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4.4.1 financial markets, image, image, image, image, image, An equity…
4.4.1 financial markets
What are the fives roles of financial markets?
-TO FACILITATE SAVING
-Can enable households and businesses to save money with varying rates of interest
TO LEND to businesses and individuals
-Connects those who want to save and those who want to borrow.
-TO FACILITATE THE EXCHANGE OF GOODS AND SERVICES.
-can make payments,
-receive payments
(handles millions of transactions every day).
-TO PROVIDE FORWARD MARKETS FOR COMMODITIES
-TO PROVIDE A MARKET FOR EQUITIES
Identify 3 financial markets
FOREX markets (currency exchange)
Capital markets (shares and bonds)
Derivative markets (futures)
-Money markets (treasury bills)
Why are financial markets important?
supports the real economy:
-Businesses need to raise finances,
-Global financial crisis illustrated this.
What is meant by liquidity?
Refers to the ease with which an asset can be converted to cash to settle a liability- if it is cost free and quick to turn into cash it is liquid.
Two liquid assets and two illiquid assets:
Liquid:
-Bonds
-Shares
Illiquid:
property
paintings.
What is meant by narrow money (M0)
-Notes and coins that are in circulation, 3% of all money.
What is meant by broad money (M4)
Includes M0 and the money held by financial institutions and money held by banks.
What is meant by financial asymmetric information?
When the buyers or sellers in the financial market has more information and exploit this advantage.
Eg if banks know they will be bailed out and take risks.
What is meant by financial rigging?
When a producer or group of producer so they can benefit- it Is a form of collusion that can give them power in markets.
Eg Libor rate scandal.
What is meant by a bubble?
-This is when the value of the asset rises, and causes her behaviour which causes the price to rise above the true value.
This can then cause an abrupt crash and people reverse their actions quickly
What are negative externalities in financial markets?
cost to a third party who was not involved in the financial transaction.
Eg when traders took excessive risks and shareholders and depositors suffered third party costs.
What is meant by moral hazard in financial markets?
This is when big banks are not concerned about taking risks as they know they will be bailed out "Too big to fail".
An equity market is one where stocks are traded.
