3. WHAT IS A FINANCIAL
SYSTEM?
The financial system plays the key
role in the economy by
• stimulating economic growth,
• influencing economic performance of the
actors, &
• affecting economic welfare.
This is achieved by financial
infrastructure, in which entities with
funds allocate those funds to those who
have potentially more productive ways
to invest those funds.
A financial system makes it possible a
more efficient transfer of funds.
FINANCIAL
SYSTEM
It is the system that allows the transfer of money
between savers (and investors) and borrowers. A
financial system can operate on a global, regional or
firm specific level.
Savers
Borrower
s
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
4. STRUCTURAL
APPROACH TO
FINANCIAL SYSTEMS
According to the structural approach, the financial
system of an economy consists of three main
components:
Each of the components plays a specific role in the
economy.
Financial
Markets
Financial
Intermediaries
Financial
Regulators
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
5. FUNCTIONAL APPROACH
TO FINANCIAL SYSTEMS
According to the functional approach, financial markets facilitate
the flow of funds in order to finance investments by corporations,
governments and individuals.
Firms
Stock Market
Bond Market
Short term fixed securities market
Banking Sector
Government
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
6. CONCEPT OF AN ‘ASSET’
IN FINANCIAL SYSTEMS
Financial assets, often called financial instruments, are intangible
assets, which are expected to provide future benefits in the form of a claim
to future cash.
Any transaction related to financial instrument includes at least two
parties:
ASSET
An asset is any resource that is expected to provide
future benefits, and thus possesses economic value.
Assets are divided into two categories:
• tangible asset (physical form)
• intangible asset (legal claim to some future
economic gain)
ISSUER INVESTOR
The party that has
agreed to make future
cash payment
The party that owns the financial
instrument, and therefore the right to
receive the payments made by the
issuer.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
8. WHAT ARE FINANCIAL
MARKETS?
A financial market is a market in
which people and entities can
trade
financial securities, commoditi
es, and other fungible items of
value at low transaction
costs and at prices that
reflect supply and demand.
MARKET
In economics, typically, the term market means the
aggregate of possible buyers and sellers of a
certain good or service and the transactions
between them.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
9. WHAT ARE FINANCIAL
MARKETS?
SECURITIES
A security or financial instrument is a tradable asset
of any kind. Securities are broadly categorized into:
• debt securities (such as banknotes, bonds and
debentures)
• equity securities, e.g., common stocks; and,
• derivative contracts, such as forwards, futures,
options and swaps.
COMMODITIES
In economics, a commodity is a marketable item
produced to satisfy wants or needs. Economic
commodities comprise goods and services.
•It is used to describe a class of goods for which
there is demand, but which is supplied without
qualitative differentiation across a market.
A country's regulatory structure determines what qualifies as a security.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
10. ECONOMIC FUNCTIONS
OF FINANCIAL MARKETS
• Transactions between buyers and sellers of financial
instruments in a financial market determine the price of the
traded asset.
Price discovery
• Provides an opportunity for investors to sell a financial
instrument since it is referred to as a measure of the ability to
sell an asset at its fair market value at any time.
Liquidity
• The function of reduction of transaction costs is performed,
when financial market participants are charged and/or bear the
costs of trading a financial instrument.
Reduction of transaction costs
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
13. TYPES OF FINANCIAL
MARKETS
PRIMARY
MARKET
The market in which new, as opposed to existing,
securities are sold. Investors who purchase shares in
a new security issue are purchasing them in the
primary market.
Source: Wall Street Words: An A to Z Guide to Investment Terms for
Today's Investor by David L. Scott
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
SECONDARY
MARKET
A market in which investors purchase securities or
assets from other investors rather than directly from
the issuing companies; exchanges such as the New
York Stock Exchange and the NASDAQ are secondary
markets.
Source: Campbell R. Harvey
14. PRIMARY MARKETS
• The primary market is the market where the securities are sold
for the first time. Therefore it is also called the New Issue
Market (NIM).
