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Theme 1
Subjects
1.1. Theoretical approaches to financial market and capital market 1.1.1. The concept and structure of financial market 1.1.2. The concept and structure of capital market 1.2. Supply and demand on the capital market 1.3. The functions of the capital market 1.4. Types of the capital markets 1.5. Securities - instruments of the capital market
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A. Obligatory bibliography
Legea Republicii Moldova privind piaa valorilor mobiliare. Nr.199-XIV din 18 noiembrie 1998. Republicat: Monitorul Oficial nr.183-185/655 din 10.10.2008. Law on securities market Anghelache G. Piee de capital i burse de valori. Bucureti: Editura Adevrul, 1992, p. 75-120. Ciobanu Gh. Bursele de Valori i tranzaciile la burs. Bucureti: Editura Economic, 1997, p.127- 135. Drgoescu E., Drgoescu A. Piee financiare primare i secundare i operaiuni de burs. Cluj-Napoca: Editura Humanitas, 1994, p. 19-42. Stancu I. Finane. Bucureti: Editura Economic, 1997, 720 p. Hincu Rodica, Munteanu Nina, Roca Marcelina, Iordachi V., Baxan T., Conencov O. Bazele funcionrii pieei de capital. Manual. ASEM, Chiinu 2012
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financial market is the place or the whole set of communication means, which facilitate the sale and purchase of non-bank financial assets at prices fixed according to supply and demand and the influence of economic, financial, monetary, psychological and technical factors.
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From the point of view of negotiated assets and the mechanism by which they are introduced into the economic circuit, the financial market consists of three main sectors, organized as separate markets: banking market; money market; capital market.
Banking market
is characterized by transactions with nonnegotiable bank assets with high level of liquidity. Banks act as intermediaries between the owners of cash availabilities and users of funds, in base of credit relations.
Money market
is characterized by transactions with shortterm financial assets made by financial companies.
Capital market
is specialized in transactions with medium and long-term financial assets.
Since there can not be made a strict distinction between the capital market and financial one, these two markets being interdependent (by including or supplementing each other),
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The Continental-European concept, defines the term of capital market through the assembly consisting of:
money market financial market mortgage market
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The plural of "financial markets" suggests that in a market economy, regardless of its level of development, there exists a system of financial markets, as:
the system of financial markets in the United States of America; the system of financial markets in Canada; the system of financial markets in Romania.
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The system of financial markets in the United States of America consists of two or more markets, according to the adopted criterion.
The first criterion concerns duration of the placement, resulting in: money markets for trading short-term debt instruments; capital markets that allow negotiation of long-term debt instruments and ownership instruments. The second criterion respects the nature of traded asset that determines the following types of markets: the stock market, bond market, goods/commodity market, currency market, options market, futures market.
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The system of financial markets in Canada does not respect a certain criteria and contains:
tangible assets markets and financial assets markets; spot market and futures markets, including options; money markets; capital markets; mortgage markets; regional and local markets; primary markets; secondary markets.
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Synthesizing the approaches of the financial markets components, there can be concluded the following:
there does not exist a unique system of financial markets that is unanimously accepted by all national economies; the number of financial markets depends on the degree of development of a market economy; although a distinction between real assets and financial assets exists, the financial market, in some countries, also includes mortgage market and even the real estate market (Canada).
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In the Republic of Moldova, according to legislation in force, the securities market (capital market) is a part of non-banking financial market.
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In the specialty literature, there are several definitions of the capital market, such as:
capital market represents the assembly of relations and mechanisms by which is realised the transfer of funds from those who have a surplus of capital towards those who need it, through specific instruments (issued securities) and specific operators (for example, professional participants of securities market, including companies for financial investment services, etc.); capital market represents the place or the whole set of communication means that permit the issuance and negotiation of securities by intermediaries (authorized persons) at a regulated price named face value and, respectively, at a market price set according to supply and demand.
