Introduction to Financial Market And Institution

I
ntr
oduct
iont
oFi
nanci
alMar
ket
s

Fi
nanci
almar
ket
s

Financi
almarketsar
estruct
uresthr
oughwhichf
undsfl
ow.Financi
almarket
scanbe
disti
ngui
shedalongtwomajordimensi
ons:(
1)pr
imaryver
sussecondar
ymarket
sand
(2)moneyv er
suscapi
tal
mar ket
s.

Pr
imar
yMar
ket
sver
susSecondar
yMar
ket
s

Pr
imar
yMar
ket
s

Pri
mar ymar ketsaremar ketsinwhi chusersoff unds(e.
g. ,corporat
ions)r ai
sefunds
thr
oughnew i ssuesoffinancialinst
ruments,suchasst ocksandbonds.Compani es
whichneedt or aiseaddi
tionalfunds,mayissuenew shar est ot hepubli
ct hroughthe
fi
nancialinstitut
ionsfort
hef ir
sttime.Thi
sisusual l
ydonet hroughf i
nancialinst
it
uti
ons
cal
ledt heinv estmentbanks.Init
ialPubl
icOffer(I
PO)meansof f
er i
ngthest ockstothe
publi
cf ort hef ir
stti
me.I tinvol
vesapr iv
atecompanybecomi ngpubl iccompanyby
i
ssuingt hest ockstothepublic.

Secondar
yMar
ket
s.

Oncefinanci
alinstr
umentssuchasst ocksareissuedinprimarymarket
s,t
heyarethen
tr
aded—thatis,reboughtandresold—insecondarymar ket
s.Onceacompanyi sli
sted
onthestockmar ket,t
hesharescanber eboughtandresoldatanyt
ime.Anexamplefor
secondarymarketisStockExchange.

MoneyMar
ket
sver
susCapi
tal
Mar
ket
s

Moneymar
ket
s

Thesear emar ketst
hatt
radedebtsecurit
iesorinstr
ument
swithmat uri
ti
esofoneyear
orless.Theyt radei
nshortter
mf i
nancessuchasbankl oansrepayabl
ewithi
ntwelve
mont hs,t
reasurybil
l
s,et
c.Thetreasurybi
llsar
et r
adedbythecentr
albanksindif
fer
ent
countri
es.

Capi
tal
Mar
ket
s

These are market
st hattrade equi
ty(st
ocks)and debt(bonds)inst
ruments wi
th
mat ur
iti
esofmorethanoney ear
.Anexampleofcapit
almarketi
stheStockExchange
(SE).The maj orsuppli
ers ofcapitalmarketsecuri
ti
es (oruser
s off unds)are
corporati
onsandgovernments.

, Ot
hermar
ket
s

For
eignExchangeMar
ket
s

Thesear emarket
swher etheforei
gncurr
encyist r
aded.Thefinancemanagersmust
understand how t he forei
gn curr
ency markets operat
e because t
hey af
fectthe
busi
nessesespeci all
ymul ti
nati
onal
s.Thetradi
ngoff orei
gnexchangecur
rencyposes
theforeigncur
rencyriskduet ofl
uct
uati
onsintherates

Der
ivat
ivesecur
it
ymar
ket
s

Thesear ethemar ket
si nwhi chderivati
vesecur it
iestrade.Ader i
vati
vesecur i
tyisa
fi
nancialsecurit
y( such as a f utur
es cont ract
,opt i
on contract
,swap cont ract,or
mortgage-backedsecur i
ty)whosepay offislinkedtoanot her
,previ
ouslyissuedsecurit
y
such as a securit
yt raded int he capitalorf oreign exchange market s.Deri
vati
ve
securi
tiesgeneral
lyinvolv
eanagr eementbet weentwopar ti
est oexchangeast andard
quanti
tyofanassetorcashf lowatapr edeterminedpriceandataspeci fieddateinthe
fut
ure.

Fi
nanci
almar
ketr
egul
ati
on

Financi
ali
nstr
ument
sar
esubj
ectt
oregul
ati
onsi
mposedbyr
egul
ator
ybodi
essuchas
thecentr
albank.

Fi
nanci
alI
nst
it
uti
ons

Financi
ali
nst
it
uti
onsperform theessent
ialf
unct
ionofchannel
li
ngfundsfr
om those
withsurpl
usfunds(suppli
ersoffunds)tothosewit
hshortagesoffunds(user
sof
funds).



Ty
pesofFi
nanci
alI
nst
it
uti
ons

Commer
cial
banks

Thesear edeposit
oryinstit
uti
onswhosemaj orasset sareloansandwhosemaj or
l
iabi
li
ti
es are deposi
ts.Commer cialbanks’loans ar e br
oaderinr ange,incl
uding
consumer,commer cial
,and realest ate(mortgage)loans,than ar
et hoseofot her
deposit
oryinst
it
uti
ons.Commer cialbanks’
li
abil
iti
esincl
udemor enon-deposi
tsources
offunds,suchassubordinatenotesanddebent ures,t
handot hoseofotherdeposi
tory
i
nstit
uti
ons.