FINC203: Topic 1 - Financial Markets

examples of financial instruments:

stocks, bonds, future contracts, mortgage-backed securities

financial markets, people and businesses buy and sell…

financial instruments

Types of financial markets:

Money, capital, primary and secondary markets

Money market

short term market

capital market:

long term market

Primary market:

where companies initially sell new security issues (debt or equity)

secondary market:

where owners of securities can sell them to other investors

Marketability:

the ease with which a security can be sold and converted into cash.

Liquidity:

the ability to convert an asset into cash quickly without loss of value.

Brokers:

market specialists who bring buyers and sellers together for a sale to take place.

Dealers:

‘make markets’ for securities and bear risk. They buy something and sell it forward.

•Efficient capital markets:

fully reflect the knowledge and expectations of all   investors at a particular point in time

overall efficiency depends on:

Operational efficiency and informational efficiency

Operational efficiency:

focuses on bringing buyers and sellers together at the lowest possible cost.

Informational efficiency:

market prices reflect all relevant information about securities at a particular point in time.

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 Strong-form efficiency:​

the idea that all information about a security is reflected in its price.​

Semi-strong-form efficiency:​

holds only that all public information ​about a security is reflected in its price

Weak-form efficiency:​

holds that all information contained in past prices of a security is reflected in current prices, but there is both current public and private information that is not.

•Organised markets (exchanges):

Provide a platform and facilities for members to buy and sell securities or other assets (such as commodities) under a specific set of rules and regulations.

examples of organised markets (exchanges):

ASX, NZX, NYSE

•Over‐the‐counter (OTC) markets:

Securities not listed on an exchange are bought and sold in OTC markets. These markets have no central location. Trade by visiting or telephoning an OTC dealer or by using electronic trading system linked to OTC dealer. Traditionally, shares traded on OTC have are those of small and relatively unknown companies

IPO:

Initial public offering, first offering of stock to the general public

Primary market:

market for the sale of new securities by corporations

Secondary market:

market in which previously issued securities are traded among investors (owners)

Money market characteristics:

whole sale markets where short‐term debt instruments, with maturities less than 1 year, are sold. The minimum transaction are usually $1 million and transactions of $100 million. These instruments are close substitutes for cash and are lower in risk than other securities because of their high liquidity and low default risk

Capital market characteristics:

where intermediate‐term and long‐term debt and corporate shares are traded. Companies raise funds to finance capital assets, such as property, plant and equipment. Carry more default risk and have longer maturities

Public markets:

are organised financial markets where members of the general public buy and sell securities through their stockbrokers. e.g ASX, NZX, NYSE

Private markets:

involve direct transactions between two parties.

What are the transactions called in private markets ?

private placements

Futures and options markets:

often called derivative securities, where investors trade derivative contracts

Futures contract: Agreements to buy or sell an asset at a fixed price on a future date.

Options Contracts: Give the buyer the right (but not obligation) to buy (call) or sell (put) at a specific price before expiration.

Foreign exchange markets:

USD, UK pound, Euro,  are traded against the NZD or against other currencies.

OTC market at large commercial banks or investment banks

spot or forward delivery

•The most important international financial markets for Australian/NZ firms are the:  

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short‐term US market​, eurocurrency market , long‐term eurobond market.

•Internationalisation of financial markets:​

connect a country to the global system, supporting borrowing, lending, and international trade.

International organisations:

play a significant role in the global financial markets.​