1 Financial Markets

Financial Markets

Financial Markets

• Create products that provide return for those who have excess funds
• Make funds available to those who need additional money (ie. individuals, businesses, in Australia or overseas and the government)
• Factor markets for capital in the economy
• Provide return on investment for savers and are source of finance for borrowers of money

Direct Finance Approach

• Funds flow directly between lenders and borrowers

Indirect Finance Approach

• Funds flow through financial institutions which act as intermediaries (eg. banks, building societies, life insurance companies and superannuation funds)

Financial Intermediaries

• Reap economies of scale in conducting financial transactions
• Help increase efficiency of operation of financial system in mobilising savings for investment purposes

Main financial markets

• Share or equity market
• Debt market
• Foreign exchange market
• Derivatives market

Primary Financial Markets

• Financial securities such as shares and bonds are issues for the first time for capital raising purposes

Secondary Financial Markets

• Once financial securities are issues, can be exchanged on the secondary market (bought and sold here)
• Companies whose securities are traded here do not receive any money from these transactions → transaction between investors

Derivatives

• Market for financial instruments such as futures contracts or options that are derives from their underlying assets

Securities

• Financial assets
• Any form of financial instrument: shares, bonds

Shares

• Equity stake in a company

Bonds

• Creditor stake in a company or government