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.1. Fig
Secondary Segment
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Economic agents
4 7
Capital Market
1 2
Public administration
3
Households
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The primary segment and secondary segment of capital market are interrelated. Secondary market can not exist without the primary one and, also, the functioning of primary market is conditioned by the ability of the secondary market to achieve the transferability of securities and their conversion into cash.
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The demand of capital comes from several major categories of economic agents, such as:
State and local authorities whose main motivation for applying for funding is financing costs of budgetary deficit, which appear on market by issuing bonds. State companies that require the available funds for own investment needs in different sectors of the economy. Private business entities, which are calling on the capital market both within the process of their creation and during the development of business by issuing shares to finance the equity capital, and bonds to finance the loan capital. Financial companies, including banks, that use investors' funds to finance their assets, and their primary role is to facilitate the circulation of capital, thus, ensuring the financial market liquidity.
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Exponents of demand are debtors on financial market. They can be grouped as follows: depending on activity (central and local administration; public and private companies without financial profile; commercial banks and other financial institutions; central monetary institutions; etc.) depending on purpose (industry and municipal economy funding; transport and public services financing; banks financing; international organisations financing; etc.).
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From the point of view of capital needs, demand may be structural and cyclical.
Structural demand is determined by the need to finance some economic activities in different sectors of activity (to support business development or creation of new businesses, entries on new markets or into related branches, etc.) and supposes the raising of funds, which are repayble either on medium and long term, or in form of participation in future earnings.
Cyclical demand is the effect of insufficiency or unavailability of internal resources, excessive restrictions on credits granting, financial needs generated by the budget deficit and balance of payments. The demand is disturbed by several factors, such as: price fluctuation, interest rate augmentation, non-reimbursement of credits at maturity.
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Supply of capital comes from savings, i.e. everything that remaines at the holders of income, after they satisfy their consumption needs
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Natural persons and legal entities who have such savings, can make real investments and/or financial investments.
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Liquidity
consists of the existence, on the primary capital market, of a large volume of available funds (supply) and of the need for direct financing (demand). On the secondary capital market the liquidity is ensured, partially, by the existing liquidity on the primary market, and by the volume of transactions.
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Efficiency
consists in the operational performance at lower costs of issues on primary market and the transactions on secondary market.
Transparency
consists in a direct and prompt ensuring of correct information to investors
Note: It determinesthe increase of the supply of funds on the primary market, of the volume of transactions and efficient functioning of the capital market.
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Correctness
is based on rigorous regulation of capital flows in the economy, and of transactions performed on the market.
Note: This condition eliminates the trends of market manipulation, reduces the risk of transactions and ensures the fulfilment of the other four conditions.
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Adaptability
indicates the degree of adaptation of elements of the capital market to economic and financial conditions in the country where they are located, as well as to international ones.
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Note: Decision of population to invest the excess of revenues on the capital market arises from comparing the return of this investment with the return on other capital investments, for example, term deposits in bank 48 accounts, buying currency etc.
Ensuring the participation of legal entities and natural persons to share capital of joint stock companies
Note: Persons who bought these titles become shareholders and influence the financial results of joint stock companies by decisions taken within the General Meeting of Shareholders and Board of Directors.
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The secondary capital market, with its two components: the stock exchange and the OTC, facilitates the meet of supply of securities in circulation that is proposed by owners, who want to liquidate the investment, with demand for securities, required by capital owners who want to become investors or to gain from evolution of securities prices.
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Reorientation of the capital flows and the reorganization of sectors of national economy is achieved, practically, through the following actions specific to the capital market:
reflection of the performance of securities issuers related to price that allows investors to abandon e the financial securities of unprofitable issuers and to make investments in profitable ones, supplying them with funds; underestimation of new enterprises whose securities are purchased to the detriment of others, supplyiung them with funds and bringing to real value by increasing the equitys prices (eg, computer companies in the U.S.); facilitation of purchasing of one company by another one.
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Facilitating investment
is a corollary of the function for the restructuring of the sectors of national economy by transformation of funds kept by legal entities and natural persons into securities issued by companies, which carry out investment programs.
