FM

• Types of Financial Markets:

  • Stock Markets (Equity Markets): Facilitate the buying and selling of shares in publicly listed companies
  • Bond Markets (Debt Markets): Participants buy and sell debt securities like government bonds, corporate bonds, and municipal bonds
  • Foreign Exchange Markets (Forex): Participants trade currencies
  • Commodity Markets: Involve trading physical goods like agricultural products, energy, and precious metals
  • Derivatives Markets: Include futures contracts, options, and swaps
• • Money Markets: Deal with short-term debt instruments like Treasury bills and commercial paper
  • Cryptocurrency Markets: Involve buying and selling digital currencies like Bitcoin and Ethereum
  • Real Estate Markets: Involve buying and selling property
  • Insurance Markets: Involve buying and selling insurance policies
  • Over-the-Counter (OTC) Markets: Include certain stocks and derivatives
• Basis of Financial Market:

  • Borrowers can be individuals, private companies, public corporations, government, and local authorities
  • Individual persons take mortgage loans to buy property
  • Private companies take loans for business expansion or improvement
  • Lenders are investors who finance borrowers' requirements
• Financial markets facilitate the exchange of financial assets between buyers and sellers

  • Classification: Money Market (short-term debt instruments) and Capital Market (long-term financial instruments)
  • Functions: Price discovery, capital allocation, risk transfer
  • Market Participants: Individuals, institutions, governments, financial intermediaries
• Historical Evolution of Financial Markets:

  • Ancient and Medieval Times: Barter system, commodity money, early financial instruments
  • Renaissance and Early Modern Era: Stock exchanges in Europe, creation of central banks
  • 19th Century: Railway boom, industrial revolution
  • 20th Century: World wars, globalization, technology, emergence of derivatives
  • Late 20th Century to Present: Deregulation, financial innovation, global financial crises
  • Rise of High-Frequency Trading and Algorithmic Trading
  • Cryptocurrencies and Blockchain
• • Future Trends: Fintech and Digitalization, Sustainable Finance, Regulatory Changes
• Financial Market

  Any type of financial transaction that you can think of that helps businesses grow and investors make money.
• Financial markets are platforms or systems that facilitate the buying and selling of financial instruments, such as stocks, bonds, currencies, and commodities.
• Money Market: Deals with short-term debt instruments and monetary assets with maturities of one year or less. Examples include Treasury bills and commercial paper.
• Capital Market: Involves longer-term financial instruments, such as stocks and bonds, with maturities exceeding one year.
• Price Discovery: Financial markets determine the prices of financial instruments through the forces of supply and demand, reflecting the market's consensus on the value of these assets.
• Capital Allocation: They allocate financial resources to different economic entities, allowing businesses and governments to raise funds for various activities.
• Risk Transfer: Financial markets provide a mechanism for transferring and managing risks. Instruments like derivatives help in hedging against price fluctuations.
• Individuals: Retail investors participate through brokerage accounts.
• Institutions: Includes pension funds, mutual funds, and insurance companies.
• Governments: Governments issue and trade securities in financial markets.
• Financial Intermediaries: Banks and other financial institutions act as intermediaries, facilitating transactions.
• Treasury Bills (T-Bills): Short-term government securities with maturities ranging from a few days to one year.
• Commercial Paper: Unsecured, short-term debt issued by corporations to meet short-term liabilities.          
• Certificates of Deposit (CDs): Time deposits offered by banks with fixed maturities and fixed interest rates.
• Repurchase Agreements (Repos): Short-term loans backed by the sale of securities with an agreement to repurchase them at a higher price.
• Stocks (Equities): Ownership shares in a company, representing a claim on its assets and earnings.
• Bonds (Debt Securities): Fixed-income securities representing loans made by investors to governments, municipalities, or corporations.
• Derivatives: Financial contracts whose value is derived from an underlying asset, such as futures and options.
• Subcategories of Capital Market: Primary Market, Secondary Market
• Primary Market: Where new securities are issued and sold for the first time, often through initial public offerings (IPOs).
• Secondary Market: Where existing securities are bought and sold among investors, without the involvement of the issuing company.
• Market participants in financial markets can be categorized into individuals, institutions, and regulators
• Individuals:

  • Private individuals who participate in financial markets to achieve personal financial goals
  • Buy and sell financial instruments for personal investment
  • Invest in stocks, bonds, mutual funds, and other securities
  • May trade directly through brokerage accounts or indirectly through investment vehicles
• Institutions:

