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SU Ch4 M.Sc Acfn551 FMI 2022.pptx

  2. FINANCE • Finance is a term for the management, creation, and study of money and investments. • Specifically, it deals with the questions of how an individual, company or government acquires money – called capital in the context of a business – and how they spend or invest that money. • Finance is then often divided into the following broad categories: – personal finance, – corporate finance, and – public finance.
  3. Financial Theory • Financial theory is studied and developed within the disciplines of management, (financial) economics, accountancy and applied mathematics. • Abstractly, finance is concerned with the investment and deployment of assets and liabilities over "space and time"; i.e., it is about performing valuation and asset allocation today, based on the risk and uncertainty of future outcomes while appropriately incorporating the time value of money. • Determining the present value of these future values, "discounting", must be at the risk-appropriate discount rate, in turn, a major focus of finance-theory. • Since the debate as to whether finance is an art or a science is still open, there have been recent efforts to organize a list of unsolved problems in finance.
  4. Managerial Finance • Managerial finance is the branch of management that concerns itself with the managerial application of finance techniques and theory, emphasizing the financial aspects of managerial decisions; the assessment is per the managerial perspectives of planning, directing, and controlling. • The techniques addressed are drawn in the main from managerial accounting and corporate finance: the former allow management to better understand, and hence act on, financial information relating to profitability and performance; the latter, as above, are about optimizing the overall financial structure, including its impact on working capital. • The implementation of these techniques - i.e. financial management - is described above. Academics working in this area are typically based in business school finance departments, in accounting, or in management science.
  5. Financial Economics • Financial economics is the branch of economics that studies the interrelation of financial variables, such as prices, interest rates and shares, as opposed to real economic variables, i.e. goods and services. It thus centers on pricing, decision making, and risk management in the financial markets, and produces many of the commonly employed financial models. (Financial econometrics is the branch of financial economics that uses econometric techniques to parameterize the relationships suggested.) • The discipline has two main areas of focus: asset pricing and (theoretical) corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. Respectively:
  6. Conti… • Asset pricing theory develops the models used in determining the risk-appropriate discount rate, and in pricing derivatives. The analysis essentially explores how rational investors would apply risk and return to the problem of investment under uncertainty. The twin assumptions of rationality and market efficiency lead to modern portfolio theory (the CAPM), and to the Black– Scholes theory for option valuation. At more advanced levels - and often in response to financial crises - the study then extends these "Neoclassical" models to incorporate phenomena where their assumptions do not hold, or to more general settings. Asset pricing theory also includes the portfolio- and investment theory applied in portfolio management. • Much of corporate finance theory, by contrast, considers investment under "certainty" (Fisher separation theorem, "theory of investment value", Modigliani–Miller theorem). Here theory and methods are developed for the decisioning about funding, dividends, and capital structure discussed above. A recent development is to incorporate uncertainty and contingency - and thus various elements of asset pricing - into these decisions, employing for example real options analysis.
  7. Financial Mathematics • Financial mathematics is a field of applied mathematics concerned with financial markets. In terms of practice, the field is referred to as quantitative finance and / or mathematical finance, and comprises primarily the three areas discussed. • Re theory, the field is largely focused on the modeling of derivatives (with much focus on interest rate- and credit risk modeling), although other important subfields include insurance mathematics and quantitative portfolio management. • Relatedly, the techniques developed are applied to pricing and hedging a wide range of asset- backed, government, and corporate-securities.
  8. Experimental Finance • Experimental finance aims to establish different market settings and environments to experimentally observe and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion, and aggregation, price setting mechanisms, and returns processes. • Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions and therefore prove them, as well as attempt to discover new principles on which such theory can be extended and be applied to future financial decisions. • Research may proceed by conducting trading simulations or by establishing and studying the behavior of people in artificial, competitive, market-like settings.
  9. Behavioral Finance • Behavioral finance studies how the psychology of investors or managers affects financial decisions and markets and is relevant when making a decision that can impact either negatively or positively on one of their areas. Behavioral finance has grown over the last few decades to become an integral aspect of finance. • Behavioral finance includes such topics as: • Empirical studies that demonstrate significant deviations from classical theories; • Models of how psychology affects and impacts trading and prices; • Forecasting based on these methods; • Studies of experimental asset markets and the use of models to forecast experiments.
  10. FINANCIAL MARKET • A Financial Market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets as commodities. • The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (such as the New York Stock Exchange (NYSE), London Stock Exchange (LSE), JSE Limited (JSE), Bombay Stock Exchange (BSE).
