INTRODUCTION TO FINANCIAL
MARKETS
1. The Financial System
1.1 The Actors
Haves or havenots?
The economy consists out of haves and havenots. Haves possess capital and can
lend it out (Lenders). Havenots have more needs than money and they will have
to raise capital (borrowers).
Would you consider the following entities as haves or havenots on a
macroeconomic level?
Corporates
The government
Households
The financial industry
The rest of the world
2 bags: 1 with all the money (= haves) and 1 with nothing (= havenots)
but the haves don’t need it and the havenots could use the money in a
productive way
so how do we get the money to the havenots?
1. direct financing: contractual relationship between the haves and the
havenots (e.g.: between me and my parents) + direct connection between
2 parties
2. semi-direct financing: through intermediaries – banks help to match the
parties, but at the end there will still be a direct connection between the 2
parties
1. & 2. = financing through financial markets
3. indirect financing:
balance sheet = overview of the assets (left) & the liabilities (right)
~ the money we place on the bank (our deposits) = the liabilities of the bank
towards us
~ deposits are all short-term; so short-term funding for the bank
~ we expect banks to finance our economy (to grant loans and credits to the
havenots)
BUT long-term credits are funded with our short-term deposits
banking is risky business (receiving deposits at a lower rate than granting loans
(de interest die wij extra betalen als we lenen is hoger dan de interest die de
bank ons betaalt voor onze zichtrekeningen bij hen) more money for the bank,
but the rate of receiving deposits can go up and that’s not good for the bank)
, - deposits: interesten op spaarrekening die wij krijgen van de bank
- credits: interesten op leningen (loans) zijn inkomsten voor de bank
shadow banks: grant also money to the havenots, but they don’t attract deposits
(e.g.: mutual funds) less regulated than normal banks
all the money is in the hands of the households (= haves)
governments are havenots
corporates are havenots
rest of the world are haves
financial industry just passes on money from the haves to the havenots
The main actor: households
When a single household owns a house of 100 but at the same time has a
remaining mortgage (= hypotheek) debt of 80, its net wealth is 20.
net wealth = assets - liabilities
The household balance sheet gives an overview of the assets and the liabilities of
a single household.
The household balance sheet
Kind of assets
An asset is a possession that has value in an exchange transaction.
- Tangible assets or real assets derive value from their physical character
and the utility they generate.
- Intangible assets derive value from a legal claim to some future benefit.
- Financial assets are intangible assets that represent a claim to future cash.
Real versus financial assets
economies are very different in
different countries !!!
,Asset classes
Traditional
Common stock = gewone aandelen
Bonds = obligaties
Cash (and cash equivalents)
Alternative
Real estate = vastgoed
Commodities = grondstoffen/goederen
Private equity = privaat vermogen
Hedge funds = risicodekkingsfondsen
Venture capital = risicokapitaal
Currencies (forex) = valuta’s, munten
In a stock market: do what you think that others will think and do (e.g.: that the
bitcoin will double), not do what you like; what you need to do is depending on
others
Liabilities
Mortgage loans = hypotheek lening
Consumer loans = consumentenleningen
Tax debt = belastingsschuld
Growth drivers in net wealth hoe stijgt onze netto-rijkdom?
Value changes in assets and liabilities (beide stijgen want moeten gelijk
zijn aan elkaar)
Net-income from labour, capital or transfers (i.e. pensions, social security
based income) inkomen
Inheritances (= erfenissen), gifts
Wealth creation
“Assets put money in your pocket, whether you work or not, and liabilities take
money from your pocket.” ~ Robert Kiyosaki
key message: What is your goal? What do you have to do to reach that goal?
e.g.: If you want to become really rich, you don’t have to become a teacher but
an entrepreneur. You need to take business risks, but if you’re lucky you get
rewarded for it.
, - poor people work hard, but get almost nothing for it
- middle class works, and they buy a house and most of their wages are
used to pay that off
- rich people are able to put a part of their wealth in income generating
assets (e.g.: they invest in stocks)
Wealth is not uniformly distributed Wealth
distribution
Wealth inequality
not much inequality in Belgium
in the U.S. wealth is very
concentrated
MARKETS
1. The Financial System
1.1 The Actors
Haves or havenots?