• Securities are issued by the company directly to investors.
• Primary issues are used by companies for the purpose of
setting up new business or for expanding or modernizing the
existing business.
• The primary market performs the crucial function of
facilitating capital formation in the economy.
• Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as
"going public."
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
15. METHODS OF ISSUING
SECURITIES IN A
PRIMARY MARKET
Initial Public
Offering
A type of public offering where shares of stock in a company are
sold to the general public, on a securities exchange, for the first
time. Through this process, a private company transforms into
a public company.
Rights
Issuance
A rights issue is an issue of rights to buy additional securities in
a company made to the company's existing security holders to buy
a specified number of new securities from the firm at a specified
price within a specified time.
Preferential
Issue
A preferential issue is an issue of shares or of convertible securities
by listed companies to a select group of persons under Section 81
of the Companies Act, 1956 which is neither a rights issue nor a
public issue.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
16. SECONDARY MARKETS
Secondary markets trade existing securities (previously owned
shares of stocks, bonds, and other financial assets). Secondary
markets consist of both organized exchanges, such as the Bombay
Stock Exchange, and over-the-counter or electronic markets, such
as NASDAQ.
Organized
Stock
Exchanges
Organized stock exchanges are markets that are
used to facilitate the trading of financial instruments
between investors. The main organized stock
exchange is the Bombay Stock Exchange (BSE) in
India.
Over-the-
counter
(OTC)
market
It is an electronic network that allows investors to
execute trades without going through specialists or
intermediaries. These trades are executed through
the NASDAQ which links various dealers and
brokers through a computer or telephone based
system.
Secondary markets trade existing securities (previously owned
shares of stocks, bonds, and other financial assets).
Secondary markets consist of both organized exchanges, such
as the Bombay Stock Exchange, and over-the-counter or
electronic markets, such as NASDAQ.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
19. CAPITAL MARKET
Primary Market Secondary Market
CAPITAL
MARKET
A market in which individuals and institutions trade
long-term financial securities.
• Organizations/institutions in the public and private
sectors also often sell securities on the capital
markets in order to raise funds.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
20. CAPITAL MARKET
Primary Market Secondary Market
• New stock or bond issues are
sold to investors.
• The main entities seeking to
raise long-term funds on the
primary capital markets are
governments (via bonds) and
business enterprises (via
equity and bonds).
• The main entities purchasing
the bonds or stock
include pension funds, hedge
funds, and less commonly
• Existing securities are sold and
bought among investors or
traders, usually on a securities
exchange, over-the-counter, or
elsewhere.
• The existence of secondary
markets increases the
willingness of investors in
primary markets, as they know
they are likely to be able to
swiftly cash out their
investments if the need arises.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
22. CAPITAL MARKET -
FUNCTIONS
Mobilization of Savings
Capital Formation
Provision of Investment Avenue
Proper Regulation of Funds
Service Provision
Speed up Economic Growth and Development
Continuous Availability of Funds
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
23. CAPITAL MARKET –
EXAMPLES OF
TRANSACTIONS
A government raising money on the primary markets
• When a government wants to raise long term finance it will often sell
bonds to the capital markets.
• It has been increasingly common for governments of the larger nations
to bypass investment banks by making their bonds directly available for
purchase over the Internet.
A company raising money on the primary markets
• When a company wants to raise money for long term investment, it can
do so by issuing bonds or shares in the capital market.
Trading on the secondary markets
• On the secondary markets, there is no limit on the number of times a
security can be traded, and the process is usually very quick.
• It indirectly helps in raising finance on the primary market.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
25. MONEY MARKET
• Money market means market where money or its equivalent can
be traded.
• Money is synonym of liquidity. Money market consists of financial
institutions and dealers in money or credit who wish to generate
liquidity.
• It is better known as a place where large institutions and
government manage their short term cash needs.
• For generation of liquidity, short term borrowing and lending is
done by these financial institutions and dealers.
