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Money doesn't create man but it is the man who created money. -Warren Buffet
EEB 2
Outline
Overview of financial markets Institutional infrastructure Role and functions of stock
exchange
Website activity
Each one of you write your bio in your course page. For example Foundation students will write in Foundation Batch course page. Bio will be written as per following guidelines:
Include your name, prior education background and institutes name Include your hobbies, 2 strengths and 2 unique talents Include your achievements Include what you want to learn from this course
www.learningfinancialmanagement.pbworks.com
Financial System
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To ensure the soundness of financial intermediaries (and the overall financial system):
Restrictions on entry Disclosure Restrictions on Assets and Activities (e.g. Basel II) Deposit Insurance Limits on Competition Restrictions on Interest Rates
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Financial Markets
Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds
Example: lenders/savers and borrowers/investors Important effects on economic performance
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Money market
Instruments
Equities
Most popular investing instruments
Stocks and shares Bonus issues Rights issues
Debt
Corporate Government
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Financial Market Primary Mkt Inst Primary market Capital market Insurance cos NIS Second ary market Investors trade securities issued in primary market
Money market Commercial Credit banks unions Short term instruments debt
equity
Public Private placement
engines of Indian economy include IT, ITes, pharmaceuticals, biotechnology, nano technology, agri. businesses
Where forces of competition are at work Innovation driving enterprises Economic reforms well on course entering second phase
India - one of 10 fastest-growing population of HNWIs globally There are at least 23 Indian citizens amongst the richest people on the planet Non Resident Indians can invest in all Indian Asset Classes Salary increases in India 13.9% is the highest in the world Increasing Investment avenues Art, Realty Funds, Commodities The number of companies listed on the Bombay Stock Exchange, at more than 6,000, is second only to NYSE. Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone.
Consumerism
Retail credit, low interest rates, changing aspirations
Infrastructure
Development of roads, ports, telecom
Reforms
FDI, Tax reforms
Global competitiveness
Exports Outsourcing
Examples include:
Treasury bills Commercial Paper
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Bank Financing
Short-Term Financing
Banks are an important source of financing They provide:
Lines of Credit in support of working capital needs Term Loans in support of longer term investment in equipment
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Market infrastructure
Stock exchange Clearing and settlement Education and training Investors protection Rating agency
Intermediaries
Financial intermediaries may stand in between ultimate lenders and ultimate borrowers Merchant Bankers Stock brokers Advisors Banks Mutual Funds etc
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1. Transaction Costs
Transaction Costs resources (time/money) used in carrying out the exchange of assets, goods or services Economies of scale
Reduction in transaction costs per dollar of transaction Example: legal costs for blueprint contract
Liquidity services
Coordination across deposit-taking and lending activities
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2. Risk Management
Risk sharing
Asset transformation
Risk transformation: sell low-risk assets and use acquired funds to buy riskier assets Maturity transformation: convert funds lent for a short-period into loans of longer duration
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3. Asymmetric Information
Asymmetric distribution of information between agents
Example: borrower has better information about investment project than the lender
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securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities
Role and Functions of a stock exchange contd Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules
The exchange itself does not buy or sell the securities, nor does it set prices for them
Fair
The exchange assures that no investor will have an undue advantage over other market participants
Efficient market This means that orders are executed and transactions are settled in the fastest possible way
Transparency
Investor make informed and intelligent decision about the particular stock based on information
Transparency contd
Listed companies must disclose information in timely, complete and accurate manner to the Exchange and the public on a regular basis
Transparency contd
Required information include stock price, corporate conditions and developments dividend, mergers and joint ventures, and management changes etc
Doing business
Price
At any point in time, the price of previously issued stock is determined by the ebb and flow of supply and demand
Listing requirements There are specific requirements for allowing a public company to list its securities on the Stock Exchange these are set out in the legislation
Benefits of listing
Visibility
Market support
Investors confidence
Once traded
Aura of reliability Accuracy in reporting financial
Delisting
Stock exchange can delist companies for a number of reasons including : Merger with another company Solvency problems Name change company asked to be removed Failure to comply with exchange rules
Liquidity
Ability to sell an asset quickly at a fairly known price Low transactions costs
each order executed Fees paid by firms when their securities are originally listed Annual fees by firms Entrance fees from new members sale of historic trading and market information
expanding their horizons beyond their home markets Investors becoming much more demanding
Owners
Ownership of the company is by the public in the form of shares one share, one vote Board is elected by shareholders to represent the best interests of the owners
Managers
presentation on Financial News Analysis (Refer Economic times and other business news papers/ magazine) Compulsory for first 5 roll numbers. Also submit a report on A4 size paper (Give intext citations) B) Individual Assignment 2 minute presentation on Key learnings of the previous class. (Compulsory for all) C) Name of Groups (Maximum 7 students)