  11. FINANCIAL MARKETS • Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. • Often, they are called by different names, including Wall Street and capital market, but all of them still mean one and the same thing. • Businesses and investors can go to financial markets to raise money to grow their business and to make more money, respectively.
  12. Conti… • To state it more clearly, let us imagine a bank where an individual maintains a savings account. • The bank can use their money and the money of other depositors to loan to other individuals and organizations and charge an interest fee. • The depositors themselves also earn and see their money grow through the interest that is paid to it. • Therefore, the bank serves as a financial market that benefits both the depositors and the debtors.
  13. Functions of the Markets • The role of financial markets in the success and strength of an economy cannot be underestimated. Here are four important functions of financial markets: • 1. Puts savings into more productive use • As mentioned in the example above, a savings account that has money in it should not just let that money sit in the vault. Thus, financial markets like banks open it up to individuals and companies that need a home loan, student loan, or business loan. • 2. Determines the price of securities • Investors aim to make profits from their securities. However, unlike goods and services whose price is determined by the law of supply and demand, prices of securities are determined by financial markets.
  14. Conti… • 3. Makes financial assets liquid • Buyers and sellers can decide to trade their securities anytime. They can use financial markets to sell their securities or make investments as they desire. • 4. Lowers the cost of transactions • In financial markets, various types of information regarding securities can be acquired without the need to spend.
  15. Functions of Financial Markets Intermediary functions: The intermediary functions of financial markets include the following: – Transfer of resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers. – Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. – Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. – Capital formation: Financial markets provide a channel through which new savings flow to aid capital formation of
  16. Conti… –Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. –Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. –Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.
  17. Financial Functions – Providing the borrower with funds so as to enable them to carry out their investment plans. – Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. – Providing liquidity in the market so as to facilitate trading of funds. – Providing liquidity to commercial bank – Facilitating credit creation – Promoting savings – Promoting investment – Facilitating balanced economic growth – Improving trading floors
  18. Importance of Financial Markets • There are many things that financial markets make possible, including the following: –Financial markets provide a place where participants like investors and debtors, regardless of their size, will receive fair and proper treatment. –They provide individuals, companies, and government organizations with access to capital. –Financial markets help lower the unemployment rate because of the many job opportunities it offers
  19. Components of Financial Market • Based on market levels • Primary market: A primary market is a market for new issues or new financial claims. Therefore, it is also called new issue market. The primary market deals with those securities which are issued to the public for the first time. • Secondary market: A market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities. • Simply put, primary market is the market where the newly started company issued shares to the public for the first time through IPO (initial public offering). Secondary market is the market where the second hand securities are sold (security Commodity Markets).
  20. Conti… • Based on Security Types • Money market: Money market is a market for dealing with the financial assets and securities which have a maturity period of up to one year. In other words, it's a market for purely short-term funds. • Capital market: A capital market is a market for financial assets that have a long or indefinite maturity. Generally, it deals with long-term securities that have a maturity period of above one year. The capital market may be further divided into (a) industrial securities market (b) Govt. securities market and (c) long-term loans market. – Equity markets: A market where ownership of securities are issued and subscribed is known as equity market. An example of a secondary equity market for shares is the New York (NYSE) stock exchange. – Debt market: The market where funds are borrowed and lent is known as debt market. Arrangements are made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some specified amount of interest.
  21. Types of Financial Markets • Financial markets can be divided into different subtypes: • For the assets transferred • Money market : It is traded with money or financial assets with short-term maturity and high liquidity, generally assets with a term of less than one year. • Capital market : Financial assets with medium and long-term maturity are traded, which are basic for carrying out certain investment processes. • Depending on its structure • Organized market • Non-organized markets denominated in English (" Over The Counter "). • According to the negotiation phase of financial assets • Primary market : Financial assets are created. In this market, assets are transmitted directly by their issuer. • Secondary market : Only existing financial assets are exchanged, which were issued at a previous time. This market allows holders of financial assets to sell instruments that were already issued in the primary market (or that had already been transmitted in the secondary market) and that are in their possession, or to buy other financial assets.
