Role of financial market

Facilitate saving

Provide an opportunity for individuals and firms to save money

Ways to save money

-pension funds

-bank account

Reason why people save

-keep money secure

-pay for future emergencies

-pay for retirement

-to earn rate of return

Facilitate Lending

To lend money to businesses and individuals who need more cash

Type of lending

Mortgage -loans to purchase property (banks own the property until the loan is paid)

Personal loans to individuals to be paid back over a small number of years

Mortgage

Loan from the bank used to pay for a house. Usually consumer need to save a deposit which will be at least 5% of value of house. Once deposit is saved, they can take out mortgage and pay it back with interest

Facilitate Exchange

To provide opportunity for individuals and firms to exchange, makes it easier for individuals and firms to trade

Provide market for equity

To provide market in which equity can be bought and sold

-selling part of company (equity) through shares to increase funds for investment

→banks sell corporate shares on behalf of the firm

Facilitates forward markets

Banks provide forward contract between firms

Forward contract

Occurs when you fix price and date of a future transaction now so that you know exactly how much you’ll pay or receive and when

Why take part in forward market

Copper is primary product, it is likely to have significant price instability. Concerned that price will have increased in 6 months time

volatile price

Currency

Price of currency (exchange rate) volatile

Interest rate, demand for import exports, FDI, speculative buying affects price

Equity

When firms raise finance by selling shares (percentage of their company to investor)

Investors receive percentage of profit

Why is marker for equity important

-allow firms to raise finance by selling shares in their company

-it provide investors with opportunities to make money by buying shares and then selling them when price increase