Financial Markets

Published: 2021-09-11 22:30:08
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Financial Markets - Arushi Sharma & Hisham Ahmed Rizvi1. FINANCIAL MARKETS ARUSHI SHARMA [50240] HISHAM AHMED RIZVI [50269] BBS II-B SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES A Financial Management Presentation2. FINANCIAL SYSTEM An Overview3. 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 Borrower s FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]4. STRUCTURAL APPROACH TO FINANCIAL SYSTEMS According 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 Intermediaries Financial Regulators FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]5. 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 FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]6. 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 MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]7. FINANCIAL MARKETS An Overview8. WHAT ARE FINANCIAL MARKETS? A financial market is a market in which people and entities can trade financial securities, commoditi es, 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]9. 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]10. 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 MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]11. FINANCIAL MARKETS Types – Primary and Secondary12. 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 FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269] SECONDARY MARKET 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. Harvey13. 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." FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]14. 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]15. SECONDARY MARKETS 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. 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 MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]16. FINANCIAL MARKETS Capital Market and Money Market17. CAPITAL MARKET18. 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]19. 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 • 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]20. CAPITAL MARKET – INSTRUMENTS Equity Shares Preference Shares Government Bonds Corporate Bonds Perpetual Bonds FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]21. 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 FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]22. 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]23. MONEY MARKET24. 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 FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]25. MONEY MARKET – INSTRUMENTS Certificate of deposit Repurchase agreement Commercial paper Treasury bills Money funds Foreign Exchange Swaps FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]26. 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 FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]27. MONEY MARKET IN INDIA FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]28. COMPARATIVE STUDY29. 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 MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]30. FINANCIAL MARKETS Financial Regulators31. 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. FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]32. 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 MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]33. FINANCIAL REGULATORS IN INDIA FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269] Securities and Exchange Board of India Reserve Bank of India Ministry of Finance Ministry of Corporate Affairs Insurance Regulatory Authority of India PFRDA34. THANK YOU [email protected] | [email protected]

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