  22. Conti… • According to the geographical perspective • National markets. The currency in which the financial assets are denominated and the residence of those involved is national. 2 • International markets. The markets situated outside a country's geographical area. • According to the type of asset traded • Traditional market. In which financial assets such as demand deposits, stocks or bonds are traded . • Alternative market. In which alternative financial assets are traded such as portfolio investments promissory notes, factoring, real estate (e.g. through fiduciary rights), in private equity funds, venture capital funds, hedge funds, investment projects (e.g. infrastructure, cinema, etc.) among many others. • Other markets • Commodity markets, which allow the trading of commodities • Derivatives markets, which provide instruments for managing financial risk • Forward markets, which provide standardized forward contracts to trade products at a future date • Insurance markets, which allows the redistribution of varied risks • Foreign exchange market, which allows the exchange of foreign currencies
  23. Conti… • According to the geographical perspective • National markets. The currency in which the financial assets are denominated and the residence of those involved is national. 2 • International markets. The markets situated outside a country's geographical area. • According to the type of asset traded • Traditional market. In which financial assets such as demand deposits, stocks or bonds are traded . • Alternative market. In which alternative financial assets are traded such as portfolio investments promissory notes, factoring, real estate (e.g. through fiduciary rights), in private equity funds, venture capital funds, hedge funds, investment projects (e.g. infrastructure, cinema, etc.) among many others. • Other markets • Commodity markets, which allow the trading of commodities • Derivatives markets, which provide instruments for managing financial risk • Forward markets, which provide standardized forward contracts to trade products at a future date • Insurance markets, which allows the redistribution of varied risks • Foreign exchange market, which allows the exchange of foreign currencies
  24. Financial services • Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit- card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual asset managers, and some government-sponsored enterprises.
  25. Commercial Banking Services • A commercial bank is what is commonly referred to as simply a bank. The term commercial is used to distinguish it from an investment bank, a type of financial services entity which instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity). • The primary operations of commercial banks include: • Keeping money safe while also allowing withdrawals when needed • Issuance of chequebooks so that bills can be paid and other kinds of payments can be delivered by the post • Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business) • Issuance of credit cards and processing of credit card transactions and billing • Issuance of debit cards for use as a substitute for cheques • Allow financial transactions at branches or by using automatic teller machines (ATMs)
  26. Conti… • Provide wire transfers of funds and electronic fund transfers between banks • Facilitation of standing orders and direct debits, so payments for bills can be made automatically • Provide overdraft agreements for the temporary advancement of the bank's own money to meet the monthly spending commitments of a customer in their current account. • Provide internet banking system to facilitate the customers to view and operate their respective accounts through the internet. • Provide charge card advances of the bank's own money for customers wishing to settle credit advances monthly. • Provide a check guaranteed by the bank itself and prepaid by the customer, such as a cashier's check or certified check. • Notary service for financial and other documents • Accepting the deposits from customers and providing credit facilities to them. • Sell investment products like mutual funds Etc. • The United States is the largest location for commercial banking services.
  27. Investment Banking Services • Underwriting debt and equity for the private and public sector for such entities to raise capital. • Mergers and acquisitions – Work to underwrite and advise companies on mergers or takeovers. • Structured finance – Develop intricate (typically derivative) products for high net worth individuals and institutions with more intricate financial needs. • Restructuring – Assist in financially reorganizing companies • Investment management – Management of assets (e.g., real estate) to meet specified investment goals of clients. • Securities research – Maintain their own department that services to assist their traders, clients and maintain a public stance on specific securities and industries.
  28. Conti… • Broker Services – Buy and sell securities on behalf of their clients (sometimes may involve financial consulting as well). • Prime Brokerage – An exclusive type of bundled broker service specifically meant to service the needs of hedge funds. • Private banking – Private banks provide banking services exclusively to high-net-worth individuals. • Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking service. • New York City and London are the largest centers of investment banking services. • NYC is dominated by U.S. domestic business, while in London international business and commerce make up a significant portion of investment banking activity.
  29. Foreign Exchange Services • Foreign Exchange machine • FX or Foreign exchange services are provided by many banks and specialists foreign exchange brokers around the world. Foreign exchange services include: • Currency exchange – where clients can purchase and sell foreign currency banknotes. • Wire transfer – where clients can send funds to international banks abroad. • Remittance – where clients that are migrant workers send money back to their home country. • London handled 36.7% of global currency transactions in 2009 – an average daily turnover of US$1.85 trillion – with more US dollars traded in London than New York, and more Eurostraded than in every other city in Europe combined
  30. Investment Services • Collective investment fund– A fund that acts as an investment pool so investors can put money into a fund that will reinvest it into a variety of securities based upon their common, outlined investment goal. • Investment Advisory Offices – Run by registered investment advisors who advise clients in financial planning and invest their money. • Hedge fund management – Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. • Private equity – Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets.