  • Organizations that manage large pools of money on behalf of others
  • Types of institutions include banks, insurance companies, pension funds, hedge funds, and mutual funds
• Regulators:

  • Governmental or non-governmental organizations responsible for overseeing and enforcing rules and regulations in financial markets
  • Functions include ensuring market integrity, protecting investors, maintaining market stability, and enforcing compliance
• Roles of Market Participants:

  • Buyers and Sellers: Engage in buying and selling financial instruments based on investment goals and risk preferences
  • Market Makers: Institutions that provide liquidity and facilitate trades
  • Analysts: Analyze market trends, assess securities, and provide recommendations
  • Advisors: Assist in making investment decisions based on financial goals and risk tolerance
  • Regulators: Oversee market activities, enforce compliance, and maintain market integrity and stability
• Interactions in Financial Markets:

  • Buy-Side vs. Sell-Side: Buy-side includes investors seeking to purchase securities, while sell-side involves entities selling or trading securities
  • Market Orders vs. Limit Orders: Participants may place market orders for immediate execution at the current market price or limit orders to execute at a specific price or better
• Banks:

  • Depository Functions: Provide a safe place for individuals and businesses to deposit and store money
  • Lending: Lend money for various purposes like home purchases, business expansion, and personal loans
  • Payment Services: Facilitate transactions through services like checking accounts, wire transfers, and electronic fund transfers
  • Risk Management: Offer financial products such as insurance and derivatives to help clients manage risks
• Brokers:

  • Execution of Trades: Execute buy and sell orders on behalf of investors in financial markets
  • Market Access: Provide access to various financial markets like stock exchanges, bond markets, and commodity markets
  • Research and Analysis: Offer research and analysis to help clients make informed investment decisions
  • Advisory Services: Provide advisory services, especially in portfolio management
  • Importance: Enhance market liquidity by facilitating efficient matching of buyers and sellers, provide individual investors with access to financial markets
• Investment Banks:

  • Underwriting: Help corporations raise capital by underwriting new issuances of stocks and bonds
  • Mergers and Acquisitions (M&A): Advise and facilitate mergers, acquisitions, and corporate restructuring
  • Trading and Sales: Engage in trading activities for their own accounts or on behalf of clients
  • Advisory Services: Provide financial advice to corporations, governments, and institutional investors
  • Importance: Play a crucial role in capital-raising for corporations, provide financial advisory services, contribute to efficient functioning of financial markets
• Common Functions:

  • Market Making: Act as market makers, facilitating liquidity by quoting bid and ask prices for financial instruments
  • Risk Management: Assist clients in managing financial risks through various financial products, including derivatives
  • Information Flow: Contribute to the dissemination of information in financial markets, aiding price discovery and transparency
• Regulatory bodies:

  1. Securities and Exchange Commission (SEC):

  • Regulates securities markets and protects investors
  • Enforces securities laws and ensures fair and efficient markets
  • Oversees securities issuers, brokers, and investment advisors
  • Facilitates capital formation through the issuance of securities

  2. Financial Conduct Authority (FCA):

  • Regulates financial firms and markets to ensure integrity
  • Supervises and enforces compliance with conduct standards
  • Protects consumers by promoting competition and fair practices
  • Maintains market stability and prevents financial crime
• 5. Prudential Regulation Authority (PRA):

  • Regulates banks, building societies, credit unions, insurers, and major investment firms
  • Ensures safety and soundness of financial institutions
  • Sets prudential standards to mitigate systemic risks
  • Implements macro-prudential policies for financial system stability

  6. Federal Reserve (Fed):

  • Conducts monetary policy for stable prices and maximum employment
  • Supervises and regulates banks and financial institutions
  • Maintains financial system stability
  • Provides financial services to depository institutions
• 3. European Securities and Markets Authority (ESMA):

  • Coordinates regulation of securities and markets across EU member states
  • Develops and enforces common rules for a level playing field
  • Enhances investor protection and market transparency
  • Promotes cooperation among national regulatory authorities

  4. Commodity Futures Trading Commission (CFTC):

  • Regulates commodity futures and options markets
  • Prevents fraud and manipulation in commodity trading
  • Ensures fair and efficient operation of futures markets
  • Oversees commodity pool operators and commodity trading advisors