Lecture 1 – Financial Markets and Instruments
Outline 1
Why do financial markets exist?
Doesn’t need a location
Mechanisms to bring buyers and sellers together
A financial market doesn’t own assets that are traded on it
Spending units - an individual living alone or a family living together and pooling incomes to meet
expenses
Economic units
Households
Companies
Government
Budget constraints – each economic unit has a budget constraint.
Deficit position - expenditure > income.
Surplus position - income > expenditure..
Balanced position - Income = expenditure
Economic units –
Economic units can be in surplus some periods and deficit in others
Deficit does not equal losses
In a well-functioning economy SSUs should supply funds to DSUs
SSUs tend to be Households
Very small surplus income
Large number of different households
Different conditions
99.99% of households cannot afford to pay for full financial claim of DSUs
Indirect financing
Financial claims must be repackaged
Financial intermediation
Financial Intermediaries –
A financial intermediary is an institution such as a bank that collects the savings of
individuals and corporations and funnel them to firms that use the money to finance their
investments in plants, equipments, research and development etc.
, Bank (commercial and retail activity) - Takes deposits from individuals and corporations, and lends
these funds to borrowers
Bank (investment activity) – Raises money for corporations by marketing and selling securities.
Insurance company - Invests money in securities, property and other assets to meet future insurance
claims.
Pension fund - Invests money in securities, property and other assets to pay pensions in the future.
Charitable foundation - Invests the endowment of a non-profit organisation such as a university
Mutual fund - Pools savings from individual investors to purchase securities
Hedge fund - Pools savings from individual wealthy and professional investors (who satisfy certain
criteria relating to personal wealth and investor sophistication) to purchase securities using a variety
of non-traditional investment strategies.
Venture capital firm - Pools money from individual investors and other financial intermediaries to
fund relatively small, new businesses, generally with private equity financing.
Outline 1
Why do financial markets exist?
Doesn’t need a location
Mechanisms to bring buyers and sellers together
A financial market doesn’t own assets that are traded on it
Spending units - an individual living alone or a family living together and pooling incomes to meet
expenses
Economic units
Households
Companies
Government
Budget constraints – each economic unit has a budget constraint.
Deficit position - expenditure > income.
Surplus position - income > expenditure..
Balanced position - Income = expenditure
Economic units –
Economic units can be in surplus some periods and deficit in others
Deficit does not equal losses
In a well-functioning economy SSUs should supply funds to DSUs
SSUs tend to be Households
Very small surplus income
Large number of different households
Different conditions
99.99% of households cannot afford to pay for full financial claim of DSUs
Indirect financing
Financial claims must be repackaged
Financial intermediation
Financial Intermediaries –
A financial intermediary is an institution such as a bank that collects the savings of
individuals and corporations and funnel them to firms that use the money to finance their
investments in plants, equipments, research and development etc.
, Bank (commercial and retail activity) - Takes deposits from individuals and corporations, and lends
these funds to borrowers
Bank (investment activity) – Raises money for corporations by marketing and selling securities.
Insurance company - Invests money in securities, property and other assets to meet future insurance
claims.
Pension fund - Invests money in securities, property and other assets to pay pensions in the future.
Charitable foundation - Invests the endowment of a non-profit organisation such as a university
Mutual fund - Pools savings from individual investors to purchase securities
Hedge fund - Pools savings from individual wealthy and professional investors (who satisfy certain
criteria relating to personal wealth and investor sophistication) to purchase securities using a variety
of non-traditional investment strategies.
Venture capital firm - Pools money from individual investors and other financial intermediaries to
fund relatively small, new businesses, generally with private equity financing.
