This document is an outline for a lecture on Financial Markets and Instruments. It covers the purpose and mechanisms of financial markets, roles of economic units, financial intermediaries, types of financing, and financial instruments. It also addresses financial system regulation and the impact o...
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Mechanisms to bring buyers and sellers together
A financial market doesn’t own assets that are traded on it
Spending units - an individual living alone or a family living together and pooling incomes to meet
expenses
Economic units
Households
Companies
Government
Budget constraints – each economic unit has a budget constraint.
Deficit position - expenditure > income.
Surplus position - income > expenditure..
Balanced position - Income = expenditure
Economic units –
Economic units can be in surplus some periods and deficit in others
Deficit does not equal losses
In a well-functioning economy SSUs should supply funds to DSUs
SSUs tend to be Households
Very small surplus income
Large number of different households
Different conditions
99.99% of households cannot afford to pay for full financial claim of DSUs
Indirect financing
Financial claims must be repackaged
Financial intermediation
Financial Intermediaries –
A financial intermediary is an institution such as a bank that collects the savings of
individuals and corporations and funnel them to firms that use the money to finance their
investments in plants, equipments, research and development etc.
, Bank (commercial and retail activity) - Takes deposits from individuals and corporations, and lends
these funds to borrowers
Bank (investment activity) – Raises money for corporations by marketing and selling securities.
Insurance company - Invests money in securities, property and other assets to meet future insurance
claims.
Pension fund - Invests money in securities, property and other assets to pay pensions in the future.
Charitable foundation - Invests the endowment of a non-profit organisation such as a university
Mutual fund - Pools savings from individual investors to purchase securities
Hedge fund - Pools savings from individual wealthy and professional investors (who satisfy certain
criteria relating to personal wealth and investor sophistication) to purchase securities using a variety
of non-traditional investment strategies.
Venture capital firm - Pools money from individual investors and other financial intermediaries to
fund relatively small, new businesses, generally with private equity financing.
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