Introduction to Financial and Capital Markets

Stock Market

Financial Futures Market

Foreign Exchange Market

Bond Market

Eurocurrency Market

Money Market

Stock Market (Broker Business)stock exchange an organization that provides a facility for broker members to buy and sell listed securities. Securities - tradeable interests representing financial value. They are often represented by a certificate. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, other derivative securities (Warrants),

alternative investment Investments that do not trade publicly on an organized exchange.

Over the CounterA security which is not traded on an exchange, usually due to an inability to meet listing requirements. For such securities, broker/dealers negotiate directly with one another

Mutual FundsThese are open-end funds that are not listed for trading on a stock exchange and are issued by companies which use their capital to invest in a diversified companies.

Transaction conducted by Brokers

Financial Futures Market

Future: A contract entered into now that provides for the delivery of a specified asset in exchange for the selling price at some specified future date.

Contracts - commodities (oil) - metals (gold)

- bond- equities- currency

Some financiak futures exchanges also sell options

Option: A privilege sold by one party to another that offers the buyer the right, but not the obligation to buy (call) or sell (put) a security at an agreed price during a certain period of time or on a specific date on shares, indexes

Derivatives concept: products related to an underlying security in the form of OPTIONS & FUTURES contracts available on the Financial Futures market

Foreign Exchange Market

Buying and selling of foreign currenciesat short term: overnight - allows banks to cover short-term positions

tomnext - 24 hours lending spot - price fixed today for delivery in 2 days tommorow week - delivery in 8 days

at long term: forward (future) delivery at maturity transaction

Premium: a price above the SPOT priceDiscount : a price below the SPOT price

the premium / discount is calculated on an assumption by the market of the future currency value. Usual periods are 1 month, 3 months and 6months forward The Forex exists for readily convertible currencies (regularly available and in demand), i.e. Major currencies used for trade: $, €, £, Yen

Forex markets are open 24 / 24 hrs;

Bond Market

Bond Types: 1. Corporate (Interest typically paid every 6 months)Characteristics: tend to be shorter than government bonds (e.g. 5 years)

Interest earnings coupon bearing with redemption at intervals or

zero coupon: repaid: at maturitywith coupons: redeemable at fixed intervals in parts Issue types: Straight (ordinary)

Convertible

2. Treasury (Interest typically paid every 6 months) (T bonds issued by government to finance National Debt

Characteristics: tend to be much longer than corporate bonds, tax exemptIssue types: from + / -7 years to + 30 years

3. Municipal Bonds (Interest typically paid every 6 months)Characteristics: issued to finance specific projects and general expenditure often refunded by local tax increases, although often tax exempt Issue types: may be similar in length of time to Treasuries

Eurocurrency Market

Characteristics: Interbank Borrowings in currencies. Offshore funds

Availability: Major Currencies, USD in particular 6-months money regularly 3 -12 months money occasionally

Uses: International Project Financing

Major centres: London (primarily USD) borowed at LIBOR (London Interbank Offered Rate)

Singapore (asian dollars) (SIBOR)

Bahrain (petrodollars)

Paris (eurosterling)

Money MarketCharacteristics:Short-term cash type lending / borrowing operations in domestic currency to allow banks a constant supply of short-term funds.Accessability: principally by domestic banks

Instruments: Treasury bills (government short term paper)

Repurchase agreements: (allows Central Bank to lend short term funds to market)

Certificates of Deposit: Banks lend each other their excess funds through these

instruments.

Commercial Paper: (like a promissory note whereby a 1st. class company

issues paper. These are discounted to have a short term cash facility).

Bankers Acceptance: (a trade bill may be stamped by a bank allowing the bill to be discounted and eventually rediscounted by the

buying bank with the Central bank)

Lender of Last Resort: rôle of Central Bank to assist banks in difficulty.

Markets Rules and Regulations

control organisations: 1. Council: SEC, Stock Exchange Council, SFB, etc.

2. Trading Associations: Foreign Exchange Dealers,

Security Dealers, etc.

3. Exams: Chartered Analysts Federation

Principle of Control: too much control kills market activity, too much freedom allows errors.

Compromise: the market should be self-regulatory. The practitioners should be responsible for controlling their own activities

Problem: assumption that all practioners are responsible for keeping to the normal ethical rules.

But greed often drives practitioners to excesses, see Enron case among others. Such incidences deteriorate market confidence.