Sub Financial Markets

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Purpose

The fundamental purpose of financial markets is to channel funds from those who have surplus funds, those who wish to spend less than their income, to those who have a shortage of funds and those who wish to spend more than their income.

Example

Financial intermediaries - they lend out to financial markets and borrowers from the money received from the savers e.g Banks, building societies, pension funds and insurance companies

Savers - They save in financial markets and financial intermediaries e.g Households, firms, governments and overseas residents

Financial Markets - They receive savings from the savers and lending from financial intermediaries and lend this to borrowers e.g bond markets and equity markets

Borrowers - They borrow from financial markets and financial intermediaries e.g Households, firms, governments and overseas residents households

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The Money Market

Financial market which provides short-term finance to individuals, firms (including banks and other financial institutions) and governments.

Short-term debt may have a maturity ranging from 24 hours to perhaps 12 months.

Interbank lending and lending to the UK Government through the purchase of Treasury bills are money market transactions

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The Capital Market

Financial market which provides medium to long term finance to firms and governments.

Companies may raise long-term finance by issuing shares or corporate bonds but they can also, for example, borrow from the banks

Governments issue bonds to finance their borrowing needs

The banks may also raise money on capital markets to support their lending by issuing bonds

Primary market - Where newly issued securities are sold

Secondary market - Trade previously issued or second-hand securities (increasing liquidity)

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The Foreign Exchange Market

Financial market in which different currencies are bought and sold.

International trade and international investment flows means that economic agents will need to convert the funds they provide and receive from one currency to another e.g the £ to $

Spot Markets- Immediate exchange of foreign currency

Forward Markets- Exchange of foreign currencies at some specified time in the future. Used by exporters and importers to protect themselves against exchange rate risks

Speculation- Subject to speculation. Movements in the strength of exchange rate

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Debt and Equity Capital

Debt - Borrowing money that has to be paid back with interest

Equity - Giving the provider of funds an ownership stake in an enterprise and a share of future profits

Debt Financing Vs Equity Financing

Debt Financing - Bank loan, bonds and mortgages. May risk loss of personal assets such as a house, relationship with financier ends on completion of repayment, repayments remain constant no matter how the business performs, possible loss of entire business, interest payments made

Equity Financing - Angel investor, venture capitalists and shares. Loss of management control, investor takes all the risk, do not have to pay money back, have to share profits

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Other Institutions Operating In Financial Markets

Insurance Companies - These companies collect premiums from a large group of people who want to protect themselves and/or their loved ones against a particular loss, such as a fire, car accident, illness, lawsuit, disability or death. Insurance helps individuals and companies manage risk and preserve wealth.

Brokerages - A brokerage acts as an intermediary between buyers and sellers to help execute the trade. Brokerage companies are compensated via commission after the transaction has been successfully completed. For example, when a trade order for a stock is carried out, an individual often pays a transaction fee for the brokerage company's efforts to execute the trade.

Investment Companies - A corporation or a trust through which individuals invest in diversified, professionally managed portfolios of securities by pooling their funds with those of other investors. Rather than purchasing combinations of individual stocks and bonds for a portfolio, an investor can purchase securities indirectly through a package product like a mutual fund

Credit Unions - A union that offers higher rates on deposits and charge lower rates on loans in comparison to commercial banks. In exchange for a little added freedom, there is one particular restriction on credit unions; membership is not open to the public, but rather restricted to a particular membership group such as workers in one company or a church group.

Shadow Banking - Collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal financial regulations.