CHAPTER 2: Financial Markets and InstitutionsJune 22, 2015 - University of St. La Salle

*Cash is essential to run, modernise, expand business - machinery, factories, intangibles, labor, daily operations*Available adequate finance is vital

Economic SystemHousehold sectorWho saves moneyBusiness sectorWho needs money for their operationsHow do these two sectors meet and transact with each other?

via banksvia financial markets

Learning ObjectivesCapital allocation, financial markets, and financial institutions (LO1)Stock markets (LO2)

introduction

cAPITAL aLLOCATION (LO1)Direct transfers - no need of financial institutions; little capital for small firmsPrimary market transactions - businesses securities and savers money simply pass through the investment bankFinancial intermediary - wherein new forms of capital are created (Certificates of deposit)

FINANCIAL MARKETS (LO1)Facilitates the transfer of savings from savers to investorsProvides pricing information in the market Provides liquiditySaves time, money and efforts.

FINANCIAL MARKETS (LO1)Physical asset markets vs financial asset marketsSpot Markets vs Futures MarketsMoney markets vs Capital marketsPrimary markets vs Secondary marketsPrivate markets vs Public marketsDerivatives

Financial Institutions (LO1)Investment banksCommercial banksFinancial services corporationCredit unionsPension fundsLife insurance companiesMutual funds

Exchange traded funds

Hedge funds

Private equity companies

Financial Services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments.

Financial Institutions (LO1)Where does money come from?The money is created from thin air every time we make a loan. When you take out P1 million to buy a car, a bank doesnt actually take P1 million in notes from its vaults to put in your account. At that moment, new money is created, according to the Bank of Englands report on Money Creation in the Modern economy. Banknotes - which are printed by the Central Bank - reflect only around 3 to 10% of a countrys actual money. the Central Bank sets a monetary policy, which among other things regulates loans and therefore the amount of wealth that is created.

Stock Exchange (LO2)Physical location stock exchangesOver the counter market