  31. Conti…. • Venture capital – Private equity capital typically provided by professional, outside investors to new, high-growth-potential companies in the interest of taking the company to an IPO or trade sale of the business. Startup companies are typically fueled by an angel investor. • Family office – Investment and wealth management firm that handles a wealthy family or small group of wealthy individuals with financial plans tailored to their needs. Similar to private banking. • Advisory services – These firms (or departments within a larger entity) service clients with financial advisers who serve as both, a broker as well as a financial consultant. • Custody services – the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately US$100 trillion. • New York City is the largest center of investment services, followed by London
  32. Insurance • National Insurance Services (NIS) – St. Vincent the Grenadines – panoramio • Insurance brokerage – Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Recently several websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry. • Insurance underwriting – Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property insurance and casualty insurance.
  33. Conti… • Finance and insurance – a service still offered primarily at asset dealerships. The F&I manager encompasses the financing and insuring of the asset which is sold by the dealer. F&I is often called "the second gross" in dealerships that have adopted the model • Reinsurance – Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses. • The United States, followed by Japan and the United Kingdom are the largest insurance markets in the world.
  34. Other Financial Services • Angel investment networks – A group of angel investors can create their own network to be the financial foundation for future companies. • Credit card networking – Companies that serve as the bridge between the retailers and the banks who issue the bank cards. Major credit card networks are: Mastercard, Visa Inc., Rupay, American Express and Discover Financial. • Conglomerates – A financial services company, such as a universal bank, that is active in more than one sector of the financial services market • e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. • A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.
  35. Conti… • Debt resolution – A consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to pay off their debts owed. This debt can be accrued in various ways including but not limited to personal loans, credit cards, or in some cases merchant accounts. • Financial market utilities – Organizations that are part of the infrastructure of financial services, such as stock exchanges, clearing houses, derivative and commodity exchanges and payment systems such as real-time gross settlement systems or interbank networks. • Payment recovery – Assistance in recovering money inadvertently paid to vendors by businesses, such as by accidental duplicate payment of an invoice or failure to return a deposit.
  36. Market Participant • Market participants include individual retail investors, institutional investors (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions), and also publicly traded corporations trading in their own shares. Robo- advisors, which automate investment for individuals are also major participants. • Demographics of market participation • Indirect vs. Direct Investment • Indirect investment involves owning shares indirectly, such as via a mutual fund or an exchange traded fund. Direct investment involves direct ownership of shares. • Direct ownership of stock by individuals rose slightly from 17.8% in 1992 to 17.9% in 2007, with the median value of these holdings rising from $14,778 to $17,000.
  37. Conti… • Participation by income and wealth strata • Rates of participation and the value of holdings differ significantly across strata of income. In the bottom quintile of income, 5.5% of households directly own stock and 10.7% hold stocks indirectly in the form of retirement accounts. The top decile of income has a direct participation rate of 47.5% and an indirect participation rate in the form of retirement accounts of 89.6%. The median value of directly owned stock in the bottom quintile of income is $4,000 and is $78,600 in the top decile of income as of 2007.The median value of indirectly held stock in the form of retirement accounts for the same two groups in the same year is $6,300 and $214,800 respectively. Since the Great Recession of 2008 households in the bottom half of the income distribution have lessened their participation rate both directly and indirectly from 53.2% in 2007 to 48.8% in 2013, while over the same period households in the top decile of the income distribution slightly increased participation 91.7% to 92.1%.
  38. Conti… • Participation by race and gender • The racial composition of stock market ownership shows households headed by whites are nearly four and six times as likely to directly own stocks than households headed by blacks and Hispanics respectively. As of 2011 the national rate of direct participation was 19.6%, for white households the participation rate was 24.5%, for black households it was 6.4% and for Hispanic households it was 4.3%. Indirect participation in the form of 401k ownership shows a similar pattern with a national participation rate of 42.1%, a rate of 46.4% for white households, 31.7% for black households, and 25.8% for Hispanic households. Households headed by married couples participated at rates above the national averages with 25.6% participating directly and 53.4% participating indirectly through a retirement account. 14.7% of households headed by men participated in the market directly and 33.4% owned stock through a retirement account. 12.6% of female-headed households directly owned stock and 28.7% owned stock indirectly. • Determinants and possible explanations of stock market participation • In a 2003 paper by Vissing-Jørgensen attempts to explain disproportionate rates of participation along wealth and income groups as a function of fixed costs associated with investing. Her research concludes that a fixed cost of $200 per year is sufficient to explain why nearly half of all U.S. households do not participate in the market.
