2.3 Financial Market

A marketplace where securities are traded.
- Business grow
- Companies diversify risk
- Consumers can earn profits

Introduction
- Definition: Selling and buying of fin assets and securities takes place
- Allocate limited resources in the economy
- Stock market:
  - Primary Market (new stocks)
  - Secondary (trading)
Importance
- Creating Liquidity: help businesses
- Determine price of assets: demand and supply, sentiment, investors, competiting
- Easing access to trading
- Influence economic performance
  - control individual economic spending
Types
- Stock Market
  - trade publicly listed stocks
  - buy or sell at desired stocks
  - types:
    - common shares: vote on company decisions
    - preferred shares: fixed dividend
  - Operates as an auction: A bid and ask value coincides => trade successful
  - Advantages:
    - Higher liquidity, large trade volume
    - Potential increased ROI
    - Regulation for Investors interest
- Bond Market
  - Issuers: Corporate entities or government
  - Creditors: receive fixed interest rate
    - Review Credit rating to know the risk
  - Depends on the market interest rate (prices)
  - Advantages:
    - safer form of volatility
    - Legal protection during bankruptcy (some or all investment)
    - Consistent or higher interest rates than bank rate
- Derivatives market
  - Value depends on value of underlying assets
    - stock
    - commoditities
    - currencies
  - Futures
    - Specify a date at which both parties are obligated to buy and sell
  - Options
    - specify the date and price at which the buyer has a right but not an obligation to buy or sell an asset
  - Swaps
    - Allows the two parties to exchange liabilities or cash flows on separate financial instruments
    - e.g. one party can buy protection from another party from losses incurred during defaults
  - Advantages:
    - investors to Hedge risks
    - investors to predict asset prices
    - lower transaction costs
    - transfer risk to another party
- Forex Markets
  - Intro
    - Facilitates trading of currency
    - ease of conversion
    - highest liquidity
    - Largest trading volume
  - Participants
    - Investors
    - banks
    - hedge funds
    - companies
    - retail foreign brokers
  - Levels
    - Interbank markets (large banks)
    - OTC (individuals)
  - Advantages:
    - no central bank can manipulate
    - flexible (multiple time zones)
    - minimal transactions costs
    - Make informed decisions
- Commodities Market
  - Marketplace for trading raw products
    - Hard: natural resources (require mining)
    - Soft: livestock or agro
  - Price depends on
    - Geopolitical scenarios
    - Weather
    - Natural & human-made disasters
    - Demand & Supply
  - Advantages
    - Hedge against inflation & Economic Decline
    - Higher leverages can lead to exponential gains (?)
    - Minimal stocks correlation (can help to diversify portfolio)
    - Large-scale participation => fair prices
Functions
- Mobilize savings
  - Public Provident Fund/Mutual Fund
- Reduction in Transaction Costs
- Reduce costs
Classification
- By Nature of Claim
  - Debt market
  - Equity Market
- By Maturity of claim
  - Money Market (12 mos)
  - Capital Market (medium or long term)
- By Timing of Delivery
  - Cash market (real-time)
  - Futures market (future specified date)
- By Org struct
  - Exchange-traded market (centralized market, patterned procedure)
  - Over-the-counter market (decentralized, customized procedure)
Examples of Financial Services
- Wealth Management
  - Factors: financial health, risk apetitie
- Banking
  - Individual Banking
  - Loans
  - Business Banking
- Insurance
  - Life & General insurance
  - Factors
    - Customer Risk assesment
    - Premiums
    - Period of insurance