topic 1 introduction to financial markets
TRANSCRIPT
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Apna Sapna MoneyApna Sapna Money--MoneyMoney
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Overview of Indian FinancialOverview of Indian Financial
System and EconomicSystem and Economic
DevelopmentDevelopment
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Our Strategy for LearningOur Strategy for Learning
Concepts, Practice and Class DiscussionConcepts, Practice and Class Discussion
Punctuality, Participation and PreparationPunctuality, Participation and Preparation
Judgment challengeJudgment challengeLearning to communicate ideasLearning to communicate ideas
Learning from each otherLearning from each other
Learning through discoveryLearning through discovery
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OutlineOutline
Overview offinancial marketsOverview offinancial markets
Institutional in
frastr
uct
ureInstit
utional in
frastr
uct
ure
Role and functions of stockRole and functions of stock
exchangeexchange
Comparison between FinancialComparison between Financial
and Non Financial Institutionsand Non Financial Institutions
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The Financial SystemThe Financial System
Financial SystemFinancial System set of markets, individualsset of markets, individuals
and institutions which trade in those marketsand institutions which trade in those markets
Channels funds from lenders to borrowersChannels funds from lenders to borrowers
Creates liquidity and moneyCreates liquidity and money
Provides a payments mechanismProvides a payments mechanism
Provides financial services such as insurance andProvides financial services such as insurance and
pensionspensions
Offers portfolio adjustment facilitiesOffers portfolio adjustment facilities
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Financial SystemFinancial System
EEBEEB 77
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Constituents of FinancialConstituents of Financial
SystemSystem
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Regulation of the FinancialRegulation of the Financial
SystemSystemTo increase the information available to investors:To increase the information available to investors:To ensure the soundness offinancial intermediaries (andTo ensure the soundness offinancial intermediaries (andthe overall financial system):the overall financial system):
Restrictions on entryRestrictions on entry DisclosureDisclosure
Restrictions on Assets and Activities (e.g. Basel II)Restrictions on Assets and Activities (e.g. Basel II)
Deposit InsuranceDeposit Insurance
Limits on CompetitionLimits on Competition
Restrictions on Interest RatesRestrictions on Interest Rates
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Financial MarketsFinancial Markets
Markets in which funds are transferred fromMarkets in which funds are transferred from
people who have an excess of availablepeople who have an excess of available
funds to people who have a shortage offunds to people who have a shortage of
fundsfunds
Example: lenders/savers andExample: lenders/savers and
borrowers/investorsborrowers/investors
Important effects on economic performanceImportant effects on economic performance
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OverviewOverview ofofFinancialFinancial
MarketsMarketsTypes offinancial markets
Money markets
Capital markets
Debt Market
Hybrid
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The Hierarchy of Markets
Money market
Government bond
market
Corporate bonds &
equities
Asset backedsecurities &
derivatives
Govt TBills
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InstrumentsInstruments
EquitiesEquities
DebtDebt
Most popular investing
instruments
Stocks and sharesBonus issues
Rights issues
Corporate
Government
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Financial Market
Money market Capitalmarket
Primary
marketSecondary
market
Commercial
banks
Firms raise
capitalInvestors
trade
securities
issued in
primary
market
debt
equity
PublicPrivate
placement
Short term
instruments
PrimaryMkt Inst
Stock
exch
ange
Credit
unions
Insurancecos
NIS
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RiskRisk--Return Trade offReturn Trade off
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IndiaIndia-- Young and RestlessYoung and Restless
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Indian EconomyIndian Economy A SnapshotA Snapshot
OneOne ofof thethe fastestfastest growinggrowing inin thethe worldworld
ConsumptionConsumption growthgrowth fuellingfuelling economiceconomic growthgrowth consumptionconsumption
expenditureexpenditure formingforming 7878%% ofof GDPGDP
ServicesServices sectorsector contributingcontributing overover 6060%% toto GDPGDP
EmergingEmerging asas aa hubhub of of manufacturingmanufacturing excellenceexcellence.. newnew growthgrowth
enginesengines ofof IndianIndian economyeconomy includeinclude IT,IT, ITes,ITes, pharmaceuticals,pharmaceuticals, biobio--
technology,technology, nanonano technology,technology, agriagri.. businessesbusinesses
WhereWhere forcesforces ofof competitioncompetition areare atat workwork
InnovationInnovation drivingdriving enterprisesenterprises
EconomicEconomic reformsreforms wellwell onon coursecourse enteringentering secondsecond phasephase
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Indian Economy and CapitalIndian Economy and Capital
Market at a GlanceMarket at a Glance
9040 brokers in cash segment and 1064 in9040 brokers in cash segment and 1064 in
derivative segment of the marketderivative segment of the market
122investment bankers in the market122investment bankers in the market
58 under writers to support primary issues58 under writers to support primary issues
34 foreign venture capital funds34 foreign venture capital funds
120 Portfolio managers120 Portfolio managers
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Indian Economy and CapitalIndian Economy and Capital
Market at a GlanceMarket at a GlanceBusiness Week says that of100 emergingBusiness Week says that of100 emerging
market firms which are rapidly globalisingmarket firms which are rapidly globalising
21 are Indian firms21 are Indian firms
Economists project India to become theEconomists project India to become the
third largest economy in the world by 2040third largest economy in the world by 2040
Indian capital market regulator hasIndian capital market regulator has
acquired international credibility in theacquired international credibility in the
least possible timeleast possible time
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Indian Economy and CapitalIndian Economy and Capital
Market at a GlanceMarket at a GlanceIndia has a disclosure based regime ofIndia has a disclosure based regime of
regulationregulation
Disclosu
re and Investor ProtectionDisclosu
re and Investor Protectionguidelines availableguidelines available
Indias accounting standards are closer toIndias accounting standards are closer to
international standardsinternational standards
India has a well laid down legal frameworkIndia has a well laid down legal framework
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Indian Economy and CapitalIndian Economy and Capital
Market at a GlanceMarket at a GlanceIndia has T+2 rolling settlement asIndia has T+2 rolling settlement as
opposed to T+3in NYSE.opposed to T+3in NYSE.
