banks and stock exchanges 8 th march 2010. page 2 financial markets and services in economics, a...
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Banks and Stock Exchanges
8th March 2010
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Financial Markets and Services
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis.
Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.
Financial markets facilitate:
» The raising of capital (in the capital markets)
» The transfer of risk (in the derivatives markets)
» International trade (in the currency markets)
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Financial Markets could mean:
1. Organizations that facilitate the trade in financial products. i.e. Stock
exchanges facilitate the trade in stocks, bonds and warrants
2. The coming together of buyers and sellers to trade financial products.
i.e. stocks and shares are traded between buyers and sellers in a
number of ways including: the use of stock exchanges; directly
between buyers and sellers etc.
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Types of Financial Markets
Capital markets which consist of:
Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities
Money markets, which provide short term debt financing and investment
Derivatives markets, which provide instruments for the management of financial risk
Futures markets, which provide standardized forward contracts for trading products at some future date
Insurance markets, which facilitate the redistribution of various risks
Foreign exchange markets, which facilitate the trading of foreign exchange
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Banking
Banks
A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).
Private banking
The providing of banking services to very wealthy individuals and families. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.
Capital market banks
Capital market banks underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products.
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Investment Services
Asset management
Asset management is the term usually given to describe companies which run collective investment funds.
Hedge fund management
Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. (A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. Prime brokerage services are provided by most of the large brokers)
Custody services
Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world were estimated to $65 trillion at the end of 2004.
Reinsurance
Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.
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Intermediation or Advisory Services
Stock brokers (private client services) and discount brokers
Conglomerates
Financial Crime detection
Market share
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NEED FOR A CAPITAL MARKET
Need for a Capital Market
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Need for Capital Market
The capital market is the market for securities, where companies and the government can raise long-term funds
The capital market includes the stock market and the bond market
The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded
Stock Market
A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately
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Markets
Irrational Behavior
Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself
Stock Market Index
The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euro next indices
Derivative Instruments
Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks
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Trading Techniques
Leveraged Strategies
Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale
Short selling
In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall
The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose
Margin buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise
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Taxation and Bond Market
Taxation
According to each national or state legislation, a large array of fiscal obligations must be respected regarding capital gains, and taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in particular in the stock exchanges
Bond Market
The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds
Market Structure
Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets
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Types of Bond Markets
Corporate
Government & Agency
Municipal
Mortgage Backed, Asset Backed, and Collateralized Debt Obligation
Funding
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Bond Markets
Bond Market Volatility
For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.
Bond Investments
Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts.
Bond Indices
A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks.
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Primary Market
The primary is that part of the capital markets that deals with the issuance of new securities
Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue
This is typically done through a syndicate of securities dealers
The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO)
Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus
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Features of Primary Market
1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM)
2. In a primary issue, the securities are issued by the company directly to investors
3. The company receives the money and issue new security certificates to the investors
4. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business
5. The primary market performs the crucial function of facilitating capital formation in the economy
6. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’
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Secondary Market
The secondary market is the financial market for trading of securities
that have already been issued in an initial private or public offering
The market that exists in a new security just after the new issue, is
often referred to as the aftermarket
Once a newly issued stock is listed on a stock exchange, investors and
speculators can easily trade on the exchange, as market makers
provide bids and offers in the new stock
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Equity Shares
Equity is the concept or idea of fairness in economics, particularly as to
taxation or welfare economics
In welfare economics, equity may be distinguished from economic
efficiency in overall evaluation of social welfare
Although 'equity' has broader uses, it may be posed as a counterpart to
economic inequality in yielding a "good" distribution of welfare
It has been studied in experimental economics as inequity aversion
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Types of Equity
Venture capital: an investment to create a new company, or expand a
smaller company that has undeveloped or developing revenues
Buy-out: acquisition of a significant portion or a majority control in a
more mature company. The acquisition normally entails a change of
ownership
Special situation: investments in a distressed company, or a company
where value can be unlocked as a result of a one-time opportunity
Merchant banking: negotiated private equity investment by financial
institutions in the unregistered securities of either privately or publicly
held companies
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Common Types
Cumulative preferred stock - If the dividend is not paid, it will accumulate for future payment
Non-cumulative preferred stock - Dividend for this type of preferred stock will not accumulate if it is unpaid. Very common in bank preferred stock, since under BIS rules, preferred stock must be non-cumulative if it is to be included in Tier 1 capital
Convertible preferred stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price
Exchangeable preferred stock - This type of preferred stock carries the option to be exchanged for some other security upon certain conditions
Participating preferred stock - This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions
Perpetual preferred stock - This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation
Puttable preferred stock - These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares
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Debenture
It is defined as a certificate of acceptance of loans which is given under
the company's stamp and it carries an undertaking that the debenture
holder will get a fixed return and the principle amount whenever the
debenture matures
In finance, a debenture is a long-term debt instrument used by
governments and large companies to obtain funds
It is similar to a bond except the securitization conditions are different.
A debenture is usually unsecured in the sense that there are no liens or
pledges on specific assets
It is, however, secured by all properties not otherwise pledged. In the
case of bankruptcy debenture holders are considered general creditors
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New Issue Market
New Issue Market: The market for selling and buying newly-issued
securities. It has no physical existence
The primary is that part of the capital markets that deals with the issuance
of new securities
The process of selling new issues to investors is called underwriting
In the case of a new stock issue, this sale is an initial public offering (IPO)
Dealers earn a commission that is built into the price of the security
offering, though it can be found in the prospectus
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Prospectus
Business Prospects and Competitive Position
Industry Prospects
Company Prospects
» Financial Position
» Management Quality
» Corporate Governance Practices
» Compliance and Litigation History
» New Projects—Risks and Prospects
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Private Placement
A private placement is a direct private offering of securities to a limited
number of sophisticated investors
It is the opposite of a public offering. Investors in privately placed
securities include insurance companies, private equity funds, pension
funds, mezzanine funds, stock funds and trusts
Securities issued as private placements include debt, equity, and hybrid
securities
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Private Placement
Private Placement Memorandum: The Private Placement Memorandum, or
"PPM", is the document that discloses all pertinent information to the investors
about the company, proposed company operations, the transaction structure,
the terms of the investment
Subscription Agreement: The Subscription Agreement sets forth the terms
and conditions of the investment. It is the "sales contract" for purchasing the
securities
Promissory Note: In debt offerings you need to have a Promissory Note
outlining the terms of the loan arrangement with the investors. The note is the
actual "loan document" between the company and the investor
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Banker Customer Relationship
The capability to integrate two or more delivery channels through shared
technology has only recently been deployed in any significant way
IT managers within the bank, as well as business managers that rely on the
delivery channels to service their products, know deep down that integrating the
channels is the right thing to do because some benefits of channel integration
are intuitive if not scientifically provable
Still, many banks have implemented, or are in the process of designing,
integrated delivery channel architectures based on these soft benefits as well as
on the goal of maintaining and deepening the customer relationship in the face
of competitive pressures
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Recent Trends
For coordinating the demand and supply of capital funds, an organized and well-capital market is highly essential for industrial growth of the country.
The supply side is represented by so many individual and institutional investors.
The capital market in pre independence era was not much popular due to the philosophy of mixed economy.
As the country opened foreign operations, many more Indian companies got listed on foreign stock markets of London, New York and Nasdaq, etc.
Trade is confirmed via the internet in no times and by this method, the investors come to know immediately the trade member, time, rates at which the trade takes place.
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THANK YOU
That’s all Folks !