Published on May 16, 2009
FINANCIAL MARKET : FINANCIAL MARKET What is Financial Market : : What is Financial Market : Mechanism that allows people to buy and sell financial securities (such as stocks and bonds) and items of value at low transaction cost. Markets work by placing many interested buyers and sellers in one “place”, thus making easier for them to find each other. PURPOSE OF FINANCIAL MARKETS: : PURPOSE OF FINANCIAL MARKETS: Financial Markets facilitate : The raising of capital. The transfer of risk. International trade. HOW FINANCIAL MARKET WORKS : : HOW FINANCIAL MARKET WORKS : BORROWER- Issues a receipt to Lender promising to payback the capital. RECEIPTS- Securities which may be freely bought or sold. LENDER- Will expect some compensation in form of interest or dividends, in return. TYPES OF FINANCIAL MARKETS : : TYPES OF FINANCIAL MARKETS : Capital Markets Stock Markets - Which provide financing through the issuance of shares or common stock ,and enable subsequent trading. Bond Markets – Which provide Financing through the issuance of bonds , enable subsequent trading. TYPES OF FM CONTD…. : TYPES OF FM CONTD…. COMMODITY MARKETS – which facilitate the trading of commodities. MONEY MARKETS – which provide short term debt financing and investment. DERIVATIVE MARKETS – which provide instruments for the management of financial risk INSURANCE MARKETS – which facilitate redistribution of various risks. FOREIGN EXCHANGE MARKETS - which facilitate the trading of foreign exchange. RAISING CAPITAL : RAISING CAPITAL Without financial Markets, borrowers would have difficulty finding buyers themselves. Here the intermediaries such as BANKS come in picture. Banks take money from those who have money to save. They can then lend this money to those who seek to borrow. Banks popularly lend money in form of LOANS and MORTGAGES. RELATIONSHIP : RELATIONSHIP LENDERS : LENDERS INDIVIDUALS Many individuals are not aware that they are lenders, but almost everyone lends money in some way. A person lends money when he : Puts money in a savings account at a bank. Contributes to a pension plan. Pays premiums to an insurance company. Invests in government bonds. Invests in company shares. LENDERS : LENDERS COMPANIES Companies usually tend to be borrowers of capital . But when they have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it, by Investing in bonds and stocks BORROWERS : BORROWERS Individuals – e.g. bank loans, mortgages. Companies – for short term or long term cash flows or future business expansion. Governments – for spending requirements, or on behalf of nationalized industries, municipalities or other public sector bodies. Public Corporations – e.g. postal services, railway companies and utility companies. FINANCIAL MARKET EFFICIENCY : : FINANCIAL MARKET EFFICIENCY : Allocative Efficiency: A market is allocatively efficient if channels fund to those firms and organisations with most promising real investment opportunities. Operational Efficiency: Carries its operations as low a cost as possible. Information Processing Efficiency: Any new relevant information is quickly and accurately impounded in prices. CONCLUSION : CONCLUSION Thus Financial market : Acts as a backbone of financial structure of any country. Acts as an interface between prospective buyers and sellers. Improves overall business liquidity. Helps in raising capital and improving international trade. Slide 14: THANK YOU…….