financial markets

• Direct Finance Approach


  Directly between lenders and borrowers
• Indirect Finance Approach


  Through financial intermediaries/institutions, e.g. banks, life insurance companies and superannuation funds
• Borrowing indirectly


  Can be safer as the bank must bare if things possibly go wrong and they must give you money they owe you
• Financial intermediaries/institutions that facilitate the flow of funds

  • Banks
  • Credit unions
  • Share market, e.g. ASX
  • FOREX market
  • Finance companies
  • Insurance firms
  • Investment companies
• RBA


  The bank for the government
• Credit unions


  They give you money even if you don't have enough money to pay off the loan, for this reason they have very high interest rates
• Primary market


  Financial securities such as debt, equity shares, govt bonds are issued for the first time for capital raising purposes, e.g. on the ASX
• Secondary market


  Buying and selling of second-hand financial securities to investors after they are issued to earn capital gains and dividends, e.g. on the ASX
• The price of the securities are determined by market forces (demand and supply)
• Majority of transactions are secondary and does not benefit the business profit-wise
• Business shares are the greatest investment piece
• People invest


  To get a higher interest on money and get capital gains
• Investment is usually long term and money can be lost
• Low risk investments


  Have low return
• High risk investments


  Have high return
• The elderly are recommended to invest in low risk
• Financial markets


  Facilitate funds from savers with a surplus of funds to borrowers/investors with a shortage of funds to stimulate cash flow
• Equity market


  Is more asset based, most developed countries have an equity market, and they are strongly linked to capitalist countries as they allow capital gain by individuals and society
• Initial Public Offering (IPO or float)


  When a company lists itself in an equity market and offer its shares to the public for the first time
• There are various financial markets to meet the needs of lenders and borrowers
• Macquarie bank


  An example of a business loan market
• Cash rate


  The interest that banks must pay when getting money from the RBA (banks' source of money)
• Future market


  Where you buy an investment piece that means you can pick the current rate and exercise this in a different period of time no matter what the actual interest of exchange rate is
• Stocks generally rise but they fluctuate a lot
• Stock markets provide access to capital - in cash
• Almost all stock trades are done electronically
• Stockbrokers are needed as a middleman by law
• Stock markets


  Are intermediaries between the seller and buyer
• Functions of the ASX share market

  Provide access to new capital funding for listed public companies in the primary market<|>Facilitate the buying and selling of shares between investors who seek capital gains and dividends in the secondary market
• Businesses sell shares to grow the company
• Foreign borrowings are an important source of funding for domestic banks, companies and the government to expand their operations or finance budget deficits
• Australian banks, companies and the government also issue debt and equity in international markets to raise additional funds
• Without access to international finance, Australians face higher borrowing costs or a lack of access to finance
• Critiques of increased integration


  • Foreign ownership of Australian firms
  • Reliance on foreign countries
  • Foreign debt and servicing (interest on top of borrowing)
  • Global disturbances on the Australian economy making it vulnerable, e.g. GFC, COVID-19 recession
• GFC


  Caused by a downturn in the housing market, where the banks went bankrupt all around the world as there was a boom prior and lots of money had borrowed money as well
• Many people lost money and jobs
• European countries also had a housing crisis (Spain, Portugal)
• Lots of investment in government banks also led to greater effects on the world
• There was insufficient regulation so that people were borrowing more than they could actually pay back
• House prices fell and people defaulted on their loans and pulled money out of banks - so banks lost all money