financial markets - arushi sharma & hisham ahmed rizvi

FINANCIAL MARKETS

ARUSHI SHARMA [50240]HISHAM AHMED RIZVI

[50269]BBS II-B

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

A Financial Management Presentation

FINANCIAL SYSTEMAn Overview

WHAT IS A FINANCIAL SYSTEM?

The financial system plays the key role in the economy by • stimulating economic growth, • influencing economic performance of the

actors, &• affecting economic welfare.

This is achieved by financial infrastructure, in which entities with funds allocate those funds to those who have potentially more productive ways to invest those funds.

A financial system makes it possible a more efficient transfer of funds.

FINANCIAL SYSTEM

It is the system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level.

Savers Borrowers

FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]

STRUCTURAL APPROACH TO FINANCIAL SYSTEMSAccording to the structural approach, the financial system of an economy consists of three main components:

Each of the components plays a specific role in the economy.

Financial Markets

Financial Intermedia

ries

Financial Regulators


FUNCTIONAL APPROACH TO FINANCIAL SYSTEMS According to the functional approach, financial markets facilitate the flow of funds in order to finance investments by corporations, governments and individuals.

Firms

Stock Market

Bond Market

Short term fixed securities market

Banking Sector

Government


CONCEPT OF AN ‘ASSET’ IN FINANCIAL SYSTEMS

Financial assets, often called financial instruments, are intangible assets, which are expected to provide future benefits in the form of a claim to future cash.

Any transaction related to financial instrument includes at least two parties:

ASSET

An asset is any resource that is expected to provide future benefits, and thus possesses economic value. Assets are divided into two categories:

• tangible asset (physical form)• intangible asset (legal claim to some future

economic gain)

ISSUER INVESTOR

The party that has agreed to make future cash payment

The party that owns the financial instrument, and therefore the right

to receive the payments made by the issuer.


FINANCIAL MARKETSAn Overview

WHAT ARE FINANCIAL MARKETS?

A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand.

MARKET

In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them.


WHAT ARE FINANCIAL MARKETS?SECURITIES

A security or financial instrument is a tradable asset of any kind. Securities are broadly categorized into:• debt securities (such as banknotes, bonds

and debentures) • equity securities, e.g., common stocks;

and,• derivative contracts, such as forwards,

futures, options and swaps.

COMMODITIES

In economics, a commodity is a marketable item produced to satisfy wants or needs.

Economic commodities comprise goods and services. • It is used to describe a class of goods for

which there is demand, but which is supplied without qualitative differentiation across a market.

A country's regulatory structure determines what qualifies as a security.


ECONOMIC FUNCTIONS OF FINANCIAL MARKETS

• Transactions between buyers and sellers of financial instruments in a financial market determine the price of the traded asset.

Price discovery

• Provides an opportunity for investors to sell a financial instrument since it is referred to as a measure of the ability to sell an asset at its fair market value at any time.

Liquidity

• The function of reduction of transaction costs is performed, when financial market participants are charged and/or bear the costs of trading a financial instrument.

Reduction of transaction costs


FINANCIAL MARKETSTypes – Primary and Secondary

TYPES OF FINANCIAL MARKETS

PRIMARY MARKET

The market in which new, as opposed to existing, securities are sold. Investors who purchase shares in a new security issue are purchasing them in the primary market.

Source: Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott


SECONDARYMARKET

A market in which investors purchase securities or assets from other investors rather than directly from the issuing companies; exchanges such as the New York Stock Exchange and the NASDAQ are secondary markets.

Source: Campbell R. Harvey

PRIMARY MARKETS

• The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM).

• Securities are issued by the company directly to investors.

• Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

• The primary market performs the crucial function of facilitating capital formation in the economy.

• Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public."


METHODS OF ISSUING SECURITIES IN A PRIMARY MARKET

Initial Public Offering

A type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company.

Rights Issuance

A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders to buy a specified number of new securities from the firm at a specified price within a specified time.

Preferential Issue

A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue.


SECONDARY MARKETS

Organized Stock Exchanges Organized stock exchanges are markets that are used to facilitate the trading of financial instruments between investors. The main organized stock exchange is the Bombay Stock Exchange (BSE) in India.

