Md. Shahed Rajon 1. 2 Chapter Contents Concepts of Market Financial Market Spot Market Status of...

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Chapter Contents

• Concepts of Market • Financial Market • Spot Market• Status of Financial Market• Classification of Financial Market• Types of securities traded in financial market• How to valuation on market pricing of securities• Market Efficiency• Financial Market regulation• Role of Financial Institutions in Financial Markets


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Concepts of Market

• Market is a set of action, where buyer and seller meet in a place or product.

So market is a – Market

Buyer .....................................Seller gathering of

for Product


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Financial Market

• Financial market is a market where financial assets are exchanged.

• Financial market is a market, which financial assets/ securities, such as stock and bonds can be purchased or sold.


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Financial Market (Con.)

• Funds are transferred in financial markets when one party purchases financial assets previously held by another party. The transfer of financial markets are –

- Deficit unit - Surplus unit.• Financial markets transfer funds from those

who have excess funds to those who need funds.


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Financial Market (Con.)

• Financial markets facilities the flow of funds and thereby allow financial and investing by-

- Households - Firms & - Govt. agencies.


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Spot Market

• Spot market's another name is cash market.

• The market in which a financial asset trades for immediate delivery is called the spot market.


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Status of Financial Market

• Status of financial markets are five- -First Market -Second Market -Third Market -Forth Market -Fifth Market


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1.First Market

• Primary stocks are traded in a market is called first market.

-e.g. IPO.• First issue of stock to make or increase of

paid up capital.• It must approved by SEC.


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2. Second Market

• When stocks are traded in a significant floor is called second market.

• It must needed listed company and floor. -e.g. Normally traded security in the stock

market.


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3. Third Market

• When listed company's stock traded outside the floor is called third market.

-e.g. OTC market.

• It must needed listed company


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4. Forth Market

• When unlisted company's stock traded in a

floor is called forth market.

• Forth market is not use in Bangladesh.

• It must needed floor.


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5. Fifth Market

• It is common market.

• When unlisted company are traded their security outside the floor is called fifth market.

• It need not any listed company and any floor.


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Classification of Financial Market

A. Classification by nature of claimB. Classification by maturity of claimC. Classification by seasoning of claimD. Classification by immediate delivery or

future deliveryE. Classification by organizational structure


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A. Classification by Nature of Claim

• On the basis of nature of claim, two types of financial market –

1. Debt market 2. Equity market


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Debt Market

• Credit instruments are call debt instruments. • The market where debt securities are traded

is called debt market. - e.g. Debenture, Bond etc. • Generally debt securities are obligates in

nominal dollars, up to certain terminal maturity date.


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Equity Market

• Equity represent deposits an ownership interest in a corporation.

• The market where common stock or equity are traded.

-e.g. common stock. • Holders of equity securities are entitled to the

earnings of the corporation when those earnings are distributed in the form of dividends. They are also entitled to a prorate share of the remaining equity in case of liquidation.


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B. Classification by Maturity of Claim

• On the basis of maturity of claim, two types of financial market –

1. Money market 2. Capital market


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Money Market

• The market where debt instruments maturity of one year or less are trade is called the money market.

• Generally they have a relatively high degree of liquidity.

• Money market securities tend to have a low expected return but also a low degree of risk.

-e.g. Treasury bill, Commercial paper, Federal funds etc.


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Capital Market

• A set of markets where funds are exchanged for long term securities is called capital market.

• Normally capital markets securities maturity of more than one year.

-e.g. Bonds, Mortgages and Stocks.


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C. Classification by Seasoning of Claim

• On the basis of seasoning of claim, two types of financial market –

1. Primary market 2. Secondary market


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Primary Market

• Primary stocks are traded in a market is called primary market.

-e.g. IPO.

• This stock is issue to make or increase of paid up capital. It must approved by SEC.


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Secondary Market

• The secondary market is where already issued financial assets are traded.

• Secondary markets are the market where the existing securities or financial asset are traded.

• The examples are Dhaka Stock Exchange, Chittagong Stock Exchange etc.


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D. Classification by Immediate Delivery or Future Delivery

• On the basis of immediate delivery and future delivery, two types of financial market –

1. Cash or Spot market 2. Derivative market

Cash or Spot Market: The market in which a financial asset trades for immediate delivery is called the spot market.


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Derivative Market

• In addition to money and capital market, derivative is another important market.

• The market where derivative securities are traded is called derivative market.

• Derivative securities are a financial contracts whose value are derived from value of underlying assets, such as debt securities or equity securities.

• Many derivative securities enable investors to engage in speculation and risk management.


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E. Classification by Organizational Structure

• On the basis of organizational structure, three types of financial market –

1. Auction market 2. OTC (Over the counter) market 3. Intermediated market.


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Auction Market

• Auction market is a common market.

• The issuer announces the terms of the issue and interested parties submit bids for the entire issue.

• The auction form is mandated for certain municipal debt obligations.

• It is commonly referred to as a competitive biding underwriting.


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OTC Market

• OTC means over the counter market.

• When listed company's stock traded outside the floor is called OTC market.

• When any company have not performing there activities not well in organized market, then SEC shift this company to the over the counter market.

• The financial market transactions occur in the OTC , which is a telecommunications network.


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Intermediated Market

• Some secondary stock market transactions occur as organized exchange or visible ,market place for secondary market transaction is called intermediate market.

-e.g. New York stock exchange.


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Types of Securities traded in Financial Market

Three types of securities are traded in a financial market. Those are-

1. Money market securities 2. Capital market securities 3. Derivative securities


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1. Money Market Securities

• Money market Securities are debt securities that have a maturity of one year or less.

