Notes inclass 22/01

The roles of financial markets are the same role as any market, that is to transfer
funds from borrowers to lenders and to allocate funds between alternative uses.
Surplus funds
Deficit and surplus units- level of savings defined as Income Consumption =
the income must be greater then the consumption function. We arent worried
about the classification.
Definition: a surplus (deficit) unit saves more (less) than it invests. Investments
dont need to can be capital can be (a home, without borrowing not producing
cash but can have a opportunity cost)
Some terms
Investment refers to the acquisition of new physical assets. financial securities,
life style investment.
Saving means the change in a unit or sectors net worth. (Net worth = assetsliabilities)
Dissaving occurs when consumption exceeds income.
Implications
Surplus units- lend to other, increase their net assets, issue financial claims.
(equity doesnt have a set value, rights to the money, risk, no guarantees in
equity)
Deficit units- borrow from others, run down their net assets, take financial
obligations.
Intermediation
Also called indirect financing
Stands inbetween the borrowers and lenders. Involves the transfer of funds
between ultimate savers and ultimate borrowers via deposit-taking institutions.
Could be a shady person on the street or a bank. Lender of last resort borrowing
from the reserve bank. The bank takes the money because they know they can
lend for a higher amount.
Advantages of intermediation
Pooling of funds and lend out.
Multiplier effect
Aggregation
Economies of scale
Liquidity
Spreading risk- diversification.
Direct financing

-the transfer of funds from ultimate savers to ultimate borrowers without an

intermediary.
Advantages of direct financing
-better returns. (cut out the middle man, earn more)
- cost savings (lower transaction costs)
Financial markets
primary market is where investors purchase financial securities from the
original issuer
Secondary market is where investors trade their securities with other investors.
Issuing financial securities
IPO- initial public offering
Public offering: the issuance of securities to the general public
Private placement: the issuance of securities to a single investor or group.

Liquidity of financial markets

-refers to the ease of buying and selling without undue price fluctuations.
-related to volume of turnover
-depends on: depth, breadth, resilience
-dealers and brokers help create liquidity.
Trading financial securties
-Exchage-traded is a market where securtieis are dealty via a centralised
exchange facility
-over the counter is when securities are issued and exchange through a dealer or
bank.
Securities markets
-a securities market is a market in which a particular type of seucirty is issued
and traded
Liquidity: a desirable quality of securities market. Liquidity means that market
participants can easily buy or sell parcels of the security without causing
changes in the price.
Participants who add liquidity
Market-makers: traders who quote prices at which they are willing to buy or sell
any time. Take the position, who need moneys, vultures.
Speculaters: players who take an open position in the market, hoping to profit
but also risking a loss. even if they dont own the shares,

Arbitragers: take offsetting positions in twin markets for profit without risk.
Stability of securities markets
Benefit of liquidy and confidence
Other qualities of securities market
Negotiability:
Low risk: