity securities);Bonds (debt securities);Derivative securities.Based on the nature of the issuer:Primary marketSecondary marketFinancial market structureBased on the time to use fundsraised1.The money market: As financialmarkets have only short-terminstruments (maturity less than 1year);
  21. 21. 2.Thi capital market: The marketplace for buying and selling long-termdebt instruments such as stocks andbonds. Capital markets are dividedinto three parts as the stock market,mortgage loans and bonds.Based on the method of raising debtfinancing1.The debt market: the most commonmethods that companies use toborrow on financial markets is toborrow a tool, such as bond or amortgage loans. The debt instrumentis an agreement contract with thenature of fixed interest rate andrepayment term capital late period.Maturity is less than 1 year is short,on a year long and medium term.Debt market is a market place for
  22. 22. buying and selling of debtinstruments mentioned above;2.The equity market: The secondmethod is to attract companies toissue shares. Shareholders own partof the assets of a company. Theywould receive dividend from thecompany net profit after deductingexpenses, taxes and payments tocreditors (holders of debtinstruments).Based on the flow of financialresources 1.Thi primary market: As thefinancial market place where buyingand selling securities are issued ornew securities. The buying andselling securities on a market level isoften conducted through intermediary
  23. 23. banks;2.Thi secondary marketl: The markettraded securities issued. When theoperation takes place to buy or sellsecurities on the market of securitieswho has received money from thesale of securities issuers are not paidmore, a company which is onlycollected when it sold the securitiesof first on the primary market.The functions and role of financialmarkets1.Transfer funds from the ownersmay be able to provide financialresources to the entity to finance:Financial markets serve as a channel
  24. 24. funds from savers to businesses.Help for the transfer of funds from noprofitable investment opportunities tothose who have profitable investmentopportunities.Financial markets and promote theaccumulation of concentrated capitalto meet the needs of constructionmaterial and technical basis,production and business.Financial markets make effective useof capital, not only for investors whohave money but with people whoborrow money to invest. The lenderwill profit through interest rates.Borrowers must calculate capitalloans that use the most effective
  25. 25. because they have to repay principaland interest to the lender at the sametime to generate income andaccumulate for them.Financial markets to create favorableconditions for the implementation ofthe open-door policy, economicreforms by the Government throughmeans such as issuing bondsabroad, selling shares, attracting FDIin addition to the business sector inthe country.Financial markets allow the use ofvaluable papers, stocks, bonds,money exchange.2. Providing liquidity for the
  26. 26. securities;3. Providing economic informationand assess the value of the business.The role of financial markets1. Financial attract and financialresources from local and abroad,encouraging people savings andinvestment;2.Thi financial contribution topromoting, improving financialefficiency;3.Thi financial performance in fiscalpolicy, monetary policy of the state.

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