In India the transactions are totallyIn India the transactions are totallyelectronic on a real time basis.electronic on a real time basis.
India has several protective safeguards forIndia has several protective safeguards for
the retail investor such as grading systemthe retail investor such as grading system
of public offering, retail quota at 25 perof public offering, retail quota at 25 per
cent etc.cent etc.
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Indian Economy and CapitalIndian Economy and Capital
Market at a GlanceMarket at a GlanceAs an integral part of risk managementAs an integral part of risk managementtrading and exposure limits,trading and exposure limits, variousvariousmargins and mark to market margins aremargins and mark to market margins are
in voguein vogueClearing housesClearing houses inin placeplace
Almost 100 per cent risk free electronicAlmost 100 per cent risk free electronic
settlement through depository systemsettlement through depository systemSEBI has a surveillance and enforcementSEBI has a surveillance and enforcementsystem in placesystem in place
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India - one of10 fastest-growing population of HNWIs globally
There are at least 23Indian citizens amongst the richest people on
the planet
Non Resident Indians can invest in all Indian Asset Classes
Salary increases in India 13.9% is the highest in the world
Increasing Investment avenues Art, Realty Funds, Commodities
The number of companies listed on the Bombay Stock Exchange,
at more than 6,000, is second only to NYSE.
Each year2,500 tonnes of gold is mined (fifth of the world's gold
output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is
consumed in India alone.
Indian Economy and Capital Market at a Glance
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Sustained GDP Growth
High GDP Growth
Growth Gap Over The World
DemographicsHalf the population below 25 yrs
ConsumerismRetail credit, low interest rates,
changing aspirations
InfrastructureDevelopment of roads, ports,
telecom
ReformsFDI, Tax reforms
Global
competitiveness
Exports
Outsourcing
Indian Equities
Long term prospects are intact
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Market infrastructureMarket infrastructure
Stock exchangeStock exchange
Clearing and settlementClearing and settlement
Education and trainingEducation and training
Investors protectionInvestors protection
Rating agencyRating agency
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IntermediariesIntermediaries
Financial intermediaries may stand in betweenFinancial intermediaries may stand in between
ultimate lenders and ultimate borrowersultimate lenders and ultimate borrowers
Merchant BankersMerchant Bankers
Stock brokersStock brokers
AdvisorsAdvisors
BanksBanks
Mutual Funds etcMutual Funds etc
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Function of FinancialFunction of Financial
Intermediaries: Indirect FinanceIntermediaries: Indirect FinanceWhy is there indirect finance, i.e., what is theWhy is there indirect finance, i.e., what is therationale forfinancial intermediation?rationale forfinancial intermediation?
