Chapter 2 Financial Market€¦ · Chapter 2 Financial Market Ibrahim Sameer (MBA - Specialized in Finance, B.Com –Specialized in Accounting & Marketing)

Chapter 2

Financial MarketIbrahim Sameer (MBA - Specialized in Finance,

B.Com – Specialized in Accounting & Marketing)

www.ibrahimsameer.wordpress.com

Overview of Financial Markets

Money & Capital Market

Money & Capital Market

Money Market – T-Bill

Money Market – Commercial

Paper

Money Market – Certificate of

Deposits

Capital Market – Shares

Capital Market – Bonds

Economic System

• There are many different types of economic

systems that include capitalism (Free Market),

communism, and socialism.

Capitalism

• Capitalism is an economic system in which the

means of production of goods or services are

privately owned and operated for a profit.

Capitalism

• In capitalism, individuals are given the freedom to

operate their business as they want and manage

their own income.

Capitalism

• Capitalism applies to every person who operates

within this system; therefore, business owners and

employees are equally represented within the

capitalism model.

Capitalism

• In terms of business operations, capitalism gives

the most freedom and flexibility to owners.

Capitalism

• Beyond taxation and standard regulatory laws, the

government does not control how the business is

operated or how the income is used.

Communism

• Visualize a world where everyone has equal

amounts of wealth.

Communism

• Everyone has equal amounts of land, equal-sized

houses, the same government-issued cars, the

same government-issued stoves, the same

government-issued cell phones, etc. Although

people do different jobs, they all get paid the same.

Since everyone is equal, there are no social

classes. In fact, there isn't even a need for money.

People do not need to fight because all materials

are shared in common through the government.

Communism

• In simple term it can define as:

Socialism

• Socialism is a populist economic and political

system in which the means of production operate

under public political ownership, sometimes called

common ownership.

Socialism

• In Socialism the price is set by government.

How Government Intervene

Economy

• Government can intervene market into 2 different

ways:

• Fiscal Policy

• Monetary Policy

Fiscal Policy

• Imagine that Ali is sick. He's at home right now,

and the doctor's been called.

Fiscal Policy

• The doctor chooses one or two of the tools in his

toolkit and uses them on the patient.

Fiscal Policy

• Now imagine the patient is the whole economy.

The economy has entered a slowdown that has

now turned into a full-blown recession.

Fiscal Policy

• Unemployment is high, and people are fearful of

their financial future.

Fiscal Policy

• The government uses its own fiscal policy toolkit,

like a doctor, to administer fiscal policy tools - like

government spending, taxes and transfer

payments - to help strengthen aggregate demand

when it's weak.

Fiscal Policy

• The fiscal policy is the use of government

spending, taxation and transfer payment to

influence aggregate demand and therefore, real

GDP.

Government Spending

• Government spending includes the purchase of

goods and services - for example, a fleet of new

cars for government employees or missiles for

national defense. Government spending is a fiscal

policy tool because it has the power to raise or

lower real GDP. By adjusting government

spending, the government can influence economic

output.

Government Spending

• In addition to the primary effect of government

spending on the economy, this spending multiplies

through the economy as it affects businesses who

sell the goods and services bought by the

government. Consumers then go on to spend the

paychecks they earn from those businesses,

stimulating real GDP even more.

Government Spending

• For example, when Alifulhubey's Limos receives a

large order for more government vehicles, his

sales increase, and he hires more employees who

earn a paycheck from the company.

Government Spending

• Once they cash their paycheck, they spend this

money on goods and services, and the effect of a

single increase in government spending now leads

to a much greater result - an effect that economists

call the multiplier effect.

Taxes

• Taxes are a fiscal policy tool because changes in

taxes affect the average consumer's income, and

changes in consumption lead to changes in real

GDP.

Taxes

• So, by adjusting taxes, the government can

influence economic output. Taxes can be changed

in several ways. Firstly, marginal tax rates can be

raised or lowered. Secondly, they can be

eliminated entirely, or the tax rules can be

modified.

Transfer Payment

• Transfer payments include things like Social

Security, welfare or unemployment checks.

Transfer Payment

• These checks go out all over the country on a

monthly basis and serve as the income for tens of

millions of consumers. Transfer payments are

fiscal policy tools in the same way that taxes are

because changes in transfer payments lead to

changes in consumer income, and when

consumers spend more of their income, this

influences economic output.

Monetary Policy

• Monetary policy consists of the decisions made by

a government concerning the money supply and

interest rates. In the Maldives, the Maldives

Monetary Authority (MMA) determines and

implements monetary policy.

Monetary Policy

• Monetary policy consists of the decisions made by

a government concerning the money supply and

interest rates. In the Maldives, the Maldives

Monetary Authority (MMA) determines and

implements monetary policy.

MMA Monetary Policy

• MMA can affect the supply of money in the

economy by changing the amount of money that

banks must hold in reserves. It can use three

different tools to do this:

Change Reserve Requirements

• MMA has regulatory authority over banks, which

means it can require banks to change their reserve

requirements.

Change the Discount Rate

• MMA can also change the discount rate, which is

the interest rate that it gives to banks when they

borrow money from MMA in the short-term to meet

minimum reserve requirements. If MMA charges a

high interest rate, banks will be less likely to

borrow money from MMA. On the other hand, if

MMA charges a low interest rate, then banks may

be willing to borrow, which means that they may

make more loans.

Open-Market Operations

• Where the MMA buys or sells government

securities, such as Treasury bills, Treasury notes,

and Treasury bonds, on the open market. If the

MMA buys, it is increasing the supply of money in

the economy because it is trading MVR for the

securities. On the other hand, if the MMA sells, it is

decreasing the supply of money because it is

sucking up MVR from the economy and giving out

federal securities. Open-market operations is the

tool used the most in recent years.

Structure of Financial System in

Maldives

Structure of Financial System in Maldives

Financial Institution

Banking Non Banking

Financial Market

Money Market Capital Market

Corporate securities

Government securities

Derivatives

What else you want to know?

Questions & Answers

Thank You

Ibrahim SameerSeek knowledge from cradle to grave