NIS Economics 2014 - Financial Markets (non-bank Financial Institutes and assets)

NIS Economics 2014- Financial Markets(non-bank Financial Institutes and assets)

During the GFC, the European Central Bank (ECB) was offering banks unlimited emergency loans at below market rates, in a co-ordinated bid to inject liquidity into the money markets.

Role of Financial Markets in EconomyFinancial markets are crucial to the functioning of a modern economy.

The financial services industry is one of the largest in the world.

Financial markets generate products so that those with surplus funds

can earn income and those who need to borrow funds can acquire

them. Financial markets depend on savers and borrowers.

Financial Intermediaries represent a bridge between savers and borrowers in the economy. Financial markets are also the factor markets for capital in the economy.

The financial system was divided into banks and non-bank financial intermediaries (NBFIs) such as finance and insurance companies. However, in many banks resemble NBFSs in many

ways.

Capital is required as an input to the production process and financial intermediaries provide an efficient process for getting income that is not spent on consumption to those who wish to invest in the various forms of capital.

NBFI Examples:

Insurance company – already discussed.

Investment firms – they invest on behalf of their clients, under contractual arrangement.

Investment Trust – Investor buys into a trust and is a part owner and receives returns.

Research Task: use the internet to find out the types of NBFIs that operate in Kazakhstan and compare that to the situation in the USA. This is important and part of the curriculum. You must know this for your exam.

Capital is required as an input to the production process.

Financial intermediaries provide an efficient process for getting

income that is not spent on consumption to those who wish to

invest in the various forms of capital.

Sources of Savings• Households• Businesses• Governments (budget surplus)• Borrowing from overseas

Reasons for Borrowing• Consumers demand exceeding current income• Entrepreneurs• Government (budget deficit)• Australian financial institutions

borrowing money overseas

Share or Equity Market

Where ownership of shares in companies are issued or exchanged

Debt Market Where debt securities are exchanged, or cash is lent or borrowed

Derivatives Market Where financial assets are bought and sold that are based on the value of other financial assets

Foreign Exchange Market (Forex)

Where currencies of different countries are traded for each other.

Shares, also called stocks.A type of security that:

1. signifies ownership in a corporation and

2. represents a claim on part of the corporation's assets and earnings

If you buy a share in a company you own party of that company

As a ‘share holder’ you may receive a regular payment from the company called a ‘dividend’. (Only if the company is successful)

Also, you may, at any time, sell that share to a third party via the stock market. If you sell the share for a profit it is called a ‘capital gain’, whereas a loss is called a ‘capital loss’

DerivativesA contract between parties.• The value of the derivative is based on the value of

an asset like a share.• Examples of derivatives include futures contracts

and options.

A future contract may look like the following:

If share X will have a value > 10.00 on January 1

You will be paid a 10 % return.

You will receive 110% of your initial investment.

Debt Securities – example: BondA bond is a type of security:1. A ‘Debt’ instrument as one party lends finance to the

other party, as a lender, not an owner.

1. The bond will mature at a future date and will be repaid with interest as agreed. The interest payment is often paid periodically if the bond is longer than one year

Debt securities are popular because they are less risky compared to shares. However, they are more risky than cash.

Domestic and Global Markets

Kazakhstan’s financial markets are becoming more open to investment from overseas, and Kazakhstan financial operators have become more involved in overseas markets. Hence Kazakhstan’s financial markets are influenced by what happens on overseas financial markets.

Foreign Exchange (Forex) markets enable the movement of funds around the world by acting as a clearing house where currencies can be exchanged for each other on the basis of the Exchange Rate existing at the time. Kazakhstan’s currency is traded on this market, however, the price of the currency is fixed- not floating. This means that the Kazakhstan currency value will not rise and fall according to demand and supply, but rather by the decisions of the Kazakhstan National Bank, in consultation with the Government.

Financial vs. non-financial assets

Definition: financial asset - An asset that derives value because of a contractual claim.

Definition: physical asset - An asset that has physical, tangible worth, Like land, property, a car, a machine, equipment, etc.

Unlike land and property--which are tangible, physical assets--financial assets do not necessarily have physical worth. Their physical worth is merely the value of the paper on which they are printed.

Financial asset Physical asset

Financial Market Products include:• Consumer credit• Housing loans• Business loans• Bonds• Shares• Financial futures and options• Forex market.

Financial markets are generally divided into two main

types which are:

• Primary Financial Markets which create new financial assets known as securities which can be sold into the economy. To establish or expand a business, new shares can be sold to raise finance. In this case, the money raised goes directly to the company. The sale of new BHP Billiton shares is an example of the primary market.

• Secondary Financial Markets involve transactions in financial assets that have already been issued in the primary market in the past.

Finance markets do not necessarily require a physical

location. The greater part of transactions that occur on

The security market, does so in cyberspace.

The amount of activity that occurs on financial markets

will be determined by the state of the global and local

economies, and by expectations.

Shares provide a good opportunity for businesses and individuals with surplus funds to invest them. There are risks involved, however. Share values might fall, dividends may be low or non-existent. Many people in Europe and the USA rely for income in their retirement on dividends from share holdings.

Changes in share market can impact on the structure of the economy and the direction of the business cycle.

Have a look at the Kazakhstan Stock Market website here:

http://www.kase.kz/en

The world's financial assets reached a record $140 trillion worth of stocks, bonds and other financial assets as of 2005, more than three times as large as the total worldwide GDP.

Today we looked at:

Then The Types and role of Financial Institutes.

Types of Financial assets: Debt and Equity. The difference and examples of each

Risk/ Return relationship: High risk requires high return, and visa versa.

Best portfolio: Mix of investments, maybe some with higher risk, but diversified risk across many different industries. (In case, for example, one industry performs badly, your portfolio will not be too adversely effected)