Module 1: Fundamentals of finance
By the end of this reading, you will understand What the field of Financial is? How Financial Markets work? What different financial products are?
What is Finance? Finance is the study of how and under what terms money are allocated between lenders and borrowers. The term finance may incorporate any of the following: o The study of money and other assets o The management and control of those assets o Profiling and managing project risks Finance is distinct from economics in that it addresses not only how resources are allocated but also under what terms and through what channels Finance is based on economic principles The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted Behavioural Finance studies how the psychology of investors or managers affects financial decisions and markets. Financial System The financial system consists of institutions that help to match one person’s saving with another person’s investment. It moves the economy’s scarce resources from savers to borrowers. The financial system is made up of institutions(Markets and Intermediaries)
The household is the primary provider of funds to businesses and government.
Households must accumulate financial resources throughout their working life times to have enough savings (pension) to live on in their retirement years Financial intermediaries transform the nature of the securities they issue and invest in Banks, trust companies, credit unions, insurance firms, mutual funds Market intermediaries simply help make markets work
Investment dealers Brokers (Investment Advisors)
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 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.
Financial Markets 1. Primary Markets: The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Primary markets creates long term instruments through which corporate entities borrow from capital market.
Methods of issuing securities in the primary market are: o o o o Initial public offering Follow-on Public Offer (for existing companies) Rights issue (for existing companies) Preferential issue
2. Secondary Markets: The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. Ex: Stock Exchanges, OTC Markets. The stock exchanges, under the supervision of the regulatory authority, like SEC/SEBI, provide a trading platform, where buyers and sellers can meet to transact in securities.
Initial Public Offering An initial public offering, or IPO, is the first sale of a corporation's common shares to investors on a public stock exchange. The main purpose of an IPO is to raise capital for the corporation. It also gives the company more exposure, prestige and public image In an IPO the issuer obtains the assistance of an underwriting firm, which helps determine what type of...