Financial Markets

Introduction to Financial Markets

• Definition: Financial markets are any place where buyers and sellers meet to trade financial assets.

• Purpose: They exist to facilitate the exchange between lenders and borrowers.

Lenders vs. Borrowers

• Lenders:

  • Individuals or institutions with excess cash.

  • Examples include:

    • Savers

    • Investors

• Borrowers:

  • Individuals or entities that need cash but do not have it available.

  • Examples include:

    • Individuals wanting to buy a house or a car

    • Firms seeking to invest and grow their business

    • Governments needing to fund essential services like healthcare and infrastructure.

• Challenges:

  • Lenders have difficulty finding borrowers.

  • Borrowers struggle to find lenders.

• Role of Financial Markets:

  • Serve as the platform for lenders to meet borrowers efficiently.

Types of Financial Markets

• Direct channels:

  • Lenders can engage directly through:

    • Bond Markets: Lenders can buy government bonds directly.

    • Stock Markets: Lenders can purchase equity capital (shares) from companies.

• Intermediaries in Financial Markets:

  • Commercial Banks:

    • Accept deposits from lenders and provide loans to borrowers.

    • Deposit interest rates are lower than loan rates, allowing banks to make a profit from the difference.

  • Investment Banks:

    • Facilitate capital raising for companies, more detail available in other resources.

Other Financial Intermediaries

• Pension Funds:

  • Collect money from individuals planning for retirement and invest in stock markets.

  • Pay annuities to pensioners of a specified amount at retirement age.

• Hedge Funds and Mutual Funds:

  • Collect large sums from investors and buy debt, sharing returns from interest payments.

  • Key Differences:

    • Hedge funds engage in high-risk transactions and leverage, resulting in greater potential rewards and losses.

    • Mutual funds are subject to stricter regulations and do not engage in high-risk transactions.

• Other Intermediaries:

  • Stock Exchanges and Insurance Companies also play a role in financial markets.

Summary of Financial Markets' Role

• Connection: Financial markets connect lenders with excess money seeking returns with borrowers needing cash, willing to pay interest.

• Main Function: Make the process of lending and borrowing seamless and efficient.

• Next Steps: Understanding the structure of financial markets will be covered in the following video.