Recording-2025-02-05T17:36:36.327Z

Financial Transactions and Markets

• Spot vs Future Transactions

  • Spot transactions involve immediate delivery of assets, such as buying euros with dollars in the currency markets, where funds are immediately transferred to the buyer's account.

  • Settlement: Some spot transactions settle in a few days (e.g., T+3), which means payment is finalized three days after the transaction.

• Futures Market: Deals with agreements to deliver assets in the future. Examples include commodities and options.

Financial Markets Overview

• Money Markets vs Capital Markets

  • Money Markets: Involve cash or cash equivalents, with asset durations of less than a year (e.g., commercial paper).

    • Commercial Paper: A short-term funding tool used by corporations to finance working capital.

    • Other instruments: Banker's acceptances related to import/export transactions.

  • Capital Markets: Includes long-term securities like stocks and bonds. Stocks represent ownership in a corporation with potentially infinite lifespan.

Primary and Secondary Markets

• Primary Market: Where financial assets are created and sold for the first time (e.g., an Initial Public Offering - IPO).

  • Transaction occurs between the corporation and the first buyer, often facilitated by investment banks.

• Secondary Market: Existing financial assets are sold and bought among investors.

Public vs Private Markets

• Public Markets: Open to all investors; must adhere to strict regulations and disclosure requirements.

• Private Markets: Access is limited to qualified investors (e.g., hedge funds) requiring significant financial prerequisites (e.g., net worth of $3 million).

Importance of Financial Markets

• Facilitate Capital Flow: Essential for transferring funds from savers to borrowers; well-functioning markets promote economic growth.

• Mortgage-Backed Securities: Enable banks to resell mortgages, improving liquidity and reducing risk.

Types of Financial Assets

• Debt Financial Assets: Includes bonds; corporations issue these to borrow money, promising regular interest payments until maturity.

• Equity Financial Assets: Mostly stocks; represent ownership in a company with no maturity date.

• Hybrid Financial Assets: Include instruments like preferred stocks and convertible bonds, which combine elements of debt and equity.

Players in Financial Markets

• Financial Institutions: Various entities including banks, investment banks, credit unions, and insurance companies offering services in the financial markets.

  • Investment Banks: Serve as market makers, facilitate capital raising processes (e.g., underwriting bonds), and help issue securities.

  • Commercial Banks: Focus on deposit and loan services.

  • Credit Unions: Non-profit institutions that serve members and emphasize community benefits.

  • Financial Services Corporations: Provide a wide array of financial products and services.

Funds in Financial Markets

• Types of Funds: Include pension funds, mutual funds, ETFs, hedge funds, etc.

  • Pension Funds: Manage retirement savings, investing substantial amounts to ensure future payouts.

  • Mutual Funds vs. ETFs: Both pool money from many investors but differ in trading mechanisms (mutual funds valued at day-end, ETFs traded throughout the day).

  • Hedge Funds: Require accredited investors, often involve high-risk investment strategies with performance-based fees (e.g., the typical fee structure is 2% of assets + 20% of profits).

Conclusion: Financial System Dynamics

• Financial markets serve as the backbone of the economy, providing necessary funding, investment opportunities, and economic growth facilitation. Understanding different market types and players is crucial for navigating investments effectively.