Financial Sector Flashcards
what is a financial market
where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature
why do financial markets exist
- meet demand for services
- allow speculation and financial games
what are the types of financial markets
- money - short term saving and lending
- capital - longer term financing
- foreign exchange
- commodity
- derivative
- insurance
what are the types of financial institutions and what to they do
- retail banks - services to households
- commercial banks - services to businesses
- investment banks - trade in foreign exchange, commodities, bonds, shares and derivatives for speculation purposes as well as giving advice to firms on how to raise finance and on mergers
- saving vehicles
- central bank - responsible for controlling the money supply, monetary policy, manage the country’s gold and foreign currency reserves and to issue government debt
what are the 5 roles of the financial market
- facilitate savings
- lend to businesses and individuals
- facilitate the exchange of goods and services
- provide forward markets
- market for equities
what are forward markets
firms are able to buy and sell in the future at a set price. exists for commodities and in foreign exchange and helps to provide stability
what is a market for equities
issuing shares is an important way for companies to finance expansion but people would be unlikely to buy shares if they were unable to sell them on in the future. financial markets provide the ability for shares to be sold in the future, making the asset more appealing
what is asymmetric information and the issues it causes
- financial istitutions often hvae more knowledge compared to their customers
- they can sell them products that they do not need, are cheaper elsewhere or are riskier than the buyers realise
- can be asymmetric information between financial institutions and regulators - institutions have little incentive to help regulators understand their business
what are the issues with externalities of financial markets
costs are placed on firms, individuals and the government that the financial market does not pay
what are the moral hazard issues of financial markets
- make decisions in their own best interests knowing there are potential risks
- individual workers take adverse risk in order to increase their salary
- the central bank is the lender of the last resort and so will not allow them to fail because of the impact it would have an economy
what are the issues with speculation and market bubbles from financial markets
- creation of market bubbles, where the price of a particular assets rises massively and then falls
- they tend to occur because investors see the price of an asset is rising and so decide to purchase this asset as they believe the price will continue to rise and will profit them in the future
- leads to prices becoming excessively high and eventually enough investors decide that the price will fall, sp they sell their assets and panic sets in, causing mass selling
- known as herding behaviour
what are the issues with market rigging in financial markets
- group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves
- insider trading = individual or institution has knowledge about something that will happen in the future that others do not know so can buy or sell shares to make profit
- individuals or institutions affect the price of a commodity, currency or asser to benefit themselves
what are the 4 roles of the central bank
- controls monetary policy
- banker to the government
- bank to other banks
- regulate the financial system
what does being a bank to other banks involve for the central bank
- deposit their money within the central bank and this is often used to balance the accounts of banks
- they are a lender of last resort
- if a bank experiences liquidity problems, they can turn to the central bank to sell their illiquid assets or to take a loan in the short term
what does regulating the financial system involve for the central bank
prevent financial institutions from undertaking activities which harm consumers or engage in risky activities which would lead to collapse or systemic collapse
