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1. Chapter 02
Financial Markets and
Institutions

2. 2
• A financial environment is a part of an economy with the major
players being firms, investors, and markets. Essentially, this
sector can represent a large part of a well-developed economy
as individuals who retain private property have the ability to
grow their capital. Firms are any business that offer goods or
services to consumers. Investors are individuals or businesses
that place capital into businesses for financial returns. Markets
represent the financial environment that makes this all possible.
Financial Environment

3. 3
• A system consisting of individuals, institutions, instruments, and
procedures that brings together borrowers and savers
• A conceptual “mechanism” rather than a physical location or a specific
type of organization or structure
• A financial market is a market in which people
trade financial securities, commodities, and 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 products
Financial Markets

4. 4
• Money vs Capital Markets
• Debt vs Equity Markets
• Primary vs Secondary Markets
Types of Financial Markets

5. 5
• Money Markets
o Maturities less than or equal to one year
• Capital Markets
o Maturities greater than one year
Money vs Capital Markets

6. 6
• Debt Markets
o Loans/liabilities/debts are traded
• Equity Markets
o Stocks or Ownerships are traded
Debt vs Equity Markets

7. 7
• Primary Markets
o New securities are traded
o The only market in which the issuer is directly involved in
the transaction
• Secondary Markets
o Preowned securities (those that are not new issues) are traded
Primary vs Secondary Markets

8. 8
• Facilitates the transfer of funds from savers to borrowers
through different financial products
• Also called financial intermediary
• Financial intermediation
• Intermediaries those channel the savings of individuals,
businesses, and governments into loans or investments
Financial Institutions

9. 9
 Reduced costs
 Risk diversification
 Funds pooling
 Financial flexibility
Benefits of Financial Intermediary

10. 10
• Commercial Banks
• Non-Banking Financial Institutions
• Mutual Fund
• Insurance Companies
• Investment Banks
• Brokerage Firm
Major Financial Intermediaries

11. 11
• A financial institution working as an intermediary between
depositors and borrowers. It receives money from those who
want to save in the form of deposits & it lends money to those
who need it.
• Financial depository institutions allowed or licensed by the
central banks to accept deposits for doing lending business.
Commercial Banks

12. 12
• A financial institution that does not have a full banking license
or is not supervised by a national or international banking
regulatory agency
o FIs cannot issue cheques, pay-orders or demand drafts
o FIs cannot receive demand deposits
o FIs cannot be involved in foreign exchange financing
Non Bank Financial Institutions (FIs)

13. 13
• Accept money from savers and then use those funds to buy
various types of financial assets
• Pool funds
Mutual Fund

14. 14
• Cooperative device to spread the loss caused by a particular
risk over a number of persons who are exposed to it and who
agree to ensure themselves against that risk
Insurance Companies

15. 15
• Institutions that assist companies in raising capital, advise firms
on major transactions such as mergers or financial
restructurings, and engage in trading and market making
activities
Investment Banks

16. 16
• A financial institution that facilitates the buying and selling of
financial securities between a buyer and a seller
Brokerage Firm

17. 17
• Share is an unit of ownership that represents an equal proportion of a company's
capital. It entitles its holder (the shareholder) to an equal claim on the company's profits
and an equal obligation for the company's debts and losses.
• Classification:
1. Common Share
2. Preferred Share
Varieties of Preferred Shares :
• Cumulative preference shares
• Non-cumulative preference shares
• Irredeemable preference shares
• Redeemable preference shares
• Convertible preference shares
• Participating preference shares
• Stepped preference shares.
Share and Its Classifications

18. 18
• A bond is a debt investment in which an investor loans money to an
entity (typically corporate or governmental) which borrows the funds
for a defined period of time at a variable or fixed interest rate. ...
Owners of bonds are debt-holders, or creditors, of the issuer.
• Classifications:
1. Callable and Put-able bonds.
2. Convertible bonds
3. Eurobonds
4. Foreign bonds
5. Index-linked bonds
6. Junk bonds
Bond and Its Classification

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• Formal Sector
• Semi-Formal Sector
• Informal Sector
Financial System of Bangladesh
https://www.bb.org.bd/fnansys/index.php

20. 20
• All regulated institutions like
o Banks
Bank Company Act, 1991
Example: UCB, SBL, SIBL, IBBL etc.
o Non-Bank Financial Institutions (FIs)
Financial Institution Act, 1993
Example: IDLC Finance, LankaBangla Finance, MIDAS
Financing etc.
Formal Sector

21. 21
• All regulated institutions like
o Insurance Companies
Insurance Act, 2010
Example: Metlife Alico, Sunlife, Dhaka Insurance etc.
o Micro Finance Institutions (MFIs)
Microcredit Regulatory Authority Act, 2006
Example: BRAC, Proshika, ASA etc.
Formal Sector

22. 22
• All regulated institutions like
o Capital Market Intermediaries like Brokerage Houses,
Merchant Banks etc.
SEC (Stock Dealer, Stock Broker & Authorized
Representative) Rules 2000
SEC (Merchant Banker & Portfolio Manager Rules) 1996
Example: LankaBangla Securities, City Brokerage, MTB
Capital, Union Capital, EBL Investments etc.
Formal Sector

23. 23
• Institutions which are regulated but do not fall under the jurisdiction
of enacted financial regulator like Central Bank, Insurance Authority,
Securities and Exchange Commission or any other.
• This sector is mainly represented by Specialized Financial Institutions
o House Building Finance Corporation (HBFC)
o Palli Karma Sahayak Foundation (PKSF)
o Samabay Bank
o Grameen Bank etc.
Semi-Formal Sector

24. 24
• Private intermediaries which are completely unregulated
Informal Sector

25. 25
• A stock market can be a very sophisticated market place, where
stocks and shares are the traded commodity. At the same time,
it is central to the creation and development of a strong and
competitive economy. It is a key to structural transformations
in any economy; from traditional, rigid, insecure bank-based to
a more flexible, more secure economy that is immune to
shocks, fluctuations and lack of investors’ confidence
Stock Market

26. 26
• The hypothesis that securities are typically in equilibrium—
that they are fairly priced in the sense that the price reflects
all publicly available information on each security.
• Level of Market Efficiency:
1. Weak Form Efficiency
2. Semi-strong Form Efficiency
3. Strong Form Efficiency
Efficient Market Hypothesis