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FINANCE (PART 2: EQUITY MARKETS (C4: THE STOCK EXCHANGE AND THE…

- - - - portfolio structuring; restructuring
      - provide financial and economic info to market participants
      - encourage an increased flow of savings :arrow_right: available savings for capital investment :arrow_right: economic growth
      - savings are more likely to be directed to the most efficient users of those funds
      - implementation of monetary policy (maintain level of inflation)
    - - Depository financial institutions
        
        large proportion of funds = saver's deposits
        
        provide loans to borrowers in the household and business sectors,
        
        eg: Commercial banks
      - Investment banks and merchant banks (money - market corporations)
        
        focus to provide advisory services for their corporate and government clients
        
        mergers and acquisitions
        
        portfolio restructuring
        
        financial risk management
        
        assist clients to raise funds directly from the capital markets
      - contractual savings institutions
        
        life insurance offices
        
        general insurers
        
        superannuation funds
      - finance companies and general financiers
        
        makes loans and provide lease finance to customers in household and business sectors
        
        raise funds directly from the money markets and capital markets
      - Unit trusts
        
        attract funds by inviting public to purchase units in a trust
        
        specialise in certain categories of investments
        
        equity trusts
        
        property trusts
        
        fixed-interest trusts
        
        mortgage trusts
    - - Equity
        
        Eg: Buy a new car
        
        deposit from your funds = your QUITY
        
        borrow the remainder from the bank :arrow_right: not you equity
        
        equity in a business corporation
        
        = ownership of shares issued by a corporation
        
        ordinary share
        
        no maturity date
        
        receive dividends
        
        right to vote :arrow_right: new BOD
        
        common stock
        
        large corporation :arrow_right: stock exchange
        
        Hybrid Security
        
        = equity + debt
        
        eg: preference shares
        
        fixed dividend for a defined period
        
        be paid before Ordinary shareholders
        
        Creditors; security holders :arrow_right: 2. Shareholders
      - Debt (D)
        
        Long-term D issued into the capital markets
        
        Debentures
        
        Unsecured notes
        
        short-term D (money markets)
        
        Commercial bills
        
        Promissory Notes
        
        Provided by financial institutions
        
        term loans
        
        mortgage loans
        
        overdrafts
        
        Government D.Instruments
        
        Treasury Bonds
        
        Treasury Notes
        
        Transferability of ownership
        
        Negotiable DI
        
        eg : commercial bills
        
        Non-negotiable DI
        
        eg: term loan obtained through the bank
      - Derivatives
        
        Future contract
        
        Buy/Sell a financial instrument at today price
        
        delivery or payment at a future date
        
        Forward contract
        
        similar to future K but more flexible
        
        negotiated over the counter with
        
        commercial bank
        
        investment bank
        
        forward rate agreement
        
        lock in an interest rate today
        
        will apply at specified date
        
        Option Contract
        
        give the buyer of the option the right to buy/sell the designated asset
        
        at a specified date/ within specified period
        
        at a predetermined price
        
        the buyer is not obliged to proceed the contract
        
        the buyer must pay a premium to the writer of the option
        
        Swap Contract
        
        = arrangement to exchange specified future cash flows
        
        Interest rate swap
        
        swap of future interest payments
        
        Currency Swap
    - - Matching principle
      - Primary market transactions
        
        create a new financial transaction
      - Secondary market transactions
        
        instruments were initially created in primary market transactions
        
        Security
        
        financial asset that can be traded in an organized secondary market (eg: stock exchange; future exchange)
        
        eg: ordinary share in a public listed company
      - Direct finance and Intermediated finance
        
        DIRECT
        
        can involve broker and dealer
        
        example
        
        share issues
        
        corporate bonds
        
        government securities
        
        INTERMEDIATED
        
        suppliers of funds :arrow_right: Intermediaries :arrow_right: users of funds
      - Wholesale and Retail markets
        
        Wholesale market transactions
        
        Direct financial transactions bw institutional investors and borrowers
        
        institutional investors
        
        commercial banks, insurance offices, superannuation funds, investment bank, merchant banks
        
        fund managers, finance companies, building societies, credit unions, government authorities
        
        retail market
        
        transactions primarily of individuals and small to medium-sized business
        
        transactions are conducted with financial intermediaries
        
        market participants is price takers
      - Money markets
        
        Money market
        
        involve wholesale short-term-to-maturity securities of less than 12 months
        
        attractive to institutional investors
        
        the markets are highly liquid
        
        Securities issued in the market are standardized and have well-developed secondary markets
        
        Conducted by computer networks
        
        Submarkets
        
        Central banks: system liquidity and monetary policy
        
        Carry out transactions that will maintain, change the amount of liquidity that is available within the financial system
        
        the amount of liquidity directly impacts on interest rates in the market
        
        The central bank implements its monetary policy by targeting the cash rate
        
        Inter-bank market
        
        Bill markets
        
        Commercial paper market
        
        negotiable certificates of deposit market
        
        Capital market
      - Capital markets