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Note: This function specific to the secondary capital market should be valued with prudence not to cause stock exchanges crashes and minicrashes
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Facilitation of gain
is a function that occurs at shorter or longer intervals. This unique purpose - achievement of the greatest possible gain - is the result of arbitrage and speculative transactions.
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The capital market is divided into several components. The most used criteria to delimit the components are: the nature of the issued and traded securities; the territorial organization; the nature of operations.
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Futures market
Stock Exchang e
OTC market
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Secondary capital market can be also classified according to the following differentiation criteria: continuity of market; way of communication; Location of the negotiations floor wide property of market and access of operators (in some sources, the institutional solution chosen for the establishment and operation of secondary capital markets); Way of negotiations; Moment when contracts are executed.
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Continuity of market:
intermittent markets continuous markets mixed markets
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wide property of market and access of operators (in some sources, the institutional solution chosen for the establishment and operation of secondary capital markets):
private markets (according this principle the major modern markets operate, of Anglo-Saxon origin), State markets. mixed markets
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Way of negotiation:
auction market negotiation market
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The main ways for obtaining additional capital are the following:
increasing of share capital through stock issue; contracting a loan through a bond issue; contracting a bank credit.
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In the case when a public recourse is made in order to obtain financial resources through the issuance of shares or bonds, the issuer companies fall within the capital market and the products offered to investors (shares, bonds, etc.) are called securities.
Note: In the romanian specialized literature, the following notions are met: valori mobiliare, hrtii de valoare, titluri financiare.
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Financial securities have a certain value. Therefore, in German literature they are called "wertpapier" "securities". Financial securities certify the existence of a contractual (guaranteed) relationships between the issuer and the holder and guarantees the rights for its owners. Therefore, in the Anglo-Saxon literature, they are called "securities" ("/guarantees"). Financial securities allow the conversion of certain transferable securities, in their essence, into securities, by their nature, (i.e. shares). Therefore, in French literature, financial securities are called "valeurs mobilieres".
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A security is defined, according to Law of Moldova on the securities market, no. 199-XIV of 18.11.98, as Securities are financial instruments certifying the proprietary and related thereto personal non-proprietary rights of one person with respect to another which may not be exercised or delegated without presentation of a specified document or without having an appropriate entry in the registry of nominative securities holders or in the records of a nominal holder of the securities.
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Securities are, therefore, documents certifying the status of owners and/or creditors and generate effects for holders in accordance with market characteristics.
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Financial securities that are traded on the capital market can be classified according to the procedure of creation, into three categories:
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Derivative securities
are stock exchange products arising from contracts concluded between the issuer (seller) and recipient (buyer) and which give to the latter rights over some assets of the issuer at a future maturity, according to conditions stipulated in the contract.
Synthetic products
result from the combination, by the financial corporation, of different financial assets and creation of a new placement instrument.
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1st level, by nature of legal relations of rights and obligations called categories; 2nd level, categories according to specific rights and obligations called groups.
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Options
Futures
Other
On the 2nd level, those 6 categories are detailed on groups of securities. For example, the category of property instruments is divided into 5 groups:
ordinary shares; preferred shares; convertible shares; certificates of investment funds; others.
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For the capital market from Republic of Moldova, grouping of securities is treated according to the Law on Securities Market, no. 199-XIV of 18.11.98. Accordong to this law, the main components of securities are shares and bonds.
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Materialized securities circulate in form of certificates that authenticates the rights conferred by securities.
A security certificate must contain: identification dates of the issuer; type and class of securities, certified by the certificate; state registration number; number of securities, authenticated by the certificate; name, surname (full name) of owner of securities (for nominative securities certificates); the obligation of issuer to ensure the rights of securities holder; number of the certificate; stamp of the issuer; the signature (facsimile of signature) of executive president of the issuer and signature of person that issued the certificate; other information specified by law/legislation for a specific type of securities.
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Dematerialized nominative securities are issued in book-entry form in personal accounts of registered persons, including on digital support.
Note: For dematerialized nominative securities as a document confirming the rights offered by the security serves the decision on the issuance of securities and statement from the register.
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