FINANCIAL MARKETS

Quotes for the day!

Do not save what is left after
spending but spend what is
left after saving.

Warren Buffet
 FINANCIAL
Investor MARKETS Borrower
/lenders
Government
BANKS ( To Companies
profit)
 FINANCIAL MARKETS

MONEY MARKETS CAPITAL MARKETS

SHORT TERM LONG TERM

INVESTMENT ( 10 TO INVESTMENT
12 MONTHS)

EQUITY DEBT
 What is a Financial Market ?

• To have a better perspective let us dissect what is a

market?
• A market is a place where two parties are involved in
transaction of goods and services in exchange of money.
The two parties involved are:
• Buyer
• Seller
• In a market the buyer and seller comes on a common
platform, where buyer purchases goods and services
from the seller in exchange of money.
 What are financial markets?
• They might sound confusing, but financial
markets basically exist to bring people together
so money flows to where it is needed most.
• Think of companies like eBay, which match
buyers and sellers to set a price for everything
from second-hand furniture to the new iPhone.
Financial markets match buyers and sellers to
set a price for financial assets.
How do financial markets help me?
• They can provide an opportunity for you to invest money in shares
(also known as equities) to build up money for the future.
• Over a long period of time this can often provide a better return than
opening a savings account at your bank. However buying shares
can be risky. It is important to remember that the value of any
investment can go down as well as up, and getting good returns in
the past does not always mean they’ll be good in the future.
• Financial markets also allow people to take out insurance. Insurance
companies need to use financial markets to make sure you will
receive a pay-out if you have an accident, such as losing or
damaging your mobile phone.
• Financial markets enable banks to borrow money, helping them to
make loans to people wishing to borrow – whether that’s attending
university with a student loan, say, or buying a house with a
mortgage.
 How do financial markets help businesses?

• Financial markets provide finance for companies so they can hire,

invest and grow.
• For example, Apple started in a garage in California. While it had
some great ideas, it needed money to make them happen.
• n 1977, it persuaded a single investor to loan the company
$250,000. Over time, the company grew and less than five years
later it was able to borrow over $100 million from financial markets
by selling shares in the company.
• Apple is now worth hundreds of billions of dollars and employs over
100,000 people.
• So, when they work well, financial markets can make the country
much better off.
 What’s our role in financial markets?

• As the 2007 financial crisis showed, when

markets go wrong they can cause a lot of
harm. In the crisis markets proved fragile.
This fragility spread to the wider economy.
Banks were less willing and less able to
provide loans to households and
companies. This meant lower economic
activity and more people out of work.
 What’s our role in financial markets?

• That’s why it’s important we make sure financial markets operate in a safe way.

• Our role includes:

• Collecting information about financial markets. It’s vital we talk to people working in
financial markets so we understand what’s happening, what the risks are and
consider how to address them together.

• Managing market operations – the buying and selling of things owned by the
government, to change the amount of money available in banking system. A few
examples of this are quantitative easing, printing money and managing the UK’s gold
and money reserves (our country’s investments) on behalf of the government.We
also hold a small number of foreign currency reserves, and carry out payments to
other countries for government departments and a small number
• Setting standards for financial markets. By doing this, we aim to make sure financial
markets are fair and there when you need them.
 What is a Financial Market ?

• A place where individuals are involved

in any kind of financial transaction
refers to financial market. Financial
market is a platform where buyers and
sellers are involved in sale and purchase
of financial products like shares, mutual
funds, bonds and so on.
 What are "financial assets?"