1.1. Lower transaction costsLower transaction costs
2.2. Risk managementRisk management
3.3. Asymmetric informationAsymmetric information
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1. Transaction Costs1. Transaction Costs
Transaction CostsTransaction Costs resources (time/money)resources (time/money)used in carrying out the exchange of assets,used in carrying out the exchange of assets,goods or servicesgoods or services
Economies of scaleEconomies of scale Reduction in transaction costs per dollar ofReduction in transaction costs per dollar of
transactiontransaction
Example: legal costs for blueprint contractExample: legal costs for blueprint contract
Liquidity servicesLiq
uidity services Coordination across depositCoordination across deposit--taking and lendingtaking and lending
activitiesactivities
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2. Risk Management2. Risk Management
Risk sharingRisk sharing
Asset transformationAsset transformationRisk transformation: sell lowRisk transformation: sell low--risk assets and userisk assets and use
acquired funds to buy riskier assetsacquired funds to buy riskier assetsMaturity transformation: convert funds lent for aMaturity transformation: convert funds lent for ashortshort--period into loans of longer durationperiod into loans of longer duration
DiversificationDiversification the holding of multiplethe holding of multiple
(not perfectly correlated) assets(not perfectly correlated) assets Take advantage of portfolio effectsTake advantage of portfolio effects
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3. Asymmetric Information3. Asymmetric Information
Asymmetric distribution ofinformation between agentsAsymmetric distribution ofinformation between agents Example: borrower has betterinformation about investmentExample: borrower has betterinformation about investment
project than the lenderproject than the lender
Economic incentives matterEconomic incentives matter
Adverse SelectionAdverse Selection (before the transaction)(before the transaction) Example: more likely to select risky borrowerExample: more likely to select risky borrower
Moral HazardMoral Hazard (after the transaction)(after the transaction) Example: activities making loan repayment by borrower lessExample: activities making loan repayment by borrower less
likelylikely
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Role and Functions ofRole and Functions of
a stock exchangea stock exchangeEstablished for the purpose ofEstablished for the purpose of
assisting, regulating andassisting, regulating and
controlling business of buying,controlling business of buying,
selling and dealing in securitiesselling and dealing in securities
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Role and Functions ofRole and Functions of
a stock exchange contda stock exchange contd
Provides a market for the trading ofProvides a market for the trading of
securities to individuals andsecurities to individuals and
organizations seeking to invest theirorganizations seeking to invest theirsaving or excess funds through thesaving or excess funds through the
purchase of securitiespurchase of securities
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Role and Functions of
a stock exchange contdProvides a physical location
for buying and selling
securities that have been
listed for trading on that
exchange
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Role and Functions of
a stock exchange contdEstablishes rules for fair
trading practices and
regulates the tradingactivities of its members
according to those rules
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Role and Functions ofRole and Functions of
a stock exchangea stock exchange contdcontd
The exchange itself doesnot buy or sell the
securities, nor does it set
prices for them
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FairFair
TheThe exchangeexchange assuresassures thatthat
nono investorinvestor willwill havehave anan
undueundue advantageadvantage overover otherother
marketmarket participantsparticipants
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Efficient marketEfficient market
This means that ordersThis means that ordersare executed andare executed andtransactions are settledtransactions are settledin the fastest possiblein the fastest possible
wayway
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TransparencyTransparency
Investor make informed andInvestor make informed and
intelligent decision aboutintelligent decision about
the particular stock basedthe particular stock based
on informationon information
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Transparency contdTransparency contd
Listed companies mustListed companies must
disclose information indisclose information in
timely, complete andtimely, complete and
accurate manner to theaccurate manner to the
Exchange and the public onExchange and the public ona regular basisa regular basis
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Transparency contdTransparency contd
Required information includeRequired information include
stock price, corporate conditionsstock price, corporate conditions
and developments dividend,and developments dividend,mergers and joint ventures, andmergers and joint ventures, and
management changes etcmanagement changes etc
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Doing businessDoing business
People who buy or sell
stock on an exchange do
so through a broker
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Doing business contdDoing business contd
The broker takes your order
to the floor of the exchange
looks for a brokerrepresenting someone
wanting to buy/sell
If a mutually agreeable price
is found the trade is made
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PricePrice
At any point in time, theprice of previouslyissued stock isdetermined by the ebb
and flow of supply anddemand
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Listing requirementsListing requirements
There are specificThere are specific
requirements for allowing arequirements for allowing a
public company to list itspublic company to list itssecurities on the Stocksecurities on the Stock
Exchange these are set outExchange these are set out
in the legislationin the legislation
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Benefits of listing
Visibility
Market support
Investors confidence Increased demand for products and
services
Overall increase in profitability
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Once tradedOnce traded
Aura of reliabilityAura of reliability
Accuracy in reporting financialAccuracy in reporting financial
datadata
ReputationReputation
StrengthStrength
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Delisting
Stock exchange can delist companies
for a number of reasons including :-
Merger with another company Solvency problems
Name change company asked to be
removed
Failure to comply with exchange rules
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Desirable Characteristics
of a stock market contd Availability of information
Market efficiency
Prices react quickly to new
information
Small price fluctuations Narrow price spread
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Financing the exchangeFinancing the exchange
Transaction fees paid by members forTransaction fees paid by members for
each order executedeach order executed
Fees paid by
firms when their sec
uritiesFees paid by
firms when their sec
uritiesare originally listedare originally listed
Annual fees by firmsAnnual fees by firms
Entrance fees from new membersEntrance fees from new members
sale of historic trading and marketsale of historic trading and market
informationinformation
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Major challenges for theMajor challenges for the
ExchangesExchanges
Cross border trading
Issuers and investors are
expanding their horizons beyondtheir home markets
Investors becoming much more
demanding
Regulatory improvementRegulatory improvement
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Regulatory improvementRegulatory improvement
Transparency and CorporateTransparency and Corporate
GovernanceGovernance
Corporate
Governance
Protection to
minority
Shareholders
Disclosure
Enhancemarket
confidence
Strong
industry
regulator
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Some important pointsSome important points
Academic HonestyAcademic Honesty
Individual Work Only, Allows for GroupIndividual Work Only, Allows for Group
Discussion of Concepts and ProblemsDiscussion of Concepts and Problems
Do Not Copy WorkDo Not Copy Work
Reference Any SourceReference Any Source
When Confused Ask InstructorWhen Confused Ask Instructor