FINANCIAL SYSTEMS
: BY:-
VINAYAK CHUNI :GAURAV DOGRA
ID-071106 ID-071546
The Financial System
The financial system consists of
institutions that help to match one
person’s saving with another person’s
investment.
It moves the economy’s scarce
resources from savers to borrowers.
The financial system is made up of
institutions(Markets and
Intermediaries)
Financial Institutions
in the Economy
Financial Markets
Stock Market
Bond Market
Financial Intermediaries
Banks
Mutual Funds
Securities
Security is a fungible, negotiable instrument
representing financial value.
Securities are broadly categorized into
debt securities (such as banknotes, bonds
and debentures); equity securities, e.g.,
common stocks; and derivative contracts,
such as forwards, futures, options and swaps
IMPORTANCE
• Securities help the economy by making it easier for
those with money to find those who need investment
capital. By making trading easy and available to many
investors, securities make markets more efficient. It is
easy for investors to see which companies are doing
well, and which ones are not. Money can swiftly go to
those companies that are growing, thus rewarding
performance and providing an incentive for further
growth.
Common Stock Basics
What is Stock?
A stock is a tradable security that a firm issues to certify
that the stockholder owns a share of the firm.
Stocks are buying parts of a
company
If the company makes money (a profit) and you
sell it then, your share is worth more.
You become a silent part owner in a company.
If the company loses money (a loss) and you sell
it then, your share is worth less.
The Risk is higher.
You have the opportunity to make more money.
Stocks are how companies get funded to grow
larger
Stocks (Ownership) are like
buying your home
You take all the risks- repairs, replacement,
possible loss of investment.
You hope its value will go up so you make a
profit when you sell it.
You need to hold on to for a long time to let it
grow in value
Stocks (Ownership) are like owning
Cattle
What matters is how much you pay for
them and
How much you can sell them for.
You might lose your money, but if the
market is right you can make more than
what you can by selling milk.
The Stock Market
The sale of stock to raise money is called
equity financing.
Stock represents ownership in a firm and
is therefore, a claim to the profits that the
firm makes.
Compared to bonds, stocks offer both
higher risk and potentially higher returns.
STOCK TYPES
Common Stock (usually entitles the owner to vote at
shareholders' meetings and to receive dividends
Class A: A classification of common stock that may be
accompanied by more voting rights.
Class B: a classification of common stock that usually does
not have as many or may not have any voting rights to elect
officers to the Board of Directors of a Corporation.
Preferred (generally does not have voting rights, but has a
higher claim on assets and earnings than the common
shares).
Dividends
Dividends. Distribution of a portion of a company's
earnings, decided by the board of directors, to a
class of its shareholders. It can also be quoted in
terms of a percent of the current market price,
referred to as dividend yield. Dividends may be in
the form of cash, stock or property. Most secure and
stable companies offer dividends to their
stockholders. Their share prices might not move
much, but the dividend attempts to make up for this.
Some terms related to stock
Capital Gain: Profit that results when the price of a security held by a
mutual fund rises above its purchase price and the security is sold (realized
gain). If the security continues to be held, the gain is unrealized. A capital
loss would occur when the opposite takes place.
Growth Stock: A stock that experiences a continued period of growth
exceeding that of the economy. Generally, the duration is over a year in
length.
Income Stock: A stock that has a high, consistent, dividend paid annually.
Speculative Stock: Stocks that offer the potential for substantial price
appreciation, usually because of some special situation such as new
management or the introduction of a promising new product.
.
Terms cont…
Cyclical Stocks: these are stocks whose earnings and overall
market performance are closely linked to the general state of
the economy.
Defensive Stocks: these stocks tend to hold their own, and
even do well, when the economy starts to falter.
Mid-cap stocks: are medium-sized companies, generally with
market values of less than $4-$5 billion but more than $1
billion.
Small-cap stocks: are stocks that generally have market
values of less than $1 billion but can offer above-average
returns.
Other Common Stock Values
Par Value: A currency amount that is assigned to a security when
representing the value contributed for each share in cash or goods.
Book Value: the value of the equity of the firm divided by the
number of shares outstanding.
Liquidation Value: the value obtained for selling all the assets of
the corporation on the auction block.
Market Value: the current market price of the stock times the
number of shares outstanding.
Effects of Inflation Over Time
Given a modest 4% rate of inflation, look what $10,000 will be worth
$6,765
: $4,564
In 10 In 20
years years
Most stocks are traded on exchanges, which are
places where buyers and sellers meet and decide on a
price. Some exchanges are physical locations where
transactions are carried out on a trading floor.