• Shares refer to the ownership of part of a

company.
• Bonds are essentially just loans to
governments or large corporations.
• In foreign exchange markets, people
exchange one currency for another.
•SHOW THE SHARK
TANK SHOW
 WHAT IS AN INVESTMENT
• An investment is any vehicle into which
funds can be placed with the expectation
that they will generate positive income
and/or their value is preserved or
increased.
 What is the Investment
Process?
• The overall investment process is the mechanism for bringing together
suppliers (those having extra funds) with demanders (those needing funds).
Normally, suppliers or savers and demanders or issuers are brought
together through a financial institution or a financial market although there
are instances, such as property transactions, where buyers and sellers
directly deal with one another. Financial institutions are organizations
through which the savings of individuals, corporations and governments are
channelled into loans or investments. Example of financial institutions is
banks, investment houses, mutual funds, pension funds and insurance
companies. Financial markets provide the legal and tax
framework/environment that bring together suppliers and demanders of
funds to make safe and quick financial transactions, often though
intermediaries such as organized securities exchanges.
 What is the Investment
Process?
• Suppliers or savers may transfer their
funds through financial markets, financial
institutions, or directly to the demanders or
issuers. Financial institutions can also
participate in the investment process
either as suppliers or demanders of funds.
 What is the Investment
Process?
• The financial markets consist of two parts,
namely, the money market and the capital
market. The money market deals with
short-term investments while the capital
market is for long-term investments. A
more thorough discussion about these
markets can be found in Part II.
 Who are the Participants in the
investment process?
• The three key participants in the
investment process are:
• government, business and individuals.
• They can either be a demander or supplier
of funds.
 Government
• Both local and national government need large amounts of money.
Funds are needed to finance capital expenditures like long-term
infrastructure projects – road building, schools and hospitals through
the issuance of different types of long-term debt securities. Also,
government needs to fund operating costs that keep it running.
Normally these funds are sourced from taxes and fees collections. In
cases where the operating expenditures exceed government
revenues or if government receipts are not yet available to meet
government payments, government resorts to borrowing funds by
issuing short-term debt securities. If government has temporary idle
cash, it sometimes makes short-term investments to earn positive
returns. As such, government becomes suppliers of funds.
 Business

• Most businesses require big sums of money to support operations in

both the long term and short-term. On the short-term, funds are used
to meet operating cost like financing inventory and accounts
receivables. Long-term needs of businesses are concentrated on
seeking funds to develop products, build plants and buy equipment.
Financing these needs require businesses to issue a variety of debt
and equity securities. Like government, business firms also supply
funds if they have excess cash. At the same time, they are both net
demanders of fund since they demand more funds than they supply.
 Individuals
• We are more familiar of the fact that people
need money, in the form of loans, to buy
property like cars and houses. Yet individuals
supply funds to help meet the needs of both
government and businesses through deposits in
savings accounts, purchases of debt or equity
securities, buy insurance or various types of
property. As a group, individuals are net
suppliers of funds; they put money into the
financial system than they take out.
 What are the different types of
investments?
• Investors can either be individual or institutional.
Individual
• Individual investors personally handle their funds to meet their
financial goals. Earning interest from idle funds, ensuring the
family’s security and building a retirement fund are some
reasons why the individual investor invests.
Institutional
• People with large sums of money for investment or who are
too busy or lack expertise for investment decisions often hire
an institutional investor. Institutional investors commonly know
as fund managers, are investment professionals paid to
manage the funds of others using their expertise and
sophistication in both investment knowledge and method.
Aside from rich individuals and professional investors include
financial institutions and large non-financial corporations.
Individual investors trade in large amounts of securities to
earn high returns that can be used as additional sources of
interest payments (for banks) and benefits to policyholders or
beneficiaries (for insurance companies).
 What is the life of an
investment?
• There is a wide range of investment vehicles available to the investor such
as securities, mutual funds, property and others.
1. Securities
• Securities are investments that represent evidence of debt or ownership
interest in a business or other assets. Bonds and stocks are the most
frequently used types of securities.
• Investment in securities represents either a debt or an equity interest.
• Debt represents funds borrowed in exchange for receiving interest
income and the promise that the loan will be repaid at a given future
date. Bonds and commercial papers are example of debt securities.
• Equity represents a current ownership interest in a specific business
or property. Typically, an investor obtains an equity interest in a business
by buying securities collectively known as stocks (i.e., common,
preferred and convertible preferred).
• Debt securities are similar to bank loans, in that the
corporation promises to pay the face value on the
maturity date together with interest payments at regular
intervals. But unlike a bank loan, bonds and commercial
papers are represented by certificates, which are handed
over to the buyer who becomes the holder of the
certificates. In this way, stocks are also similar to debt
securities – a stock certificate is issued – but differ in a
way that the issuing company does not have the
obligation to pay interest to the holder or repay the face
value of the stock.
• The investor also has a choice, of which type of
securities to invest in depending on such considerations
like cost, rate of return, risk involved and taxes to be
paid.
 Short-term investment
• Examples of short-term investment vehicles are deposit
accounts, Treasury bills (T-bills), commercial papers,
certificates of deposit, promissory notes and the like. The
maturity of all these instruments is under one year.
These instruments are suitable for temporarily investing
idle funds and earning a return, usually interest.
Generally, they are popular to conservative investors
because they carry little or no risk at all. They are highly
liquid since they can be easily converted to cash with
little or no loss in value, thus, enabling the investor to
quickly obtain funds to meet unexpected obligations or
shift to more attractive investment opportunities.
 Common stock
• Buying a share of common stock is in fact
buying a share of a business. An individual who
owns shares in, say Petron or PLDT has an
ownership interest in that company and is called
a stockholder or shareholder. The holds are
evidence of ownership in the corporation. The
percentage or proportion of ownership depends
on how many of the company’s shares he owns.
 Common stock

