chapter 1 an overview of financial markets. financial system financial markets financial...

CHAPTER 1

AN OVERVIEW OF

FINANCIAL MARKETS

FINANCIAL SYSTEM

FINANCIAL MARKETS FINANCIAL INSTITUTIONS &INDIVIDUALS FINANCIAL INSTRUMENTS (SECURITIES) RULES AND REGULATIONS

FINANCIAL MARKETS

Financial markets consist of

- fund suppliers-lenders

- fund demanders-borrowers

- financials instruments (fin assets, securities)

- financial institutions (intermediaries)

TYPES OF FINANCIAL MARKETS

MONEY MARKET FOREIGN EXCHANGE MARKET GOLD MARKET BONDS AND BILLS MARKET STOCK MARKET DERIVATIVES MARKET

MONEY MARKET-CAPITAL MARKET

Differences Money Market Capital Market

Due-date Short-term Medium and Long Term

Fin. Instruments Commercial Papers, Treasury Bills etc.

Securities (Common Stock, Bonds etc.)

Sources of Funds Individual Savings Individual and Institutional Savings

Uses of Funds Woring Capital (Current Assets)

Investment Capital

(Fixed Assets)

PRIMARY MARKET-SECONDARY MARKET

PRIMARY MARKET SECONDARY MARKET

-firstly issued securities are traded

- Issuers raise new capital

-existing securites are traded

- Issuers does not raise new capital

ORGANIZED MARKET-OTC MARKET

Have central physical location No physical location

Commission No commission

Registration is required No need for registration

Controlling system Any controlling system. They are informal

Customers orders provide liqıidity Buying and selling transaction of financial intermediaries on their portfolios provides liqıidiy

Listing No listing (except NASDAQ)

Advantages of OTC markets for small firms

They can raise funds in OTC market with a little cost.

It helps them to develop and get the listing conditions (requirements).

Firms in the OTC markets are not followed closely by the public like in OSE.

It increase the reputation of the firms and increase the ability to find out debt financing sources.

Disadvantages

CSs in these markets are seen as more risky and those securities are being being bought and sold for speculative purposes which decrease the marketability of them.

Buying publicly held corporations requires the declaration of information about corporation which is not acceptable especially in competitive markets.

Being publicly held is costly especially for small firms which is a disadvantage from the economical point of view.

ORGANIZED AND OTC MARKETS IN TURKEY

Central Bank Open Market Central Bank Interbank Money

Market Central Bank Foreign Exchange

Market ISE Stock Market ISE Bonds and Bills Market ISE International Bonds and

Bills Market Istanbul Gold Market Turkish Derivatives Exchange

Interbank Money Market Interbank Repo Market Interbank Bonds Market Interbank Foreign Exchange

Market Free Gold Market

BASIC FUNCTIONS OF CAPITAL MARKETS

CAPITAL FORMATION LIQUIDITY CREATION RISK MANAGEMENT

Capital Formation

CMs facilitate the flow of funds from suppliers to demanders. By this way it provides increases in savings and investments into profitable areas.

Provides capital accunulation. Convestrs small savings to large

investments.

Liquidity Creation

Liquidity is the ability to buy or sell a security at any time you want.

This function increase the demand for the securities in both primary and secondary markets.

Risk Management

Security markets permit investors to reduce risk through diversification and hedging.

Diversification: Investing into more than one securities by this way we can reduce the risk.. By combining negatively correlated assets into the a portfolio (losses in some investments are offset by gains in others), we can reduce the total risk.

- Industry diversification - Country diversification

Risk Mang Contd.

Hedging: Individual and institutional investors use derivatives such as futures, options, forwards and swaps to hedge looses.

The risks that can be hedged with them are;– Foreign exchange risk– Interest rate risk– Commodity risk– Equity risk

Is there any derivative market in Turkey?

CAPITAL MARKET BOARD (CMB)

CMB has;– regulating – supervising – mixed (regulating and supervising) and – operational duties

CMB

Regulating and supervising duties of the CMB; Initial public offerings IPOs Clearing, safekeeping and rating Securities exchanges (existing and upcoming

alike) Trading through internet

CMB

Regulating duties of the CMB; Laying down the standard ratios for the issuers (initiators) The rules and regulations on external auditing The rules and regulations on certificates of registration and

prospectuses Laying down rules on proxy voting Rules and regulations on derivative business Rules and regulations on repos and reverse repos Rules and regulations on margin trading Rules and regulations on overseas securities to be traded in Turkish

markets Electronic trading Voting rights at general meetings of shareholders

CMB

Supervising duties of the CMB; Supervising the issuers, banks and dealers-

brokers Supervision of all kinds of advertisements in

capital markets

CMB

CMB regulates and supervises the following institutions; corporations offering their securities to the public, securities market intermediaries and banks-limited to their capital

market activities, mutual funds and investment companies including real estate

investment companies and venture capital investment companies, independent external auditing firms offering services to capital market

institutions, stock exchanges and the secondary markets in general, precious metal exchanges and derivative exchanges, other related institutions operating on the capital markets such as

rating agencies, clearing and depository institutions,

CMB

Operational duties of the CMB; Registration of securities and suspension of IPOs if

deemed in the best interest of Public Review of financial tables and reports Briefing relevant Secretary of State Real estate surveillance companies Educating all in the markets Cooperation with overseas counterparts