financial market and institutions pdf

Financial market and institutions pdf

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Book Preface

Financial Markets and Instruments Lecture notes

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Financial markets finance much of the expenditures by corporations, governments, and individuals. Financial institutions are the key intermediaries in financial markets because they transfer funds from savers to the individuals, firms, or government agencies that need funds. Financial Markets and Institutions, 11th Edition, describes financial markets and the financial institutions that serve those markets. It provides a conceptual framework that can be used to understand why markets exist. Each type of financial market is described with a focus on the securities that are traded and the participation by financial institutions.

Book Preface

A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds , raw materials and precious metals , which are known in the financial markets as commodities. The term "market" is sometimes used for what are more strictly exchanges , organizations that facilitate the trade in financial securities, e.

Much trading of stocks takes place on an exchange; still, corporate actions merger, spinoff are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, to stock exchanges.

There are also global initiatives such as the United Nations Sustainable Development Goal 10 which has a target to improve regulation and monitoring of global financial markets. Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance. For long term finance, the Capital markets ; for short term finance, the Money markets.

Another common use of the term is as a catchall for all the markets in the financial sector, as per examples in the breakdown below. The capital markets may also be divided into primary markets and secondary markets.

Newly formed issued securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors. Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value.

Securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want; an illiquid security may force the seller to get rid of their asset at a large discount. Financial markets attract funds from investors and channel them to corporations—they thus allow corporations to finance their operations and achieve growth.

Money markets allow firms to borrow funds on a short term basis, while capital markets allow corporations to gain long-term funding to support expansion known as maturity transformation. Without financial markets, borrowers would have difficulty finding lenders themselves.

Intermediaries such as banks , Investment Banks , and Boutique Investment Banks can help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties.

A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:. The lender temporarily gives money to somebody else, on the condition of getting back the principal amount together with some interest or profit or charge.

Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she:. Companies tend to be lenders of capital. When companies 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 via short term markets called money markets.

Alternatively, such companies may decide to return the cash surplus to their shareholders e. Banks can be lenders themselves as they are able to create new debt money in the form of deposits. Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed, the debt seemingly expands rather than being paid off.

One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments.

Public Corporations typically include nationalized industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets. Borrowers having similar needs can form into a group of borrowers. They can also take an organizational form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this lowers the cost of their borrowings.

During the s and s, a major growth sector in financial markets was the trade in so called derivatives. In the financial markets, stock prices, share prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products that are used to control risk or paradoxically exploit risk.

Derivative products or instruments help the issuers to gain an unusual profit from issuing the instruments. For using the help of these products a contract has to be made. Derivative contracts are mainly 4 types: [5]. Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods.

While this may have been true in the distant past, [ when? Much effort has gone into the study of financial markets and how prices vary with time. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis , which states that the next change is not correlated to the last change.

The role of human psychology in price variations also plays a significant factor. Large amounts of volatility often indicate the presence of strong emotional factors playing into the price.

Fear can cause excessive drops in price and greed can create bubbles. In recent years the rise of algorithmic and high-frequency program trading has seen the adoption of momentum, ultra-short term moving average and other similar strategies which are based on technical as opposed to fundamental or theoretical concepts of market behaviour.

The scale of changes in price over some unit of time is called the volatility. Large changes up or down are more likely than what one would calculate using a normal distribution with an estimated standard deviation. Simply put, primary market is the market where the newly started company issued shares to the public for the first time through IPO initial public offering.

Secondary market is the market where the second hand securities are sold security Commodity Markets. With the increase in commodity prices, the cost of goods for companies increases. This increase in commodity prices level causes a rise in inflation. Due to the production cost remaining same, and revenues rising due to high commodity prices , the operating profit revenue minus cost increases, which in turn drives up equity prices.

From Wikipedia, the free encyclopedia. Generic term for all markets in which trading takes place with capital. Government spending Final consumption expenditure Operations Redistribution. Taxation Deficit spending. Economic history. Private equity and venture capital Recession Stock market bubble Stock market crash Accounting scandals. Types of banks. Funds transfer. Automated teller machine Bank regulation Loan Mobile banking Money creation Bank secrecy Ethical banking Fractional-reserve banking Full-reserve banking Islamic banking Private banking.

Related topics. Economic systems. Economic theories. Finance capitalism Financial services Financial instrument Financial market efficiency Brownian model of financial markets Investment theory Quantitative behavioral finance Market profile Mathematical finance Stock investor Financial market theory of development Liquidity. Retrieved Wright and Vincenzo Quadrini. A dictionary of business and management. Oxford University Press.

Financial markets. Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock.

Authorised capital Issued shares Shares outstanding Treasury stock. Electronic communication network List of stock exchanges Trading hours Multilateral trading facility Over-the-counter. Algorithmic trading Buy and hold Contrarian investing Day trading Dollar cost averaging Efficient-market hypothesis Fundamental analysis Growth stock Market timing Modern portfolio theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Sector rotation Style investing Swing trading Technical analysis Trend following Value averaging Value investing.

General areas of finance. Computational finance Experimental finance Financial economics Financial engineering Financial institutions Financial management Financial markets Financial technology Fintech Investment management Mathematical finance Personal finance Public finance Quantitative behavioral finance Quantum finance Statistical finance.

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Financial Markets and Instruments Lecture notes

A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds , raw materials and precious metals , which are known in the financial markets as commodities. The term "market" is sometimes used for what are more strictly exchanges , organizations that facilitate the trade in financial securities, e. Much trading of stocks takes place on an exchange; still, corporate actions merger, spinoff are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, to stock exchanges. There are also global initiatives such as the United Nations Sustainable Development Goal 10 which has a target to improve regulation and monitoring of global financial markets. Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance.


Fundamentals of Derivatives Markets. Mishkin/Eakins. Financial Markets and Institutions†. Moffett/Stonehill/Eiteman. Fundamentals of Multinational Finance†.


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In many parts of the world, international financial institutions IFIs play a major role in the social and economic development programs of nations with developing or transitional economies. This role includes advising on development projects, funding them and assisting in their implementation. Characterized by AAA-credit ratings and a broad membership of borrowing and donor countries, each of these institutions operates independently.

Financial Markets o Transaction costs o Investors vs. Lecture , Notes , Market , Financial , Institutions , Instruments , Financial institutions , Financial markets and instruments lecture notes. Link to this page:. Protection of property rights o Laws and enforcement Openness of capital account o Liberalization leads to higher competition and diversification, lower cost of capital o But only after ensuring property rights Legal origin o Common law countries: prevalent role of Financial Markets Require transparency and protection of small investors o Continental Europe and Asia: led by Financial intermediaries banks FIs establish deep relations with the clients and have enough power to protect their interests Synergy between banks and Financial Markets Lecture notes Financial Markets and Instruments Module 1, New Economic School MiF supported by MorganStanley 3 How does Financial development contribute to economic growth? How to help the poor?

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Financial Markets and Institutions

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