Module 1 - Lecture 1: The Financial Markets PDF

Capital Markets Introduction The Nature of Financial Markets https://www.youtube.com/watch?v=qSPDtYWIK VU Essentially Markets for debt and equity Also currencies, commodities and derivatives (next lecture) Various key questions about these markets. Particularly EFFICIENCY Market Ef...

Capital Markets Introduction The Nature of Financial Markets https://www.youtube.com/watch?v=qSPDtYWIK VU Essentially Markets for debt and equity Also currencies, commodities and derivatives (next lecture) Various key questions about these markets. Particularly EFFICIENCY Market Efficiency In financial markets, particularly markets for popular shares, buying and selling takes place all the time. How well does this process push the price of a share toward the ‘true underlying value’? This is a question which we return to later. Trading on Financial Markets IOUs and bits of paper The nature of wholesale markets and some of the instruments traded on them E.g. Shares Bonds Treasury Bills Blah Blah Blah Drone Drone I could gesture and point to slides while you gently nodded off (zzzzz) or chatted to your pal. So why don’t we google it? Analyse this! The Stock Market https://www.youtube.com/watch?v=F3QpgXBtD eo https://www.thebalance.com/investing-lesson-1- introduction-to-the-stock-market-356170 https://www.nerdwallet.com/blog/investing/stock -market-basics-everything-beginner-investors-k now/ Some basic characteristics of financial markets By financial markets, we typically mean wholesale markets. That is to say, markets where: Firms deal with other firms Very large quantities of money are at stake Borrowing and lending is not intermediated Some basic characteristics of financial markets Money markets are the markets for shorter- term finance, typically of a year or less. Capital markets are markets for longer-term finance, typically longer than a year. Some basic characteristics of financial markets Participants – Typically larger ‘blue chip’ companies, sovereign governments issue shares, bonds etc. which are widely held and traded However, SMEs often depend on intermediated finance and retained profit Equity capital and the stock exchange Ordinary shares and preference shares IPOs and Rights Issues Learning Activity – Google the top 10 IPOs of all time. Which of these companies have you heard of? Equity capital and the stock exchange The primary purpose of all stock exchanges is to raise equity capital for firms in return for securities issued in the form of ordinary shares or preference shares. Ordinary Shares Shareholders have fractional ownership of firm Ordinary shareholders are usually paid dividends out of any residual profit Ordinary shareholders usually have voting rights, though this is not always the case­ Ordinary Shares Technically, the firm is under no obligation to pay a dividend to ordinary shareholder Firm may retain profit for investment Retained profit belongs to ordinary shareholder Ordinary shareholders are paid after all other creditors if the firm is wound up Ordinary Shares Preference shares Much less common than ordinary shares. Dividend which is fixed percentage of the value of their share subscription. Unpaid dividend accrues until it can be paid. Ordinary Shares Do not usually have voting rights unless dividends fall into arrears. More like debt in their characteristics. In the event of liquidation, they have precedence over ordinary shares The Two Types of Capital – Debt and Equity Benefits of debt for firm Risks of debt for firm Benefits of debt for investor Risks of debt for investor Debt capital and the markets for debt Benefits of debt for firm Types of Debt Instrument The Money Markets https://www.investopedia.com/articles/investing/ 052313/financial-markets-capital-vs-money-mar kets.asp The Bond Market The Bond Market https://www.youtube.com/watch?v=O7ww0gQw uhI How a bond is defined Bond Rating Agencies Defining a Bond A bond is defined by face value, maturity and coupon rate The face value is the denomination of the bonds, i.e. the units in which it’s transacted £100/bond in the UK, $1000/bond in the US This is also the sum borrowed/loaned per bond Defining a Bond Bond interest is called the coupon. It is a fixed % of face value. As interest is fixed, investors are essentially buying an income stream. Hence bonds are called fixed income instruments. Defining a Bond As well as face value and coupon rate, the 3rd parameter that defines the bond is maturity The bond expires at maturity. All of the sum borrowed is repaid at maturity This is known as bullet repayment. Key Points Introduction The Nature of Financial Markets Essentially Markets for debt and equity Various key questions about these markets IOUs and bits of paper The nature of wholesale markets and some of the instruments traded on them Key Points Debt capital and the markets for debt Benefits of debt for firm Types of Debt Instrument The Money Markets The Bond Markets Key Points Equity capital and the stock exchange Ordinary shares, preference shares, IPOS and Rights Issues Bond Valuation A bond is defined by face value, coupon rate and maturity This defines the fixed cash flow which is offered to the investor Key Points Bond Valuation As with all valuations, value = price = sum of Discounted Cash Flow.