investment markets graduation paper work

AZERBAIJAN STATE UNIVERSITY of ECONOMICS

Student: Shahlar BayramovManaging teacher: Ruslan TalibovFaculty: STF Finance Group: M6Topic: Investment Markets

Baku 2014

Content

• Chapter 1• The history and essence of investment markets• The stages of investment markets development

• Chapter 2• The main operations in investment markets• The role of investment banks in economy

• Chapter 3• Sources of financing• Risk reducing ways in investment markets

Introduction and essence of investment markets

• Financial markets and institutions are at the heart of the financial system…

• Sine-qua-non-efficient flow of funds in economic system

• Prices must accurately convey the value of a good or a service

• Minimum intervention of government

Chapter 1The history and essence of investment markets

• The role of Globalization, and main international events in the process of Investment markets development

• The period between 1915-1942(1915-1945)• Formal abandonment of the gold standard• Bretton woods financial order (1945)• General Agreement On Tariffs And

Trade(GATT)» (1947)

Chapter 1The stages of investment markets development• The Next Step of Financial Globalization. • Financial integration and systemic crises

(1980-present)• 1990s economic crisis• 1997-Asian crisis unproductive real estate investment*

• 2001 dot.com crisis

Chapter 1The stages of investment markets development• The Next Step of Financial Globalization.

• 2007 financial crisis

• 2009 Greek financial crisis

• 2012–13 Cypriot financial crisis.

Chapter 2The main operations in investment markets

• Channeling funds from surplus – to shortage

• direct finance- from lenders in financial markets to borrowers by selling them securities

• Indirect finance – involves third parties in channeling operations

• Primary market vs. secondary market

Chapter 2The main operations in investment markets

• Brokers vs. dealers • money marketThey are usually sold in large denominations.They have low default risk.They mature in one year or less from their original issue date.

Chapter 2The role of investment banks in economy

• Investment banks make their money primarily:

• By advising corporate clients on the creation of stocks, bonds and other securities

• By underwriting securities• By facilitating mergers and acquisitions, along with any due

diligence and securities exchanges that may go along with them.• And by brokering (or selling) securities to investors.

Chapter 2The role of investment banks in economy

• Underwriting helps in 2 ways

• 1. it reduces the risk for issuer

• 2. it sends positive signal to investors

about the quality of appropriate assets

Chapter 2 Main participants of investment markets

• U.S. Treasury Department – • T-Bills and other securities

• Federal Reserve System – regulator of money supply - most influential participant in the U.S. money market.

• Commercial Banks - hold a percentage of U.S. government securities second only to pension funds.

• Businesses - Many businesses buy and sell securities in the money markets

Chapter 2 Main participants of investment markets• Investment Companies – (Bank of America, Merrill Lynch,

Barclays Capital, Credit Suisse, and Goldman Sachs)

• Individuals – people owning funds or cash from their career activities and

Chapter 3Sources of financing

• Treasure bills - U.S. Treasury Department issues a variety of debt securities. The most widely held and most liquid security is the Treasury bill. Treasury bills are sold with 28, 91, and 182-day maturities

• Federal funds-are short-term funds transferred (loaned or borrowed) between financial institutions, usually for a period of one day

• Repurchase agreements-(repos) work much the same as fed funds except that nonbanks can participate

Chapter 3Sources of financing

• Negotiable Certificates of Deposit - is a bank-issued security that documents a deposit and specifies the interest rate and the maturity date.

• Commercial Paper - are unsecured promissory notes, issued by corporations that mature in no more than 270 days(only the largest and most creditworthy corporations issue commercial paper.)

• Asset-backed commercial paper - backed (secured) by some bundle of assets

• Banker’s Acceptances - A banker’s acceptance is an order to pay a specified amount of money to the bearer on a given date

Chapter 3Sources of financing

• Eurodollars: Many contracts around the world call for payment in U.S. dollars due to the dollar’s stability

• Bonds - are securities that represent a debt owed by the issuer to the investor.

• Separate Trading of Registered Interest and Principal Securities - to be sold in book entry form means that no physical document exists; instead, the security is issued and accounted for electronically.

• Mortgage bonds - used to finance a specific project

• Equipment trust certificates - are bonds secured by tangible non-real-estate property, such as heavy equipment or airplanes

• Debentures - are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer

• Variable-rate bonds - financial innovation spurred by increased interest-rate variability in the 1980s and 1990s

Chapter 3Sources of financing

• Common vs. preferred stocks

• Common Stock in a firm represents an ownership interest in firm.

• Preferred Stock in a firm represents no ownership interest in firm

• *(Less than 25% of new equity issues are preferred stock)• **only about 5% of all capital is raised using preferred stock

Chapter 3Sources of financing

Chapter 3Risk reducing ways in investment markets

• Types of risk• 1) Credit risk• 2) Price risk• 3) Reinvestment risk• 4) Inflation risk• 5) Liquidity risk• 6) Foreign-exchange risk. • 7) Sovereign risk

Chapter 3Risk reducing ways in investment markets

• Pooling risk Financial markets and institutions allow firms and

individuals to pool their risksmutual fund that invests in a diversified portfolio of common

stocks or other securities

• Systematic vs. unsystematic risk

Chapter 3Risk reducing ways in investment markets• A Simple Forward Contract• Futures Exchange• Swaps – fixed floating- floating floating• (*fixed fixed is not possible)

Conclusion

• Disastrous financial crisis which had a great impact on economies throughout the world

• Financial institutions focus on short time cash increase rather than long term.

• Governments intervention into economy can increase or decrease efficiency

Conclusion

• Governments, or governmental authorities keep declaring changes in legislations on behalf of big companies…

• The gap between small to big size companies will increase constantly

• Information asymmetry problem remains the same- re-regulations are inefficient

Conclusion

• Recent finance crisis seems to produce many long-term return anomalies

• The long-term return anomalies are fragile.

Suggestions to possible outcomes of conclusion

Suggestions to possible outcomes of conclusion

• Competition and markets

• Specialization a major trend

• Exchange and diversification of staff

• More long-term investment in future possible

trends

Suggestions to possible outcomes of conclusion

• Clients and products• An improving domestic economy • Central bank support • Derivatives market importance• Improve flexibility of firms

Suggestions to possible outcomes of conclusion

• Government risk and compliance• Political problems (land occupancies)• FTZ- improvement• Fresh wave of rules and regulatory

proposals concerning capital markets activities

Suggestions to possible outcomes of conclusion

• Financial management• Long term perspectives rather than short

term• Balance investors desire for better returns

with countervailing cost• Regulatory, and risk factors

Suggestions to possible outcomes of conclusion

• Organizational effectiveness • Many firms have pushed tactical efficiency and

cost reduction measures • Capital markets firms should pursue

fundamental changes to their cost base and operating models. Standardized processes, streamlined product offerings, shared processing capabilities, and technology automation

Suggestions to possible outcomes of conclusion

• Technology dynamics

• Thank you for attention !