Financial Markets

Topics: Stock exchange, Financial markets, Debt Pages: 6 (1007 words) Published: February 12, 2012
Financial Markets


Financial Markets & Flow of Funds
Financial Markets M k t Lenders
Households Firms Governments Foreigners

Households Firms Governments Foreigners

Financial Institutions
Note that lenders are suppliers of funds (surplus units) while borrowers are demanders/users of funds (deficit units) 2


Flow of Funds
Financial institutions perform the essential function of channeling funds from surplus units to deficit units. Agents (e.g. brokers). Carry out the instructions of lenders and have no rights to the benefits that flow from the acquisition of the instruments by the l d lenders. Asset transformers (e.g. banks, investment/finance companies). Involved as principals in the exchange of funds either as the borrower or the lender. 3

Flow of Funds: Direct Transfer
Financial Claims (Equity and debt instruments)

Users of Funds

Suppliers of Funds

Example: A firm sells shares directly to investors without going through a financial institution



Flow of Funds: Indirect Transfer
Users of Funds FI (Brokers) Suppliers of Funds

Financial Claims (Equity and debt securities)

FI (Asset transformers)

Financial Claims (Deposits and insurance policies)


Well Functioning Financial Markets
Facilitate the flow of funds from surplus economic units to deficit economic units. Surplus units expect improved wealth through saving and associated acquisition of financial assets. Deficit units thus need to provide surplus units with a positive rate of return. Future consumption and productivity increased through efficient channeling of resources

Provide liquidity for the exchange of financial q y g claims. Leads to the development of financial intermediaries Process of portfolio structuring and restructuring facilitated through the creation and exchange of suitable types of financial instruments (assets) 6


Money versus Capital Markets
Money Markets k
Markets that trade debt securities with maturities of one year or less

Capital Markets
Markets that trade debt (bonds) and equity (shares) instruments with maturities of more than one year


Primary versus Secondary Markets
Primary markets k
Markets in which users of funds raise funds by issuing financial instruments • e.g. new issues of shares and bonds

Secondary markets
Markets where already-issued financial instruments are traded among investors • Market sentiment: bull versus bear; over-bought versus over-sold • Market making: Involves the creation of a secondary market in an asset by a financial institution 8


Organized Markets
Transactions of securities may occur at an T ti f iti t organized exchange (e.g. HKEx, NYSE) Generally a visible marketplace present Organized exchanges are authorized and regulated by the Government or its appointed bodies Supported b authorized clearinghouses which S t d by th i d l i h hi h guarantee all trades made by exchanges’ traders Issuers need to comply with rules/regulations of listing and trading their securities on organized exchanges 9

Over-the-counter Markets
Transactions of securities may also occur in T ti f iti l i the over-the-counter (OTC) markets OTC markets do not operate in a specific fixed location Transactions occur via a telecommunications network such as telephones, computer terminals, internet, internet wire transfer To facilitate transactions of securities not listed on organized exchanges Relatively less regulated 10


Some Useful Terminologies
Bearer securities
Physical holder of the security is entitled to receive, say in case of debt, interest payments and principal repayment at maturity

Registered securities
Current owner s identification information and any owner’s changes in ownership recorded in a central register. Only registered owners are entitled to receive dividends, interests, etc.


Some Useful Terminologies
An agent that safe-keeps securities for its...
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