financial market

• Why study Financial Markets


  • To examine how financial markets such as bond, stock and foreign exchange markets work
  • To understand how funds are channeled through the economy
  • To understand the role of intermediaries, fund market professionals and investors
  • To understand when markets are or are not functioning well – and how bubbles are created
• Financial Markets


  • Financial markets are markets in which funds are transferred from people and Firms who have an excess of available funds to people and Firms who have a need for funds
  • These markets channel funds from savers (who wish to get a return) to borrowers
• Financial Markets


  • Market activity affects personal wealth (via pensions for example), the behaviour of business firms, and the economy as a whole
  • Well functioning financial markets, such as the bond market, stock market, and foreign exchange market, are crucial in our economy and are key factors in producing high economic growth
• Function of Financial Markets


  • Promotes economic efficiency by producing an efficient allocation of capital, which increases production – businesses can access financial resources to invest and expand
  • Directly improve the well-being of consumers by allowing them to time purchases better and have access to funds (e.g., use of credit cards; or a loan – availability of a debt instrument)
  • Provides a mechanism for governments to borrow money (e.g. through issues of Government Bonds)
  • Allows central banks to create liquidity (Quantitative Easing)
• Financial Market Participants; Instruments & Considerations


  • Lenders and borrowers
  • Financial intermediaries (e.g. Institutions)
  • Financial markets (bond, stock, commodity; FX)
  • Financial instruments (contracts we can trade in the market)
  • Primary instruments
  • Derivatives
  • Combinations
  • Risk
  • Liquidity
  • Term to maturity
• Financial Institutions


  • Central Banks (BoE; Federal Reserve; Bundesbank, etc.) – set monetary policy and regulate the banking system
  • Depository Institutions
  • Commercial Banks (address the financial needs of businesses)
  • Retail Banks (Provide products/services to individuals)
  • Credit Unions
  • Building Societies (Mortgages; savings)
  • Non Depository Institutions
  • Investment Banks (help clients raise capital; underwrite security issues - IPO)
  • Securities Brokers
  • Institutional Investors (pension funds etc.)
• Role of financial intermediaries


  • Act as agents
  • Take money from savers
  • Lend money to borrowers
  • Manage a portfolio of paper assets (Bonds; Stocks etc.)
• Financial instruments


  A contract we can trade in a market. It represents an asset to one party and a liability (or equity) to the other.
• Primary Instruments


  • Equity instruments (shares)
  • Bonds; loans; borrowings
  • Receivables and Payables
  • Deposits of Cash
  • Derivatives
  • Options; Futures; Swaps
  • Combinations
  • Convertible debt
  • Dual Currency bonds
• Debt and Equity Markets


  • Debt instruments (interest; maturity: Overnight, 1mth, 3mth - 50 years)
  • Equities (capital gains; dividends)
  • Other Assets: (Oil; Gold; Wine; Property, Crypto!)
• Exchanges and Over-the-Counter (OTC) Markets


  • Exchanges: London; New York; Chicago Board of Trade (CBOT)
  • OTC Markets: Government and Corporate Bonds; Foreign exchange
• Money and Capital Markets


  • Money markets deal in short-term debt instruments
  • Capital markets deal in longer-term debt and equity instruments
• Primary and Secondary Markets


  • The primary market is where securities are created. Investment Banks underwrite securities in primary markets
  • In the primary market, companies sell stocks and bonds created from new to the public for the first time, such as with an initial public offering (IPO)
  • The secondary market is basically the stock market, where existing securities are traded by investors on exchanges (such as)the New York Stock Exchange, the Nasdaq, and other exchanges worldwide.
• Security


  A financial instrument that is a claim on the issuer's future income or assets
• Bond


  A debt security that promises to make payments periodically for a specified period of time
• Interest rate


  The cost of borrowing or the price paid for the rental of funds
• U. S. Federal Funds Rate 1962 - 2023
• U.S.10 yr Treasury Bond Yield 1962-2023
• U.S. Inflation Rate 1962-2023
• Stocks


  Represent ownership (equity) in the firm, which give shareholders voting rights, as well as a residual claim on corporate earnings in the form of capital gains and dividends
• Stock markets


  Where individual and institutional investors come together to buy and sell shares in a public venue. Nowadays these exchanges exist as electronic marketplaces
• Share prices


  Set by supply and demand in the market as buyers and sellers place orders. Order flow and bid-ask spreads are often maintained by specialists or market makers to ensure an orderly and fair market
• Stock Prices as Measured by the Dow Jones Industrial Average, 1962–2023
• Over-The-Counter Market (OTC)


  • Trading of securities; currency or other financial products by phone or electronically
  • Brokers and Dealers negotiate directly
  • Non-standardised market (e.g. quantities)
  • Products are tailored made
  • Easy for a firm to find the product that it requires
  • Potential increase in risk; lack of transparency; less stringent regulation; lower liquidity
• The Foreign Exchange Market

  • The FX market is an OTC market
  • The foreign exchange market is where funds are converted from one currency into another
  • The foreign exchange rate is the price of one currency in terms of another currency (e.g. £/$)
  • The foreign exchange market determines the foreign exchange rate (affected by relative interest rates, economic policy etc.)
• £/Euro Exchange Rate, 2010-2023
• The Derivatives Market


  • This market is derived from other markets (e.g. stock market, money market, foreign exchange)
  • The value of the derivative relies on the value of the underlying asset
  • Types of contracts includes: Futures, Forward, Options, Swaps
  • This market can be used for: Hedging risk, Speculation, Arbitrage
• Financial Crises


  • Financial crises are major disruptions in financial markets
  • They are characterized by sharp declines in asset prices and the failures of many financial and non-financial firms
• Impact of Crises on FTSE 100
• Impact of Crises on FTSE 250