General Macro Intro Flashcards
What is a financial market?
Marketplace where the trading of securities occurs, including the stock market, bond market, FX market, and derivatives markets among others.
What is the goal of financial markets?
and state examples
To bring investors and borrowers together, via Financial markets that facilitate this.
e.g.
Retail investors with extra disposable income exchanging their money through financial market, e.g. Banks and other institutions to invest in Governments (Bonds) and Companies (stocks).
Name all the functions of financial markets
- Acts as a Link
- Price Determination
- Fund mobilisation
- Provides Liquidity
- Easy access
- Reduce transaction cost
- Risk sharing
- Capital Formation
Explain the functions of financial markets
*explore further
Acts as a Link: Investors –> borrowers via financial markets which bridge gap for mutual benefit.
*Price Determination : The demand and supply of various securities in the financial markets regulate their prices.
Fund mobilisation : Financial markets transfer funds from those who have excess funds (surplus units) to those who need funds (deficit units).
Provides Liquidity : investors can sell their securities readily and convert them into cash in the financial market, thereby providing liquidity.
Easy access : These markets are readily available anytime for both the investors and the borrowers.
Reduce transaction cost : by providing information
*Risk sharing : the financial market performs the function of risk-sharing as the person who
is undertaking the investments is different from the persons who are investing their fund in
those investments. With the help of the financial market, the risk is transferred from the person who
undertakes the investments to those who provide the funds for making those investments.
Capital Formation : new investors’ savings flow into the country through financial markets, which aids in the country’s capital formation.
What are the four main categories of classification of financial markets and what markets are within them?
- The nature of the Claim : Debt and equity markets
- By Maturity of the Claim : Money and capital markets
- By Timing of Delivery : Cash/spot market or Forward/futures market
- By organisational structure: Exchange traded and OTC market (trading floor or similar.)
What is debt and equity markets?
Debt markets - provide finance to borrowers e.g. The government bond market, the corporate bond market, the money market and the mortgage market
Equity markets – trade claims on the earnings of corporations
What is the money and capital market?
Money market - Provides very short-term loans/advances with a maturity period within a year of issue.
Capital Market - This market exists for the trading of medium and long-term financial instruments between the individuals and financial institutions.
What is cash/spot or forward/futures market?
Cash or Spot Market - It is a spot or real-time market where all the trading and transactions are executed or take place immediately.
Forward or Futures Market - the execution of the transaction takes place on a future date but the transaction value takes place at current to minimise loss to either party.
What is Exchange-traded market and OTC market?
Exchange-Traded Market - Trading of call, put, and futures options take place on an organised futures exchange in a systematic manner.
(OTC) market - decentralised market with no physical location and trading is conducted electronically—in which market participants trade securities directly
between two parties without a broker.
