Topic 1:

Introduction to
Financial
Markets
Authors: María Gutiérrez and David Moreno
Universidad Carlos III
Course: Financial Economics
Overview

Introduction to finance

Investment: concepts and different types of assets in which to

invest

Financial assets

Financial markets

2
1 – Introduction to finance
An area of economics
that studies processes
What is finance? of investment and
financing, and the
interchange of funds

What areas exist in Corporate finance and

Asset valuation
finance? governance

Financial institutions

3
2 – Investment

Definition of investment Types of investments/assets

• Any process/technology that

transforms current wealth into REAL ASSETS
future wealth

FINANCIAL ASSETS

ALTERNATIVE ASSETS
Revise on your own using material on Aula
Global

4
3 – Financial assets

Financial assets: Types of financial assets

• Contracts which give the owner the right to
receive future payments in exchange for a Debt
payment today.
• Loans, bonds, bills, deposits...
• “Fixed income securities”
• They permit families, firms and the public sector
to transfer wealth over time and make better Equity
financial decisions. • Stocks, shares, participations...
• Give the right to receive part of the profits of the firm and to
participate in decisions.
• “Variable income securities”.

Derivatives
• Forwards, futures, options, swaps…
• Sophisticated products whose payments are derived from
the value of another asset called the underlying asset.

5
3 – Financial assets
Type of operations with financial assets:

Buy Sell Shortsell

Long operations

Short operation
Sell operation

6
3 – Financial assets

Shortselling
• A loan of a financial asset: the agent • If the asset which has been
who shortsells borrows the asset from shortsold has a cash flow
a lender.
(dividend or coupon)…
• Risky operation
• … the agent who carried out the
• It gives:
• Profit if the price of the financial asset
shortsale must pay this cash
goes down. flow to the lender of the asset.
• Loss if the price of the financial asset
goes up.
• Liquidity (financing).
• Important in portfolio theory.

7
3 – Financial assets

Example: 3 people have a current account

with the bank BBVA (each with 1,000EUR)
and a different number of Telefonica
stock. Each stock is worth 5EUR.
• Carmen can “lend out” her stock via her
bank, thus losing voting rights but
maintaining the same long-term
position
• Ana believes that the price of the stock
will fall and wishes to sell (take a short
position).
• Pedro believes that the price of the
3 – Financial assets

Time Action Ana Pedro Carmen Juan

0 Initial position Cash 1,000 1,000 1,000 1,000

Stocks 0 0 100 100

1 Ana shortsells 100 stocks to Pedro for Cash 1,500 500 1,000 1,000
5EUR/stock, she borrows them from Carmen Stocks -100 100 100 100

2 Dividend payment of 0.1EUR per stock Cash 1,490 510 1,010 1,010
Stocks -100 100 100 100

3 Ana buys 100 stocks from Juan for 4EUR/stock. Cash 1,090 510 1,010 1,410
Stocks 0 100 100 0

9
3 – Financial assets

An operation of pure
When you have to
arbitrage is an
make an inital
operation which
investment but obtain
permits an agent to
Arbitrage obtain a financial
a profit without risk,
we talk of
profit without risk and
an arbitrage
without an initial
opportunity.
investment.

Revise on your own using

material on Aula Global 10
4 – Financial markets

DEFINITION OF FINANCIAL MARKETS CLASSIFICATION

• Markets (physical or • PRIMARY MARKETS AND

electronical) that emit and/or SECONDARY MARKETS
interchange financial assets.
• ORGANIZED MARKETS AND
UNORGANIZED MARKETS (OTC)

Revise on your own using

material on Aula Global
11
4 – Financial markets

Agents who participate in financial markets

• Commercial banks • Analysts:

• Offer deposits and loans. • Study the valuation/price of
• Make profit from interest rate financial assets and write reports
margin. with recommendations of
• Investment banks whether to buy/sell/hold.
• JP Morgan, Morgan Stanley, UBS… • They usually work for investment
• Advise firms/governments in the funds or investment banks, and
process of emitting debt and equity. help these institutions (or their
• Advise in merges, initial public
clients) in their investment
offerings, and other processes. decisions.
• Participate in other market • 2 types:
functions. • Fundamental analysts
• Technical analysts
12
4 – Financial markets

• Brokers: Intermediaries • Fund managers: Invest the funds or

between buyers and sellers. their clients (the investors) in a set of
assets to maximize the profit/
• They (generally) do not take any minimize risk.
risk themselves. • They charge a commission which
• They are merely intermediaries. depends on the type of management
they do.

• An example are managers of

investment funds.
• Differentiate between:
• Active management
• Passive management
Bibliography
• Recommended reading:
• Brealey, R., S. Myers, y Allen, F., 2022.
Principles of Corporate Finance. McGraw Hill.
Chapter 1.

14