ftp CHAPTER 1 FINANCAL OR CAPITAL MARKET

• Possibilities for the individual's excess


  • Save for coming months
  • Invest
  • Use for future consumption
• If the individual keeps the wealth for future consumption


  Wealth amount will remain unchanged
• If the individual saves or invests the excess


  Obtains a certain amount of interest and wealth will be increasing
• Financial intermediation


  Process through which capital is transferred from those who have an excess towards those who have a need for capital
• Financial intermediation process

  1. Individuals save capital in the bank

  2. Bank collects and lends to those who need capital

  3. Transactions take place through financial intermediaries
• Financial intermediation allows individuals to increase their purchasing power
• why are banks ready to serve for that purpose?


  generate an amount of profit obtain through the difference between the higher borrowing interest rate and the lower deposit interest rate.
• the financial market is a market place between those who have an excess and those who have a need for capital. those who have an excess of capital know exactly from which institution they are buying financial products and thus transferring their captital.
• FINNCIAL MARKET

  an investor either buy or sell financial products. investors can be classified as [1] individual investors

  [2] institutional investors
• markets is one way of differentiating between financial markets in terms of money markets and capital markets.

  MONEY MARKET- it is where financial products have life span of less than one year

  CAPITAL MARKET - it is where the financial products hae life span of more than 1 year
• another way of distinguishing financial products is primary and secondary market
• financial products can be issued by the government or companies

  a financial products is issued by investors in the primary markets

  in secondary market we have the possibility to trade the financial products which was purchased from the primary or secondary market itself

  the existence of secondary market increases the liquidity of the financial products that is it is with the which a financial market can be converted into money
• a thrid way of differentiating market is in terms of organised exchanges and over the coutner markets

  organised exchanges represent particular location where brokers will undertake the transaction of financial products on behalf if buyers and sellers whereas OTC markets is where the transactions occur at different location undertaken through dealers unlike the brokers can purchase and sell the finacial products for their own acoutn and then redo trading with the investors . in the process they will try to generate a profit
• Financial products


  • Debt securities
  • Equity securities
• Debt securities


  Issued by companies or governments who have a need for capital, investors buy them as they have excess capital and benefit from interest payments
• Debt securities issued by the government


  • Treasury bills
  • Treasury notes
  • Treasury bonds
• Treasury bills, notes, and bonds

  • Differ in duration, maturity, and lifespan - T.bills less than 1 year, T.notes 1-10 years, T.bonds above 10 years
  • Have regular interest/coupon payments
  • Have a final repayment of the nominal/principal amount at maturity
• Debt securities issued by companies


  • Secured bonds
  • Subordinate bonds
  • Convertible bonds
  • Zero coupon bonds
• Corporate debt securities


  • Differ in terms of credit risk level
  • Credit risk is present as there is a possibility the company may not make interest or nominal repayments
  • Companies can reduce credit risk by using real assets as guarantees
  • Government debt has no credit risk as the government can generate capital through printing money or tax collection
• EQUITY SECURITIES

  ordinary stocks

  preffered stocks

  both stocks offer an ownership in the comapany to the stock holders. the holder s of preferred stocks will received dividend prior to ordinary stock holders. ordinary stock holder have voting rights during the general meetings organised by the company whereas preffered stock holders do not have voting rights.
• Buy order


  An order placed by an investor to purchase a stock
• Sell order


  An order placed by an investor to sell a stock
• Types of orders


  • Market order
  • Limit order
• Market order


  An order where the investor instructs the stock broker to find the best possible prices available
• Buyer's market order


  Buy at the lowest price possible
• Seller's market order


  Sell at the highest price possible
• Limit order


  An order where the investor specifies a limit price
• Buyer's limit order


  Buy the stock at a price of Rs 40 or less
• Seller's limit order


  Sell the stock at a price above Rs 40
• market capitalisation is commonly used for measuring the size of a company or industry or sector or a size of a stock market . formalae is$market price of company stock time T *$$number of stocks issued by company at time T$
• a market ondex or market indices are used to measure the performance of stock market .