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IBF PPT Lecture # 2 (03102023) (Financial Markets)

This document summarizes a lecture on financial markets. It discusses the definition of financial markets and their functions, including facilitating the transfer of funds from lenders to borrowers. It outlines the key segments of financial markets such as direct financing vs indirect financing. Finally, it describes the main types of securities traded in financial markets, including money market securities, capital market securities, bonds, stocks and derivatives.

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Ala Amin
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23 views16 pages

IBF PPT Lecture # 2 (03102023) (Financial Markets)

This document summarizes a lecture on financial markets. It discusses the definition of financial markets and their functions, including facilitating the transfer of funds from lenders to borrowers. It outlines the key segments of financial markets such as direct financing vs indirect financing. Finally, it describes the main types of securities traded in financial markets, including money market securities, capital market securities, bonds, stocks and derivatives.

Uploaded by

Ala Amin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Course Code:

Course Title: Introduction to Business Finance

Class Day: Tuesday Timing: 12:15pm - 03.15pm

Lecture / Week No. 2 (Financial Markets)


(03/10/2023)

Instructor Name: Asim Iqbal

Management Science Department

PAF KIET, City Campus, Karachi


Contents

1. Financial Markets
2. Function of Financial Markets
3. Segments of financial markets
4. Transfer funds in financial markets
5. Function of financial intermediaries
6. Types of financial markets
7. Securities traded in financial markets
Reference No. 1 Topic: Financial Markets

Financial Markets
Financial Market refers to a marketplace, where
creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies,
etc. take place. It plays a crucial role in allocating
limited resources, in the country's economy.
Reference No. 1 Topic: Functions of Financial Markets

Function of Financial Markets


 A financial market is a market in which financial
assets (securities) can be purchased or sold
 Financial markets facilitate transfers of funds
from person or business without investment
opportunities (i.e., “Lender-Savers”, or “Surplus
Unit”) to those who have them (i.e., “Borrower-
Spenders”, or “Deficit Unit”)

4
Reference No. 1 Topic: Segment of Financial Markets

Segments of Financial Markets


 Direct Financing
 Funds are transferred directly from ultimate
savers to ultimate borrowers
 Indirect Financing
 A financial "intermediary" transforms financial
claims with one set of characteristics into
financial claims with other characteristics e.g.
deposits are used to make loans.

5
Reference No. 1 Topic: Transfer of funds on Financial Markets

Transfer of Funds on Financial Market


Reference No. 1 Topic: Function of Financial Intermediaries

Function of Financial
Intermediaries
 Provide customers with liquidity service
 Help to repackage the risk
 Willing to create and sell assets with lesser
risk to one party in order to buy assets
with greater risk form another party
 This process is referred to as asset
transformation

7
Reference No. 1 Topic: Types of Financial Markets
Types of Financial
Markets
 Financial markets can be distinguished by the
maturity structure and trading structure of its
securities

 Money versus capital markets


 The flow of short-term funds is facilitated by money
markets
 The flow of long-term funds is facilitated by capital
markets

8
Reference No. 1 Topic: Types of Financial Markets

Types of Financial Markets


 Primary versus secondary markets
 Primary markets facilitate the issuance of new
securities

• e.g., the sale of new corporate stock or new


• Treasury securities
 Secondary markets facilitate the trading of existing
securities

 e.g., the sale of existing stock
Securities traded in secondary markets should be liquid

9
Reference No. 1 Topic: Types of Financial Markets

Types of Financial Markets


(cont’d)
 Organized versus over-the-counter markets
 A visible
marketplace for secondary market
transactions is an organized exchange
 Some transactions occur in the over-the-counter
(OTC) market (a telecommunications network)
 Knowledge of financial markets is power
 Decide which markets to use to achieve our
investment goals or financing needs
 Decide which markets to use as part of
your job
 Avoid common mistakes in investing and
borrowing 1
0
Reference No. 1 Topic: Securities traded in Financial Markets

Securities Traded in Financial


Markets
 Money market securities
 Money market securities are debt securities
with a maturity of one year or less
 Characteristics:
 Liquid
 Low expected return

 Low degree of risk

11
Reference No. 1 Topic: Securities traded in Financial Markets

Securities Traded in Financial


Markets (cont’d)
 Capital market securities
 Capital market securities are those with a
maturity of more than one year
 Bonds and mortgages
 Stocks

 Capital market securities have a higher


expected return and more risk than money
market securities 12
Reference No. 1 Topic: Securities traded in Financial Markets

Securities Traded in Financial


Markets (cont’d)
 Bonds and mortgages
 Bonds are long-term debt obligations issued
by corporations and government agencies
 Mortgages are long-term debt obligations
created to finance the purchase of real estate
 Bonds and mortgages specify the amount and
timing of interest and principal payments

13
Reference No. 1 Topic: Securities traded in Financial Markets

Securities Traded in Financial


Markets (cont’d)
 Stocks
 Stocks (equity) are certificates representing
partial ownership in corporations
 Investors may earn a return by receiving
dividends and capital gains
 Stocks have a higher expected return and
higher risk than long-term debt securities
14
Reference No. 1 Topic: securities traded in Financial Markets

Securities Traded in Financial


Markets (cont’d)
 Derivative securities
 Derivative securities are financial contracts whose
values are derived from the values of underlying
assets
 Speculating with derivatives allow investors to
benefit from increases or decreases in the underlying
asset
 Risk management with derivatives generates gains if
the value of the underlying security declines
15
References / Resources

1. Mayo, H. B. (2015). Basic finance: an introduction to financial


institutions, investments, and management. Nelson Education.

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