  39. Investment Strategies • Many strategies can be classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC filings, business trends, and general economic conditions. • Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends based on historical performance, regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns and is also rooted in risk management and diversification. • Additionally, many choose to invest via passive index funds. In this method, one holds a portfolio of the entire stock market or some segment of the stock market (such as the S&P 500 Index or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from realizing gains, and ride the general trend of the stock market to rise. • Responsible investment emphasizes and requires a long-term horizon on the basis of fundamental analysis only, avoiding hazards in the expected return of the investment. Socially responsible investing is another investment preference.
  40. Taxation • Taxation is a consideration of all investment strategies; profit from owning stocks, including dividends received, is subject to different tax rates depending on the type of security and the holding period. Most profit from stock investing is taxed via a capital gains tax. • In many countries, the corporations pay taxes to the government and the shareholders once again pay taxes when they profit from owning the stock, known as "double taxation".
  41. Investment Management • Share prices listed in a Korean Newspaper • "The excitement before the bubble burst" - viewing prices via ticker tape, shortly before the Wall Street Crash of 1929. • Modern price-ticker. This infrastructure underpins contemporary exchanges, and allows, ultimately, for individual day trading, as well as wholesale computer- executed program trading and high-frequency trading. • Investment management is the professional asset management of various securities - typically shares and bonds, but also other assets, such as real estate and commodities - in order to meet specified investment goals for the benefit of investors. • As above, investors may be institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts or, more commonly, via collective investment schemes like mutual funds, exchange- traded funds, or REITs.
  42. Conti… • At the heart of investment management is asset allocation - diversifying the exposure among these asset classes, and among individual securities within each asset class - as appropriate to the client's investment policy, in turn, a function of risk profile, investment goals, and investment horizon. Here: • Portfolio optimization is the process of selecting the best portfolio given the client's objectives and constraints. • Fundamental analysis is the approach typically applied in valuing and evaluating the individual securities. • Overlaid is the portfolio manager's investment style - broadly, active vs passive , value vs growth, and small cap vs. large cap - and investment strategy. In a well-diversified portfolio, achieved investment performance will, in general, largely be a function of the asset mix selected, while the individual securities are less impactful.
  43. Risk Management • Crowds gathering outside the New York Stock Exchange after the Wall Street Crash of 1929. • People queuing outside a Northern Rock branch in the United Kingdom to withdraw their savings during the financial crisis of 2007–2008. • Risk management, in general, is the study of how to control risks and balance the possibility of gains; it is the process of measuring risk and then developing and implementing strategies to manage that risk. Financial risk management is the practice of protecting corporate value by using financial instruments to manage exposure to risk, here called "hedging"; the focus is particularly on credit and market risk, and in banks, through regulatory capital, includes operational risk. • Credit risk is risk of default on a debt that may arise from a borrower failing to make required payments; • Market risk relates to losses arising from movements in market variables such as prices and exchange rates; • Operational risk relates to failures in internal processes, people, and systems, or to external events.
  44. Financial Risk Management • Financial risk management is related to corporate finance in two ways. • Firstly, firm exposure to market risk is a direct result of previous capital investments and funding decisions; while credit risk arises from the business' credit policy and is often addressed through credit insurance and provisioning. • Secondly, both disciplines share the goal of enhancing or at least preserving, the firm's economic value; here, businesses devote much time and effort to forecasting and performance monitoring generally, and specifically re risk, understanding their operating leverage and break even dynamics.
  45. Securities Market • Security market is a component of the wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. Security markets encompasses stock markets, bond markets and derivatives markets where prices can be determined and participants both professional and non professional can meet. • Securities markets can be split into two levels: primary markets, where new securities are issued, and secondary markets where existing securities can be bought and sold. Secondary markets can further be split into organised exchanges, such as stock exchanges and over-the-counter, where individual parties come together and buy or sell securities directly.
  46. Conti… • For securities holders knowing that a secondary market exists in which their securities may be sold and converted into cash increases the willingness of people to hold stocks and bonds and thus increases the ability of firms to issue securities. • There are a number of professional participants of a securities market and these include; brokerages, broker-dealers, market makers, investment managers, speculators as well as those providing the infrastructure, such as clearing houses and securities depositories. • A securities market is used in an economy to attract new capital, transfer real assets in financial assets, determine prices which will balance demand and supply and provide a means to invest money both short and long term.
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