• They generally have a relatively high degree of liquidity.

• Money market securities tend to have a low expected return but also a low degree of risk.

-e.g. Treasury bill, negotiable instrument, commercial paper, federal funds.


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2. Capital Market Securities

• Securities with a maturity of more than one year are called Capital Market Securities.

• Three common types of capital market securities are bonds, mortgages and stocks.

-Bonds are long term debt obligations issued by corporations and government agencies to support their operations.

-Mortgages are long term debt obligations created to finance the purchase of real estate.

-Stock also referred to as equity securities. Stocks are certificates representing partial ownership in the corporations that issued them.


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3. Derivative Securities

• In addition to money market and capital market securities, derivative securities are also traded in financial markets.

• Derivative securities are financial contracts whose values are derived from the values of underlying assets; such as debt securities or equity securities.

• Many derivative securities enable investors to engage in speculation and risk management.


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Derivative Securities (Con.)

Speculation: Derivative securities allow an investor to speculate on movements in the underlying assets without having to purchase those assets.

Risk management: Financial institutions and other firms can use derivative securities to adjust the risk of their existing investments in securities.


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How to valuation on market pricing of securities

• Securities are priced in the market according to how they are valued by market participants as-

1. Impact of Information on valuation 2. Impact of valuations on pricing 3. Impact of the internet on the valuation

process


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1. Impact of Information on valuation

• All investors rely on valuation to make investment decisions, different investors may derive different valuations of a security based on the existing set of information.

• That is investors interpret and use information in different ways. Given below the valuation process of securities-


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Valuation process of securities

Informationon

Economicconditions

Information on

IndustryConditions

Assessment of Firm's expected

Cash Flows

Valuation of Security related

to firm

Decide whether to take a position in

Security

Firms Specific Information(Information provide by

firm and othersources)


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2. Impact of valuations on pricing

• When investor receive new information that clearly indicates the like hood of higher cash flows or less uncertainty , they revise all of their valuation of that security upward.


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3. Impact of the internet on the valuation process

• The internet has improved the valuation of securities in several ways. Pricing of securities are quoted online and can be obtained at any given moment by investors.


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Market Efficiency

• When security prices fully reflect all available information, the markets for these securities are said to be efficient. Market Quotations and overview of financial market activity is called market efficiency.


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Market Efficiency (Con.)

• Three types of market efficiency-

1.Highly Efficient Market- All information are available in a market is called highly efficient market. e.g. New York stock exchange.

2.Low efficient Market- All information are not founded, but past information are founded in a market is called low efficient market. e.g. Dhilly Stock exchange.

3.Un efficient Market- No information are founded in a market ( such as past and present) is called un efficient market. e.g. Dhaka stock exchange.


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Financial Market Regulation

• In general , securities markets are regulated to ensure that the participants are treated fairly. Many regulations were stay in financial market-

1. Disclosure2. Regulatory response to financial scandals3. Other regulations


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1. Disclosure

• Disclosure require to secondary market issue.

• It also declared illegal a variety of deceptive practices.

• Such as misleading financial statements and trading strategies designed to manipulate the market price.


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2. Regulatory response to Financial Scandals

• Financial scandals response various regulators imposed new rules requiring firms to provide more complete and accurate financial information.

• They also imposed more regulations to ensure proper auditing by auditors and proper oversight by the firms board of directors.


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3. Other Regulations

• Some regulations apply to all financial institutions , while others are applicable only to a specific type.


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Role of Financial Institutions in Financial Markets

• Financial Markets were perfect all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors. Two types of financial institutions in financial market and their role also different as-

A. Depository InstitutionsB. Non depository Institutions


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A. Role of Depository Institutions

• The institutions whose main activities is deposit money and those money provide to credit is called depository institutions. e.g. Commercial Bank, Saving institutions, Credit union etc. The major role of depository institutions are given as-

1. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.


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Role of Depository Institutions (Con.)

2.They repackage funds received from deposits to provide loans of the size and maturity.

3. They accept the risk on loans provided.4. They are more expertise than individual

surplus unit in evaluating the credit worthiness of deficit units.

5. They diversify their loans among numerous deficit units,


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B. Role of Non-Depository Institutions

• The institutions whose main purpose is not deposit money . But some times they provide credit to others. Non depository institutions generate funds from sources other than deposits but also play a major role in financial intermediation. e.g.

-Finance companies-Mutual Fund-Security firms-Insurance companies.


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Role of Non-Depository Institutions (Con.)

1. Finance companies: Most finance companies obtain funds by issuing securities then lend the funds to individuals and small enterprise. The functions of finance companies overlap the function of depository institutions.

2. Mutual funds: Mutual funds sell share to surplus units and use the funds received to purchase a portfolio of securities.

3. Insurance Company: Insurance company provide insurance policies to individuals and firms that reduce the financial lender associated with death , illness and damage to property.


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4. Security firm: Securities firms provide a wide variety of function in financial markets. Some security firms use their information resources to act as a broker

• Broker: Broker executing securities between two parties. Broker charge a fee for transactions.

• Bid: Buyer price is called bid. Lower price offer.


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• Ask: Seller price is called ask. It is higher than bid.

• Spread: Settle the ask and bid is called spread . That is selling price.

• Underwriter: When any institute guarantee to purchase security for newly issued share , than grantor is called underwriter.

• Dealers: Making a market in specific securities by adjusting their inventory is called dealer.

Md. Shahed Rajon 1. 2 Chapter Contents Concepts of Market Financial Market Spot Market Status of...

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