Introduction to Financial Markets
Introduction:
Financial markets are the backbone of the global economy, facilitating the flow
of funds between savers and borrowers.
This course provides an overview of the types of financial markets, the role of
stock exchanges and regulatory bodies, and the basics of equity and debt
instruments.
Understanding these concepts is essential for anyone interested in finance,
investing, or business.
Types of Financial Markets
Definition:
Financial markets are platforms where buyers and sellers trade financial assets
like stocks, bonds, currencies, and derivatives.
Key Functions:
1. Capital Formation: Mobilize savings for productive investments.
2. Price Discovery: Determine the fair value of financial assets.
3. Liquidity: Enable easy buying and selling of assets.
4. Risk Management: Provide tools to hedge against financial risks.
Example: The New York Stock Exchange (NYSE) is a financial market where
companies list their shares for trading.
a) Money Market
Definition:
The money market deals with short-term borrowing and lending, typically for
periods of less than one year.
Key Instruments:
1. Treasury Bills (T-Bills): Short-term government securities.
2. Commercial Paper: Unsecured promissory notes issued by corporations.
3. Certificates of Deposit (CDs): Time deposits offered by banks.
4. Repurchase Agreements (Repos): Short-term loans backed by securities.
Example: A corporation issues commercial paper to meet its short-term funding
needs.
b) Capital Market
Definition:
The capital market deals with long-term financing, typically for periods of
more than one year.
Key Instruments:
1. Stocks: Represent ownership in a company.
2. Bonds: Debt instruments issued by governments or corporations.
3. Mutual Funds: Pooled investments in diversified portfolios.
4. Derivatives: Financial contracts derived from underlying assets.
Example: A company issues bonds to raise capital for a new factory.
c) Forex Market
Definition:
The forex (foreign exchange) market is where currencies are traded.
Key Features:
1. Largest Market: The forex market is the most liquid and largest financial
market in the world.
2. 24-Hour Trading: Operates 24 hours a day, five days a week.
3. Participants: Banks, corporations, governments, and individual traders.
Example: A U.S. company converts dollars to euros to pay a supplier in Germany.
Role of Stock Exchanges
Definition:
Stock exchanges are organized markets where securities like stocks and bonds
are traded.
Key Functions:
1. Facilitate Trading: Provide a platform for buying and selling securities.
2. Ensure Transparency: Require listed companies to disclose financial
information.
3. Provide Liquidity: Enable investors to easily convert securities into cash.
Examples:
New York Stock Exchange (NYSE): The largest stock exchange in the world.
NASDAQ: Known for listing technology companies like Apple and Microsoft.
Role of Regulatory Bodies
Definition:
Regulatory bodies oversee financial markets to ensure fairness, transparency,
and stability.
Key Functions:
1. Protect Investors: Prevent fraud and ensure fair trading practices.
2. Maintain Market Integrity: Monitor and enforce compliance with regulations.
3. Promote Transparency: Require companies to disclose financial information.
Examples:
Securities and Exchange Commission (SEC): Regulates U.S. securities
markets.
Financial Conduct Authority (FCA): Regulates financial markets in the UK.
Basics of Equity Instruments
Definition:
Equity instruments represent ownership in a company.
Key Features:
1. Stocks: Common and preferred shares.
2. Dividends: Payments made to shareholders from profits.
3. Voting Rights: Common shareholders can vote on corporate matters.
Example: An investor buys shares of Apple, becoming a part-owner of the company.
Basics of Debt Instruments
Definition:
Debt instruments represent loans made by investors to borrowers.
Key Features:
1. Bonds: Issued by governments or corporations with a fixed interest rate.
2. Maturity Date: The date when the principal amount is repaid.
3. Interest Payments: Regular payments made to bondholders.
Example: A government issues bonds to fund infrastructure projects, promising to
repay investors with interest.
Summary and Key Takeaways
Summary:
Financial markets play a crucial role in the global economy by facilitating the
flow of funds.
The money market deals with short-term financing, while the capital market
deals with long-term financing.
The forex market is where currencies are traded.
Stock exchanges and regulatory bodies ensure transparency, fairness, and
stability in financial markets.
Equity instruments represent ownership, while debt instruments represent
loans.
Key Takeaways:
1. Financial markets are essential for capital formation and economic growth.
2. Stock exchanges and regulatory bodies play a vital role in maintaining market
integrity.
3. Understanding equity and debt instruments is crucial for investing and
financing decisions