Over-the-counter (OTC) market It is an electronic network that allows investors to execute trades without going through specialists or intermediaries. These trades are executed through the NASDAQ which links various dealers and brokers through a computer or telephone based system.

Secondary markets trade existing securities (previously owned shares of stocks, bonds, and other

financial assets). Secondary markets consist of both organized exchanges, such as the Bombay Stock

Exchange, and over-the-counter or electronic markets, such as NASDAQ.


FINANCIAL MARKETSCapital Market and Money Market

CAPITAL MARKET

CAPITAL MARKET

Primary Market Secondary Market

CAPITAL MARKET

A market in which individuals and institutions trade long-term financial securities.

• Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds.


CAPITAL MARKET

Primary Market Secondary Market

• New stock or bond issues are sold to investors.

• The main entities seeking to raise long-term funds on the primary capital markets are governments (via bonds) and business enterprises (via equity and bonds).

• The main entities

purchasing the bonds or stock include pension funds, hedge funds, and less commonly wealthy individuals.

• Existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

• The existence of secondary

markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises.


CAPITAL MARKET – INSTRUMENTS

Equity Shares

Preference Shares

Government

Bonds

Corporate Bonds

Perpetual Bonds


CAPITAL MARKET - FUNCTIONS

Mobilization of Savings

Capital Formation

Provision of Investment Avenue

Proper Regulation of Funds

Service Provision

Speed up Economic Growth and Development

Continuous Availability of Funds


CAPITAL MARKET – EXAMPLES OF TRANSACTIONS

A government raising money on the primary markets• When a government wants to raise long term finance it will

often sell bonds to the capital markets.• It has been increasingly common for governments of the

larger nations to bypass investment banks by making their bonds directly available for purchase over the Internet.

A company raising money on the primary markets• When a company wants to raise money for long term

investment, it can do so by issuing bonds or shares in the capital market.Trading on the secondary markets

• On the secondary markets, there is no limit on the number of times a security can be traded, and the process is usually very quick.

• It indirectly helps in raising finance on the primary market.


MONEY MARKET

MONEY MARKET

• Money market means market where money or its equivalent can be traded.

• Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity.

• It is better known as a place where large institutions and government manage their short term cash needs.

• For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers.

MONEY MARKET

Money market is a market where short-term obligations such as treasury bills, commercial papers and banker’s acceptances are bought and sold.

Source: www.CAalley.com


MONEY MARKET – INSTRUMENTS

Certificate of deposit

Repurchase

agreement

Commercial paper

Treasury bills

Money funds

Foreign Exchange

Swaps


MONEY MARKET - FUNCTIONS

Maintenance of monetary equilibrium.

Promotion of economic growth.

Providing help to Trade and Industry

Helping in implementing Monetary Policy

Helping in Capital Formation

Providing non-inflationary sources of finance to government


MONEY MARKET IN INDIA


COMPARATIVE STUDY

MONEY MARKET VS. CAPITAL MARKET

MONEY MARKET CAPITAL MARKET

Trading is through recognized stock exchanges

Associated with high risk and high return

Anybody can make investments through a broker.

Often the purpose is to invest in additional physical capital goods.

Raising of long term finance, such as loans not to be fully paid back

for at least a year.

Deals are transacted on phone or through electronic systems

Relatively secure

Individual players cannot invest in money market as the value of

investments is large.

Often used for general operating expenses.

Short term lending and borrowing, typically a year.


FINANCIAL MARKETSFinancial Regulators

FINANCIAL REGULATION

BENEFITS:

• Market confidence

• Financial stability

• Consumer protection

• Reduction of financial crime

FINANCIAL REGULATION

Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization.


STRUCTURE OF SUPERVISION

Supervision of stock exchanges

Supervision of listed companies

Supervision of anti-money laundering

Supervision of investment management

Supervision of banks and financial services providers


FINANCIAL REGULATORS IN INDIA


Securities and Exchange Board

of India

Reserve Bank of India

Ministry of Finance

Ministry of Corporate Affairs

Insurance Regulatory Authority of

India

PFRDA

THANK YOU

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financial markets - arushi sharma & hisham ahmed rizvi

Economy & Finance