FINANCIAL MARKETS
A L S O K N O W N A S “ WA L L S T R E E T ” A N D “ C A P I TA L M A R K E T ”
WHAT ARE FINANCIAL MARKETS?
• Financial markets refers to a type of marketplace that provides
an avenue for the sale and purchase of assets such as bonds,
stocks, foreign exchange, and derivatives.
FINANCIAL MARKET
• To state it more clearly, let us imagine a bank where an
individual maintains a savings account. The bank can use their
money and the money of other depositors to loan to other
individuals and organizations can charge an interest fee.
• The depositors themselves also earn and see their money grow
through the interest that is paid to it. Therefore, the bank
serves as a financial market that benefits both the depositors
and the debtors.
FINANCIAL MARKETS
INVESTORS BORROWERS
Financial markets brings together the investors and the
borrowers.
TYPES OF FINANCIAL MARKETS
• Stock market
The stock market trades shares of ownership of public
companies. Each share comes with a price, and investors make
money with the stocks when they perform well in the market. It
is easy to buy stocks. The real challenge is in choosing the right
stocks that will earn money for the investor.
• Bond market
The bond market offers opportunities for companies and the
government to secure money to finance a project or investment. In
a bond market, investors buy bonds from a company, and the
company returns the amount of the bonds within an agreed period,
plus interest.
• Commodities market
The commodities market is where traders and investors buy and
sell natural resources or commodities such as corn, oil, meat, and
gold. A specific market is created for such resources because their
price is unpredictable. There is a commodities futures market
wherein the price of items that are to be delivered at a given future
time is already identified and sealed today.
• Derivatives market
The derivatives market refers to the financial market for financial
instruments such as underlying assets and financial derivatives.
• There are four kinds of participants in a derivatives market: hedgers, margin
traders, speculators and arbitrageurs.
Hedgers
- Hedging is when a person invests in financial markets to reduce the risk of price
volatility in exchange markets, i.e., eliminate the risk of future price movements.
Derivatives are the most popular instruments in the sphere of hedging. It is because
derivatives are effective hedges in correspondence with their respective underlying assets.
Margin traders
- In the finance industry, the margin is the collateral deposited by an investor investing in
a financial instrument to the counterparty to cover the credit risk associated with the
investment.
Speculators
- Speculation is the most common market activity that participants of a financial
market take part in. It is a risky activity that investors engage in. It involves the
purchase of any financial instrument or an asset that an investor speculates to
become significantly valuable in the future. Speculation is driven by the motive
of potentially earning lucrative profits in the future.
Arbitrageurs
- Arbitrage is a very common profit-making activity in financial markets that
comes into effect by taking advantage of or profiting from the price volatility of
the market. Arbitrageurs make a profit from the price difference arising in an
investment of a financial instrument such as bonds, stocks, derivatives, etc.
FUNCTIONS OF THE MARKETS
• The role of financial markets in the success and strength of an
economy cannot be underestimated. Here are four important
functions of financial markets:
• Puts savings into more productive use
As mentioned in the example above, a savings account that has money in it
should not just let that money sit in the vault. Thus, financial markets like
banks open it up to individuals and companies that need a home loan,
student loan, or business loan.
• Determines the price of securities
The frequent interaction between investors helps in fixing the price of
securities, on the basis of their demand and supply in the market.
• Makes financial assets liquid
Buyers and sellers can decide to trade their securities anytime. They can
use financial markets to sell their securities or make investments as they
desire.
• Lowers the cost of transactions
It saves the time, money and efforts of the parties, as they don’t have
to waste resources to find probable buyers or sellers of securities. Further,
it reduces cost by providing valuable information, regarding the securities
traded in the financial market.
IMPORTANCE OF FINANCIAL MARKETS
• There are many things that financial markets make possible,
including the following:
Financial markets provide a place where participants like investors and
debtors, regardless of their size, will receive fair and proper treatment.
They provide individuals, companies, and government organizations with
access to capital.
Financial markets help lower the unemployment rate because of the many
job opportunities it offers
CLASSIFICATIONS OF FINANCIAL
MARKETS
By Nature of Claim
• Debt Market: The market where fixed claims or debt
instruments, such as debentures or bonds are bought and
sold between investors.
• Equity Market: Equity market is a market wherein the
investors deal in equity instruments. It is the market for
residual claims.
By Maturity of Claim
• Money Market: The market where monetary assets such as commercial paper,
certificate of deposits, treasury bills, etc. which mature within a year, are traded is
called money market. It is the market for short-term funds. No such market exist
physically; the transactions are performed over a virtual network, i.e. fax, internet
or phone.
• Capital Market: The market where medium and long term financial assets are
traded in the capital market. It is divided into two types:
Primary Market: A financial market, wherein the company listed on an
exchange, for the first time, issues new security or already listed
company brings the fresh issue.
Secondary Market: Alternately known as the Stock market, a
secondary market is an organized marketplace, wherein already issued
securities are traded between investors, such as individuals, merchant
bankers, stockbrokers and mutual funds.
By Timing of Delivery
• Cash Market: The market where the transaction between buyers and sellers
are settled in real-time.
• Futures Market: Futures market is one where the delivery or settlement of
commodities takes place at a future specified date.
By Organizational Structure
• Exchange-Traded Market: A financial market, which has a centralised
organisation with the standardised procedure.
• Over-the-Counter Market: An OTC is characterised by a decentralised
organisation, having customised procedures.
Members:
Bucaling, Gemarie Lantaca, Merelle
Cabardo, Chriscil Lepasana, Kier
Gono, Angelica Mercado, Resh Shiena
Gonzaga, Ella Mae Ocmen, Robert
Hadjitaib, Mohammad Hussein Omboy, Noemi
Labajo, Xenia Villarva, Kristille
THANK YOU!