Types of markets

How do financial markets perform the role of channelling funds?

Move savings from those with surplus funds to those who want to borrow and invest

How do financial markets perform the role of providing liquidity?

Let asset-holders convert their investments back into cash quickly when needed

How do financial markets perform the role of lowering costs?

reduce the search, information, and transaction costs of matching lenders to borrowers

How to households contribute to the sources of savings?

the proportion of household income not spent is saved

How to businesses contribute to the sources of savings?

not distributing all profits to their owner

How to governments contribute to the sources of savings?

when government budgets for a surplus it accumulates savings

How do consumers contribute to the reasons for borrowing?

demand for goods and services exceed their current capacity to pay for them

How do businesses contribute to the reasons for borrowing?

borrowing to fund expansions in businesses

How does the government contribute to the reasons for borrowing?

borrow money from overseas

What is the role for primary financial markets?

facilitate the creation of financial assets, known s securities, that can be sold into the economy

What is the role for secondary financial markets?

involve transaction with financial assets that have already been issues on a primary market some time in the past

What is debt?

the borrower must repay principal plus interest. No ownership changes hands

What is the risk and return for debt?

fixed, contractual return, lower risk, lenders are repaid before equity holders

What is equity?

part-ownership of a company, a residual claim on its profits and assets

What is the risk and return for an equity?

variable return, higher risk, paid last after all debts

What is a derivative?

a contract whose value derives from an underlying asset

What are the risks and returns from a derivative?

used to hedge, or to speculate, leveraged on magnifying both gains and losses

What is consumer credit?

allows consumers to purchase consumer goods and services before actual payment.

What is a housing loan?

mortgages are offered by banks as well as non-finnacial institutions, these are long-term loans used to purchase property requiring periodic repayments with interest

What is a business loan?

A form of debt that allows businesses to invest in business operations

What is the short term money market?

brings together people and businesses with temporary shortages or surplus of funds. THose with surplus funds, such as banks, issue various forms of debt securities to those in need of funds

What is a bond?

bonds are longer term securities for which lenders receive regular fixed payments from the issuing institution, and receive the principal value of debt

What is a financial future and options?

are contracts to trade in financial instruments at a later date for a certain price

What is the foreign exchange?

The market for buying and selling of foreign currencies.

What is the share market?

a market for issuing and trading shares (equity), part ownership of listen companies

What is the role of the share market?

raises equity capital for companies through floats and capital raisings, and provides a liquid second market so investors can buy and sell, and allocates capital towards companies investors think are most productive

What is the share markets effect on the economy?

funds businesses investment, supporting output, jobs and growth.

What is a share?

a type of financial asset that provides an individual with ownership over part of a business or company

What is an investment?

is any current expenditure where the benefits will obtained in the future.

What is a public company?

is an entity whose shares are traded freely on the share market, and are not subject to any restriction in being transferred to other parties

What is a private company?

is an entity where shares are not traded freely

What is a dividend?

are the profit returns received by the shareholders of a businesses

What is a capital gain?

are the profits made by investors who sell their shares or assets at a price above the level that they originally paid fo them

What is a float?

when a company decides to list itself on the stock exchange and offer its shares to the public company for the time

are bonds debt or equity?

equity

are bonds safe or risky?

relatively safe

What are the benefits for investors in the share market?

can make limitless gains due to increasing share price, and losses are limited to only your investment in shares

What are the benefits for a company in the share market?

opportunity to raise funds for investment and growth, and they can list shares at any time by issuing a prospectus

What is a secondary financial market transaction?

When an existing shareholder sells to another investor via a stockbroker

What is the All Ordinaries Index?

measures the overall value of companies listed on the ASX

What is speculation?

where investors buy assets with the intention of re-selling then for a higher price within a short period?

What is the problem with speculation?

these decisions are based on hype and not real profitability. This can lead to a misallocation of resources

Why have global markets increased?

improvements in digital communication, deregulation of financial markets since 1980s

How can income and cash flow be a constraint on raising finance?

can the agent generate enough income or profit to service and repay the debt

How can existing debt be a constraint on raising finance?

high existing leverage limits how much more can safely be borrowed

How can market access and size be a constraint on raising finance?

governments and large firms reach bond and equity markets, households rely on banks

How can security/collateral be a constraint on raising finance?

assets pledged to back borrowing lower the lenders, risk and the cost of funds

How can the cost of funds be a constraint on raising finance?

the interest rate or return demanded rises with risk and with the RBA’s cash rate

How can regulations and confidence be a constraint on raising finance?

responsible lending and APRA rules, plus lender risk appetite that tightens in downturns