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OVERVIEW OF FINANCIAL MARKET - Coggle Diagram
OVERVIEW OF FINANCIAL MARKET
BANKING SYSTEM
FINACIAL INTERMEDIATION
Intermediary btwn who have surplus cash and those who need to borrow cash
Importance
Easier for saving to be loaned to borrower through intermediary
Few individual have lots of money (million pound)
Bank will aggregate individual savings
In return, bank should better at assessing credit risk
Financial intermediation involves a reduction and pooling of risks
Many lenders or depositors want a reasonable degree of liquidity
Dealing with a lot of customer, financial intermediary can provide long term funds and meets lender's liquidity
Pooling reduce risk - offer low risk securities to primary investors
Maturity transformation - investors can deposit funds for long period of time while borrowers may need funds on short term basis and vice versa
BANKS IN UK
Primary (Retail) bank
Provide payment mechanism
Provide a place people store wealth
Lend money on overdraft/loan
Offer a variety of service
Wholesale banking: small no of customers with larger deposits or requiring larger loans
ASSET & LIABILITIES OF BANKS
Liabilities
Sterling deposit - Sight deposit/current acc: arise from bank func. provide mechanism for transmitting money
Sterling deposit - time(term) deposit: bear interest, cannot drawn by cheque
Other currency deposits
Asset
notes, coin, bills, market loans, investment, advance to customer
Profit: investing in assets which earn a higher rate of interest
INCOME & EXPENSES OF BANK
Income
Charge on current acc
Commision & fees on other service
Activities on foreign exchange market
Mortgage lending
Expenses
Staff wages
Maintenance
Advertising
Bad debt
CENTRAL BANK
Role: Controlling monetary system of a country
Banker to central government
Issuing bank notes in the UK
Intervenes in foreign exchange market
Banker to commercial banks
ECB
Conduct foreign exchange operations
Hold & manage the reserves of the Euro area
Issuing banknotes in Eurozone
Promoting the smooth operations of payment system
Collect statistical info & promote smooth exchange of info
Role: Eurosystem for countries adopted Euro - ensure price stability
BUILDING SOCIETIES
Offer wide range of saving schemes to attract deposit
Asset take the form of mortgages
Saving schemes - fixed term, withdrawal on demand
FINANCIAL MARKET
where provider & user can trade financial asset
MONEY MARKET
Short term debt financing
Bank is main user
Large non-bank companies can also have access
Smaller depositor have access only by assistance of their bank
UK MONEY MARKET
Operated today via complex dealing communication technology
Participants: Financial intermediaries, gov, local authorities, broker, market makers, firm and individuals
FINANCIAL INSTRUMENT
Deposit
Simple deposit of money in bank
Most liquid asset
Bills
Short term asset
Converted to cash in very short time
Can be sell in discount market
Issued by gov.
Pay specified amount of money at future date
Commercial paper
Short term IOU issued by large companies
Can held until maturity or sold to others at disc. rate
CD
Customer that deposit with bank for fixed term
Can be sold in CD market
UK SHORT TERM MONEY MARKET
Repo market
Sell a quantity of securities (bonds and bills) now
Simultaneous agreement to buy back in future with higher price
Function of Bank of England
Provide more cash
Withdraw surplus cash
Interbank market
wholesale money market for unsecured loan btwn banks
Purpose
Smooth out fluctuation in receipts & payment
Use market to borrow funds
Sound out the market
Commercial paper market
Arranged btwn company and bank
Issued short term CP - promise pay back money with interest at end of stated period
Eurocurrency market
Deposit funds with bank outside currency country of origin
OTHER FINANCIAL MARKET
Shares
Can raise long term finance
Investors buys or sell them
Goverments bonds and bills
Long term debt securities
Issued by government
Sold to investors to raise money
Pay interest on the bond
Redeem bond at par value
Usually offer fixed rate of interest
Short term-Treasury bills
Repayable in 91 days at nominal value
Local authority bond
Long term debt securities
Issued by local government authority
Pay interest
Redeem bond at maturity out of their future income
Foreign exchange market
Buying and selling currency in other country
STOCK MARKET
PURPOSE
Primary market
enable organisation raise new finance
By issuing new share/loan notes
Must have public company status
Secondary market
Enables existing investors to sell their investment
Marketability of securities as important feature because investors are more willing to buy stocks if they can sell them easily
Increase willingness of surplus units to invest their funds
Other main functions
Realise some of the value of their shares
Issuing finance to take over
AIM
Market for smaller, growing companies that cannot qualify or do not wish to join Official List
Wider access to capital
Enhance credibility among financial institutions
Lower cost than full listing
More lax entry requirement
REASON STOCK MARKET LISTING
Access to wider pool of finance
Improved marketability of shares
Transfer of capital to other uses
Enhancement of company image
Facilitation of growth by acquisition
DISADVANTAGE OF LISTING
Greater public regulation, accountability and scrutiny
Wider circle of investors
Additional cost including brokerage commissions and underwriting fees
METHODS OBTAINING LISTING
Offer for sale
IPO
Invitation to public to apply for shares
Acquisition by an issuing house
Issuing house usually an investment bank
Issuing house accept responsibility to the public
Offer for sale by tender
Min price will be fixed
Subscribers will be invited to tender for shares
Price will be equal or above minimum
Share will be allotted at highest price
All shares will be taken up
Known as striking price
Introduction
No share are made available to the market
Stock market grants quotation
Min proportion of company shares must be in hand of general
Introduction to obtain greater marketability
Other
Small issue of new share
Rights issue
Takeover
Share option schemes