MONEY
MARKET
Money market is a market where short-term
obligations such as treasury bills, commercial papers
and banker’s acceptances are bought and sold.
Source: www.CAalley.com
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
26. MONEY MARKET –
INSTRUMENTS
Certificate
of deposit
Repurchase
agreement
Commercial
paper
Treasury
bills
Money
funds
Foreign
Exchange
Swaps
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
27. MONEY MARKET -
FUNCTIONS
Maintenance of monetary equilibrium.
Promotion of economic growth.
Providing help to Trade and Industry
Helping in implementing Monetary Policy
Helping in Capital Formation
Providing non-inflationary sources of finance to government
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
28. MONEY MARKET IN
INDIA
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
30. MONEY MARKET VS.
CAPITAL MARKET
MONEY MARKET CAPITAL MARKET
Trading is through recognized stock
exchanges
Associated with high risk and high
return
Anybody can make investments
through a broker.
Often the purpose is to invest in
additional physical capital goods.
Raising of long term finance, such as
loans not to be fully paid back for at
least a year.
Deals are transacted on phone or
through electronic systems
Relatively secure
Individual players cannot invest in
money market as the value of
investments is large.
Often used for general operating
expenses.
Short term lending and borrowing,
typically a year.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
32. FINANCIAL REGULATION
BENEFITS:
• Market confidence
• Financial stability
• Consumer protection
• Reduction of financial crime
FINANCIAL
REGULATION
Financial regulation is a form of regulation or
supervision, which subjects financial institutions to certain
requirements, restrictions and guidelines, aiming to
maintain the integrity of the financial system. This may be
handled by either a government or non-government
organization.
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
33. STRUCTURE OF
SUPERVISION
Supervision of stock exchanges
Supervision of listed companies
Supervision of anti-money laundering
Supervision of investment management
Supervision of banks and financial services providers
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
34. FINANCIAL
REGULATORS IN INDIA
FINANCIAL MARKETS | A Financial Management Presentation by Arushi Sharma [50240] and Hisham Ahmed Rizvi [50269]
Securities and
Exchange Board of
India
Reserve Bank of
India
Ministry of Finance
Ministry of
Corporate Affairs
Insurance
Regulatory
Authority of India
PFRDA
In market economies the economic rationale for the existence of institutions and instruments is related to transaction costs, thus the surviving institutions and instruments are those that have the lowest transaction costs.The key attributes determining transaction costs are asset specificity, uncertainty, frequency of occurrence.
National Association of Securities Dealer Automated Quotation System (NASDAQ)
Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.
Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions.Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.Commercial paper - short term usanse promissory notes issued by company at discount to face value and redeemed at face valueEurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States.Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months.Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.Short-lived mortgage- and asset-backed securities
To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions.To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry.To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy.To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy.Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this dose not leads to increases in the prices.
Supervision of stock exchangesExchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.[5][6][edit]Supervision of listed companiesFinancial regulators ensures that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.[7][8][9][edit]Supervision of anti-money launderingThe anti-money laundering supervision ensures that criminal activities does not threaten the reputation and financial strength of an institution, or also endanger the integrity and stability of the whole financial market. All companies concerned need to have policies in place which prevents transactions with criminal background.[10][edit]Supervision of investment managementAsset management supervision or investment acts ensures the frictionless operation of those vehicles.[11][edit]Supervision of banks and financial services providersBanking acts lays down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.[12][13]
Supervision of stock exchangesExchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.[5][6][edit]Supervision of listed companiesFinancial regulators ensures that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.[7][8][9][edit]Supervision of anti-money launderingThe anti-money laundering supervision ensures that criminal activities does not threaten the reputation and financial strength of an institution, or also endanger the integrity and stability of the whole financial market. All companies concerned need to have policies in place which prevents transactions with criminal background.[10][edit]Supervision of investment managementAsset management supervision or investment acts ensures the frictionless operation of those vehicles.[11][edit]Supervision of banks and financial services providersBanking acts lays down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.[12][13]