Essay Financial Markets

Submitted By ghostpig
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Pages: 5

Financial Markets- create products that provider return for those who have excess funds and making funds available to those who need money. Intermediaries are firms who do that stuff. Also factor markets for capital (savings can be used for future consumption, invest in capital, increase in productive capacity)
Sources of savings
1. Saved household income
2. Not distributing part of profit to owners
3. Gov budgets for surplus
4. O/S borrowing and access to foreign savings
Reasons for Borrowing
1. Demand for G/S exceeds current capacity to pay
2. Expansion of business
3. Govt borrows funds when budgets for deficit
4. Lend money to O/S borrowers
Primary Market: facilitate creation of financial assets aka securities (any form of financial instrument e.g. shares, bonds that provider holder with a claim over real assets or future income stream) that can be sold into eco.
Secondary Market: transactions with financial assets that have already been issued on a primary market in the past.
ASX- Australians Securities Exchange
1. Share or Equity market- ownership shares in companies are issued or exchanged
2. Debt Market—debt securities are exchange, cash is lent or borrowed
3. Derivatives market- buy or sell financial assets that are based on the value of other financial assets
4. Foreign Exchange Market- financial assets defined in one currency exchanged for assets in diff. cur.
Financial Intermediary: channel excess savings from net savers to borrowers (net borrowers)
1. Finance Companies- obtain funds by borrowing from public through issuing debt securities and lend to households/business are higher interest rates
2. Investment banks- borrow short-term from company with surplus funds and lend to other larger companies. Also provide financial advisory services to comps on issues e.g. issuing securities
3. Credit unions- non profit org for particular group , members can deposit or borrow with return
4. Permanent building societies- accepts deposits from public and provide funds for mainly home loans
5. Mortgage originators- Wizard, RAMS, offer home loans to customers
6. Superannuation Funds- contributions from employees/ers to invest in financial assets to provide retirement income.
Financial Market Products (credit is loans to individs, govt, business for consumption +investment)
1. Consumer credit- e.g. credit card, allows purchase of G/S in advance of actual payment
2. Housing loans- long-term loans to purchase properties with periodic payments+ interest
3. Business loans- form of debt that allows business to invest e.g. new tech
4. Short-term money market- bring together ppl who want money or have heaps. Debt securities
5. Bonds- longer-term securities for which lender receive fixed payments (coupon payments) and receive principal value (face value) + interest before end of bond (date of maturity)
6. Financial futures & options- contracts in financial instruments at a later date for certain price
7. FOREX-market for buying/selling foreign currencies
Share market- financial market where investors buy and sell shares (giver owner part-ownership of company)
Companies must be recognised as separate legal entity (limited liability)
Private- restricts ownership of shares Pty Ltd Proprietary Limited
Public- shares are not subject to transfer restrictions. Share markets only deal with public companies
Role of Share Market
1. Investors to gain stake in company profits and make capital gains from increase in share prices. Also gives right to vote for BoD->appoint managers->maximise profit
Dividends-profit returns received by shareholders of business
Capital gains- profit made by investors who sell their shares for a higher price than original
2. Provides opportunity for business to raise new funds for investment and business growth
Float- when a company lists itself on stock exchange and offers shares to public for first time
3. Method of allocating resources to different types of…