The economy consists out of haves and havenots. Haves possess capital and can
lend it out (Lenders). Havenots have more needs than money and they will have
to raise capital (borrowers).
Would you consider the following entities as haves or havenots on a
macroeconomic level?
Corporates
The government
Households
The financial industry
The rest of the world
2 bags: 1 with all the money (= haves) and 1 with nothing (= havenots)
but the haves don’t need it and the havenots could use the money in a
productive way
so how do we get the money to the havenots?
1. direct financing: contractual relationship between the haves and the
havenots (e.g.: between me and my parents) + direct connection between
2 parties
2. semi-direct financing: through intermediaries – banks help to match the
parties, but at the end there will still be a direct connection between the 2
parties
1. & 2. = financing through financial markets
3. indirect financing:
balance sheet = overview of the assets (left) & the liabilities (right)
~ the money we place on the bank (our deposits) = the liabilities of the bank
towards us
~ deposits are all short-term; so short-term funding for the bank
~ we expect banks to finance our economy (to grant loans and credits to the
havenots)
BUT long-term credits are funded with our short-term deposits
banking is risky business (receiving deposits at a lower rate than granting loans
(de interest die wij extra betalen als we lenen is hoger dan de interest die de
bank ons betaalt voor onze zichtrekeningen bij hen) more money for the bank,
but the rate of receiving deposits can go up and that’s not good for the bank)
, - deposits: interesten op spaarrekening die wij krijgen van de bank
- credits: interesten op leningen (loans) zijn inkomsten voor de bank
shadow banks: grant also money to the havenots, but they don’t attract deposits
(e.g.: mutual funds) less regulated than normal banks
all the money is in the hands of the households (= haves)
governments are havenots
corporates are havenots
rest of the world are haves
financial industry just passes on money from the haves to the havenots
The main actor: households
When a single household owns a house of 100 but at the same time has a
remaining mortgage (= hypotheek) debt of 80, its net wealth is 20.
net wealth = assets - liabilities
The household balance sheet gives an overview of the assets and the liabilities of
a single household.
The household balance sheet
Kind of assets
An asset is a possession that has value in an exchange transaction.
- Tangible assets or real assets derive value from their physical character
and the utility they generate.
- Intangible assets derive value from a legal claim to some future benefit.
- Financial assets are intangible assets that represent a claim to future cash.
Real versus financial assets
economies are very different in
different countries !!!
,Asset classes
Traditional
Common stock = gewone aandelen
Bonds = obligaties
Cash (and cash equivalents)
Alternative
Real estate = vastgoed
Commodities = grondstoffen/goederen
Private equity = privaat vermogen
Hedge funds = risicodekkingsfondsen
Venture capital = risicokapitaal
Currencies (forex) = valuta’s, munten
In a stock market: do what you think that others will think and do (e.g.: that the
bitcoin will double), not do what you like; what you need to do is depending on
others
Liabilities
Mortgage loans = hypotheek lening
Consumer loans = consumentenleningen
Tax debt = belastingsschuld
Growth drivers in net wealth hoe stijgt onze netto-rijkdom?
Value changes in assets and liabilities (beide stijgen want moeten gelijk
zijn aan elkaar)
Net-income from labour, capital or transfers (i.e. pensions, social security
based income) inkomen
Inheritances (= erfenissen), gifts
Wealth creation
“Assets put money in your pocket, whether you work or not, and liabilities take
money from your pocket.” ~ Robert Kiyosaki
key message: What is your goal? What do you have to do to reach that goal?
e.g.: If you want to become really rich, you don’t have to become a teacher but
an entrepreneur. You need to take business risks, but if you’re lucky you get
rewarded for it.
, - poor people work hard, but get almost nothing for it
- middle class works, and they buy a house and most of their wages are
used to pay that off
- rich people are able to put a part of their wealth in income generating
assets (e.g.: they invest in stocks)
Wealth is not uniformly distributed Wealth
distribution
Wealth inequality
not much inequality in Belgium
in the U.S. wealth is very
concentrated
