1.05 - Understand financial markets to recognize their importance in business.

Types of financial marketsMoney market, Capital market, Insurance market, Commodities markets

Financial Market

Financial market is a broad term describing any marketplace where buyers, sellers, and intermediaries participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade.

Basic Functions of Financial MarketsFinancial Markets are essential for fund raising. Through Financial Market borrowers can find suitable lenders. Banks also help in the process of financing by working as intermediaries. They use the money, which is saved and deposited by a group of people; for giving loans to another group of people who need it. Generally, banks provide financing in the form of loans and mortgages

Basic Function of Financial Markets cont.Basis of Financial Markets are the Borrowers and Lenders:

Borrowers of the Financial Market can be individual persons, private companies, public corporations, government and other local authorities like municipalities. Individual persons generally take short term or long term mortgage loans from banks to buy any property. Private Companies take short term or long term loans for expansion of business or for improvement of the business infrastructure

Basic Function of Financial Markets cont.Basis of Financial Markets are the Borrowers and Lenders:

Lenders in the Financial Market are actually the investors. Their invested money is used to finance the requirements of borrowers. So, there are various types of investments which generate lending activities. Some of these types of investments are depositing money in savings bank account, paying premiums to Insurance Companies, investing in shares of different companies, investing in govt. bonds and investing in pension funds and mutual funds.

Types of financial markets

• Money market• Capital market• Insurance market• Commodities market• Auction Market

Capital Markets

Capital markets are perhaps the most widely followed markets. Both the stock and bond markets are closely followed and their daily movements are analyzed as proxies for the general economic condition of the world markets. As a result, the institutions operating in capital markets - stock exchanges, commercial banks and all types of corporations, including nonbank institutions such as insurance companies and mortgage banks - are carefully scrutinized• The Bond market provides financing by accumulating debt through bond

issuance and bond trading• The Stock market provides financing by sharing the ownership of a

company through stocks issuing and trading

Primary and Secondary Markets

A secondary market, or the so-called “aftermarket” is the place where investors purchase previously issued securities such as stocks, bonds, futures and options from other investors, rather from issuing companies themselves. The secondary market is where the bulk of exchange trading occurs and it is what people are talking about when they refer to the “stock market”. It includes the NYSE, Nasdaq and all other major exchanges

Primary and Secondary Markets

• A primary market, or the so-called “new issue market”, is where securities such as shares and bonds are being created and traded for the first time without using any intermediary such as an exchange in the process. When a private company decides to become a publicly-traded entity, it issues and sells its stocks at a so-called Initial Public Offering. IPOs are a strictly regulated process which is facilitated by investment banks or finance syndicates of securities dealers that set a starting price range and then oversee its sale directly to the investors

Money Markets

• The money market is often accessed alongside the capital markets. While investors are willing to take on more risk and have patience to invest in capital markets, money markets are a good place to "park" funds that are needed in a shorter time period - usually one year or less. The financial instruments used in capital markets include stocks and bonds, but the instruments used in the money markets include deposits, collateral loans, acceptances and bills of exchange. Institutions operating in money markets are central banks, commercial banks and acceptance houses, among others

Insurance Markets

• It helps in relocating various risks. Insurance is used to transfer the risk of a loss from one entity to another in exchange for a payment. The insurance market is a place where two peers, an insurer and the insured, or the so-called policyholder, meet in order to strike a deal primarily used by the client to hedge against the risk of an uncertain loss.

Commodity Markets

• The commodity market manages the trading in primary products which takes place in about 50 major commodity markets where entirely financial transactions increasingly outstrip physical purchases which are to be delivered. Commodities are commonly classified in two subgroups.• Hard commodities are raw materials typically mined, such as gold, oil, rubber,

iron ore etc.• Soft commodities are typically grown agricultural primary products such as

wheat, cotton, coffee, sugar etc.

Auction Market

• A market in which buyers enter competitive bids and sellers enter competitive offers at the same time. The price a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to sell at. Matching bids and offers are then paired together and the orders are executed

Distinguish between the Spot market and the Futures Market• Spot Market - A commodities or securities market in which goods are

sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective• Future Market - anauction market in which participants buy and sell

commodity/future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit.

Performance Activity

Your new employers want to ensure that their new employees are familiar with the current condition of different types of financial markets available to corporate investors. You need to conduct an Internet search to locate and read articles about 2 recent events in different financial markets. You need should explain the market events to team members and discuss the general importance and functions of different financial markets.