• For example, 1000 shares of common stock in a

corporation that has 100,000 outstanding shares
represent 1,000/100,000 ownership interest. This means
you have a one percent ownership interest in the
company’s plant, its building, its inventories and, last but
not the least, its management. You own one percent in
everything that the company has or may have in the
future. This type of ownership is also referred to as
having equity in a company; hence, stocks are also
called equity securities.
 Fixed-income securities
• Common examples of fixed-income
securities are bonds, preferred stocks and
convertible securities. These groups of
investment vehicles offers a fixed periodic
return and are quite popular investments
during periods of high interest rates since
investors like to have guaranteed high
returns
 Bonds

• Are long-term debt instruments that offer

the holder a known interest return along
with a return of the bond’s face value (the
value stated on the face of the certificate)
at maturity (usually 20 years). Bonds are
commonly issued by corporations and
governments.
 Preferred stocks
• Represent an ownership interest in a firm
and like common stocks, has no maturity
date. It has however a specific dividend
rate. This dividend payment has
preference over stock dividends paid to
common stockholders. Aside from the
dividends it pays, investors buy preferred
stocks for the possibility of earning capital
gains from its sale.
 Convertible security
• Is a special type of fixed-income obligation
(bond or preferred stock) with a feature
permitting the investor the benefit of
earning fixed income such as interest (for
bonds) or dividends (for preferred stocks),
while offering the potential of capital gains
(like common stocks)
 Mutual funds
• A mutual fund is the commonly used name for
an investment company, which pools the money
of many investors into a large fund. It is
managed by a financial professional, called an
investment adviser or fund manager. who invest
this large accumulation of funds into a large
portfolio of securities, such as debt and equity
securities, and other financial instruments
 Property

• Investments in property can either be

in real property or tangible personal
property
 Real estate
• This term usually refers to raw land,
buildings and that which is permanently
affixed to the land such as residential
homes, commercial property
(condominiums, office and apartment
buildings), and the like. Returns normally
received from this form of investment are
in the form of capital gains, rental income,
etc.
 Tangibles
• Examples of tangibles include gold,
precious metals and gemstones, along
with collectible items such as artwork,
antiques, coins and stamps. Investors
purchase these in anticipation of price
increases.
 What is the life of an investment?

• The life of an investment can either be

short or long-term. Sort-term investments
usually mature within one year while long-
term investments have longer maturities,
like bonds, or with no maturity at all, like
common stocks.
 What is the importance of
investing?
• Investing is the process of placing funds in selected
investment vehicles with the expectation of generating
positive income and/or preserving and increasing their
value.

• The availability of funds in the economy largely

influences its growth and continuity. A cyclical
interdependence dictates the flow of funds that are
needed to finance the activities of government, business
firms, even individuals. For instance, if fewer individuals
save their money in financial institutions, supply of funds
for investments or borrowings will decline.
• A shortage in funds for housing loans will result to fewer
houses being bought. Corollary, fewer houses being
bought will mean fewer people being employed to build
houses and lower demand for construction materials.
This would also affect the demand for consumer goods
such as appliances, furniture and fixtures, which would in
turn affect the sales of the manufacturers of these
goods. Lower sales translate to lower taxes and lower
income to be used for business expansion.
What are the rewards of investing?

• It must be noted that for the investment process to run

smoothly, the suppliers of funds must be sufficiently
compensated by the demanders of funds in exchange for
the risk involved in supplying the funds.
• Returns or rewards form investing are in the form of
current income or increase in value. An example of
earning current income is placing money in a savings
account that would give periodic (usually quarterly)
interest payments or insurance policy that offers
dividends. On the other hand, investing in a piece of
property entails expectations of an increase in its value
between the time it was bought and the time it will be
sold.
New topic
Let us go through the various types
of financial market:
• Capital Market
• A market where individuals invest for a longer duration i.e. more
than a year is called as capital market. In a capital market various
financial institutions raise money from individuals and invest it for a
longer period.
• Capital Market is further divided into:
• Primary Market: Primary Market is a form of capital market where
various companies issue new stock, shares and bonds to investors
in the form of IPO’s (Initial Public Offering). Primary Market is a form
of market where stocks and securities are issued for the first time by
organizations.
• Secondary Market: Secondary market is a form of capital market
where stocks and securities which have been previously issued are
bought and sold.
 Types of Capital Market