The purpose of a stock market is to facilitate the
exchange of securities between buyers and sellers,
reducing the risks of investing.
STOCK EXCHANGE
In India there are two major stock exchanges
The Bombay stock exchange(SENSEX)
The National stock exchange(NSE)- Established in the
year 1994
The Regional stock exchanges-The volumes of trading at
the regional stock exchanges have been decreasing and
their share of the turnover has declined progressively
since 1994
Types of Markets
The primary market is where securities are created (by
means of an IPO)
Secondary market, investors trade previously-issued
securities without the involvement of the issuing-companies.
The secondary market is what people are referring to when
they talk about the stock market. It is important to understand
that the trading of a company's stock does not directly involve
that company.
It involves stock exchanges and the respective registered
brokers
Animals in the Market
The use of "bull" and "bear" to describe
markets comes from the way in which each
animal attacks its opponents. That is, a
bull thrusts its horns up into the air, and a
bear swipes its paws down. These
actions are metaphors for the movement of
a market: if the trend is up, it is considered a
bull market. And if the trend is down, it is
considered a bear market.
Bull market
• The Bull market is when everything in the economy
is great, people are finding jobs, gross domestic
product (GDP) is growing, and stocks are rising.
Things are just plain rosy! Picking stocks during a
bull market is easier because everything is going
up. Bull markets cannot last forever though, and
sometimes they can lead to dangerous situations if
stocks become overvalued. If a person is optimistic
and believes that stocks will go up, he or she is
called a "bull" and is said to have a "bullish
outlook".
Bear Markets
Bear Markets characterize the attitude of
investors who believes that a particular security
or market is headed downward. Bears attempt
to profit from a decline in prices. Bears are
generally pessimistic about the state of a given
market. Bearish sentiment can be applied to all
types of markets including commodity markets,
stock markets and the bond market.
Selling Short
The selling of a security that the seller does not own, or any
sale that is completed by the delivery of a security borrowed
by the seller. Short sellers assume that they will be able to buy
the stock at a lower amount than the price at which they sold
short.
Selling short is the opposite of going long. That is, short sellers
make money if the stock goes down in price.
This is an advanced trading strategy with many unique risks
and pitfalls. Novice investors are advised to avoid short sales.
The Bond Market
A bond is a certificate of
indebtedness that specifies
obligations of the borrower to
the holder of the bond.
Bonds
You loan your money to the company.
You get some interest paid to you.
You get back the money you loaned out
sometime in the future.
The Risk is very low.
The Money you make is very little.
This is how CD’s work and you are the
Bank.
Characteristics
Term: The length of time until the bond
matures.
Credit Risk: The probability that the
borrower will fail to pay some of the
interest or principal.
Types of bonds
• Corporate bonds which are sold by the representative bank.
• Junk bonds or high yield bonds, which are bonds from risky
companies, so therefore they offer higher interest rates to compensate
for the risk.
• Municipal bonds which are issued by various cities. These are tax free,
but have slightly lower interest rates.
• Savings bonds which are issued by the Treasury Department and are in
low enough amounts to make them affordable for individuals.
• I Bonds which are like Savings Bonds, except they are adjusted for
inflation every six months.
• Treasury bonds, also issued by the Treasury Department. However, the
smallest denomination is $10,000...too large for most individual
investors.
Bonds (Loans) are like renting a
house.
The risk is low, but
you don’t have
much to show for
it when you leave.
If your time frame
is short, it’s the
only smart thing to For
do. Rent
Bonds (lending) are like owning
Dairy Cows.
You always own
the cows.
You make your
money selling the
milk.
The more milk
(interest) the cow
provides, the more
money you make.
Mutual Funds allow us to buy little
bits of lots of companies.
If you own shares of stocks in lots of
companies and One or two go out of business,
Probably the rest will be ok and you won’t lose
all your [Link] tend to be less risky than
buying individual stocks because they are a
diversified investment
If you own shares of stock in lots of companies
and One or two make incredible profits
Probably the rest won’t and you will make
money
Mutual funds are safer than owning shares
(stocks) of individual companies because not
all your eggs in one basket.
Mutual fund sub-accounts are what you invest
in with most Company Retirement Plans.
Like stocks, bonds can be packaged into a
bond mutual fund. This is a good way for an
individual investor to let an experienced
mutual fund manager pick the best selection of
corporate bonds. A bond fund can also reduce
risk through diversification. This way, if one
corporation defaults on its bonds, then only a
small part of the investment is lost.
THANK YOU
Questions?