MONEY AND
BANKING 1
DR. RANIA RAMADAN
MOAWAD
Chapter 2:
financial markets
Definition of Financial Markets
Financial markets :
are markets in which funds are
transferred
From people and Firms who have an
excess of available funds
to people and Firms who have a need of
funds.
Financial Intermediaries
• Financial Intermediaries: institutions
that borrow funds from people who
have saved and make loans to other
people:
– Banks: accept deposits and make loans.
– Other Financial Institutions: insurance
companies, finance companies, pension
funds, mutual funds and investment
companies.
Financial instruments
• Financial instruments : sometimes called
financial securities, are legal contracts that detail
the obligations of their makers, and the rights of
their holders
• Their major function is to specify who owes what
to whom, when or under what conditions
payment is due, and how and where payment
should be made.
Financial instruments cont.
• Makers are the individuals, governments,
or businesses that issue (initially sell) them
and promise to make payment.
• Holders are the individuals, governments,
or businesses that currently own them and
expect to receive payment.
Financial instruments cont.
• Financial instruments (securities) come in three
major varieties
1) debt
2)equity
3)hybrid
1) Debt instruments:
such as bonds, indicate a lender–borrower
relationship in which the borrower promises to
pay a fixed sum and interest to the lender at a
specific date or over some period of time.
Financial instruments con’t
• Equity instruments:
such as stocks, represent an
ownership stake in which the holder of
the instrument receives some portion
of the issuer’s profits.
Financial instruments con’t
• Hybrid instruments:
such as preferred stock, have some of the
characteristics of both debt and equity
instruments. Like a bond, preferred stock
instruments promise fixed payments on specific
dates but, like a common stock, only if the issuer’s
profits warrant.
Convertible bonds, by contrast, are hybrid
instruments because they provide holders with the
option of converting debt instruments into
equities.
Financial instruments cont.
So we conclude that:
Debt instruments are for fixed sums on fixed
dates and need to be paid in all events.
Equities are ownership stakes that entitle
owners to a portion of profits
Hybrid instruments are part debt and part
equity or are convertible from one into the other.
Financial markets and
Financial instruments
• Financial markets can be categorized or grouped
by:
1) issuance (primary vs. secondary markets),
2) type of instrument (stock, bond, derivative), or
3) market organization (exchange or OTC).
4)time to maturity (money vs. capital)
Primary vs. secondary market
• The primary market is where companies float shares to
the general public in an initial public offering (IPO) to
raise capital.
• Once new securities have been sold in the primary
market, they are traded in the secondary market—where
one investor buys shares from another investor at the
prevailing market price or at whatever price both the
buyer and seller agree upon. The secondary market or
the stock exchanges are regulated by the regulatory
authority.
• So primary is a financial market in which new issues of a
security are sold to initial buyers , but secondary is a financial
market in which securities can be resold.
Exchanges vs. OTC
• Secondary markets can be organized in two
ways:
1- Exchanges market : where buyers and sellers of
securities meet in one central location to conduct
trades.
2- OTC market: over the counter market is when
dealers are at different locations. They are in
contact via computers .
Money and capital market
• Money market is a financial market in
which only short-term debt ( maturity of
less than one year) are traded.
• Capital market is a financial market in
which only long-term debt ( maturity of
one year or greater) and equity
instruments are traded.
• An initial public offering is when
companies sell stock for the first
time.
• The stock market is where you can buy,
sell, and trade stocks any business day.
Why Companies Sell Stocks
• Stocks are how companies get funded to grow larger.
Usually, when someone wants to start a business, they
pay for it with loans or even their credit cards. Once
they grow the company enough, they can get bank
loans, or also float their bonds to individual investors.
• Eventually, they'll need a lot of money to take the
business to the next phase. At that time, they will sell
the first stocks, called an initial public offering. Once
that happens, no single person owns the company
because they have sold it to the stockholders.