• Stock Markets: Stock Market is a type of Capital market which

deals with the issuance and trading of shares and stocks at a certain
price.
• Bond Markets: Bond Market is a form of capital market where
buyers and sellers are involved in the trading of bonds.
• Commodity Market: A market which facilitates the sale and
purchase of raw goods is called a commodity market.
• Commodity market like any other market includes a buyer and a
seller. In such a market buyer purchases raw products like rice,
wheat, grain, cattle and so on from the seller at a mutually agreed
rate.
• Money Market: As the name suggests, money market involves
individuals who deal with the lending and borrowing of money for a
short time frame.
 Types of Capital Market

• Derivatives Market: The market which deals with the trading of

contracts which are derived from any other asset is called as
derivative market.
• Future Market: Future market is a type of financial market which
deals with the trading of financial instruments at a specific rate
where in the delivery takes place in future.
• Insurance Market: Insurance market deals with the trading of
insurance products. Insurance companies pay a certain amount to
the immediate family members of owner of the policy in case of his
untimely death.
• Foreign Exchange Market: Foreign exchange market is a globally
operating market dealing in the sale and purchase of foreign
currencies.
 Types of Capital Market
• Private Market: Private market is a form of
market where transaction of financial products
takes place between two parties directly.
• Mortgage Market: A type of market where
various financial organizations are involved in
providing loans to individuals on various
residential and commercial properties for a
specific duration is called a mortgage market.
The payment is made to the individual
concerned on submitting certain necessary
documents and fulfilling certain basic criteria.
 Shares and Stock Market - An
Overview
• An organization in order to raise money divides its entire capital into
small units of equal value. Each unit is called a share.
• A share is nothing but an indivisible unit of a company’s capital to
be sold among individuals to increase profit of the organization.
• Shareholder
• An individual owning one or more than one share of an organization
is called a shareholder. In simpler words, an individual purchasing
one or more than one share from any private or public organization
is called a shareholder.
• A shareholder can sell his shares anytime depending on the current
value of the share.
• He/she can purchase any new share issued by any other or same
organization.
• A shareholder has the right to declared dividend.
 Terms to remember
• Dividend
• Why do people invest in shares ?
• An organization pays the shareholders for investing in their company’s shares. The
income earned by an individual by investing in an organization’s share (private or
public) is called as dividend.
• What is Retained Earnings ?
• The profit earned by an organization is put into use in the following two ways:
• It is paid to the shareholders as dividend.
• The profit earned by the organization is not distributed amongst the shareholders
but is retained and reinvested in the organization. This portion of the income is
called retained earnings.
• What is a Share Certificate ?
• When an individual purchases shares from any organization, he/she is issued a
certificate as a proof of his investment. Such a certificate issued by an organization
to the shareholders is called a share certificate
 Types of Shares
• Equity Shares
• Equity shares also called as ordinary shares are the
shares where the payment of dividend is directly
proportional to the profits earned by the organization.
Higher the profits earned, higher the dividend, lower the
profits, and lower the dividend. In an equity share,
dividends are paid at a fluctuating/floating rate.
• Preference Shares
• Shares which enjoy preference over payment of
dividends are called preference shares. Shareholders
enjoy fixed rate of dividends in case of preference
shares.
 Types of Shares
• Founder Shares
• Shares held by the management or founders of the
organization are called as founder shares.
• Bonus Shares
• Bonus shares are often issued to the shareholders when
the organization earns surplus profits. The company
officials may decide to pay the extra profits to the
shareholders either as cash (dividend) or issue a bonus
share to them.
• Bonus shares are often issued by organizations to the
shareholders free of charge as a gift in proportion to their
existing shares with the organization.
 How to buy shares ?
• Find a good broker for yourself. Make sure he has good
knowledge about the share market and can guide you
properly.
• To invest in shares one needs to open a DEMAT
Account for online trading. A DEMAT Account is
mandatory for sale and purchase of shares anytime and
anywhere.
• An individual needs to have his PAN Card, a bank
account, other necessary Identity proofs, address proofs
and so on.
• A stock market is a platform for trading of company’s
shares at an agreed rate.
 What is a Stock Market ?
• A stock market is a platform for trading of
company’s shares at an agreed rate.