Introduction to Financial Markets
Financial Markets
A Financial Market is the place, facility, or system where assets are bought and sold.
The purpose of a financial market is to connect buyers and sellers of funds and determine fair prices for different financial assets.
- Financial markets operate:
- Electronically.
- By phone.
People Deficit
- Individuals, businesses, and governmental units that need to raise capital.
(Income < Expenses).
Surplus People
- Individuals and companies that have funds available for investment.
(Income > Expenditure).
Participants – Investor Holders
Holder or Owner of the Securities
The investor who bought and has physically or deposited securities.
- Shareholder: If the securities are shares.
- Bondholder: (Bonds, notes, etc.): In all other types of securities.
Other Participants
- Stockbrokers: Authorized brokerage firms and investment companies Operators.
- Specialized Agents:
- Brokers: They act on behalf of third parties, charging a fee.
- Dealers: Are brokers who may also act on their own.
- Market Maker: They are brokers who specialize in certain financial markets. They should always give a purchase price and sales price and are forced to operate at those prices.
- Provider Rates: Are companies that provide the service of calculation, determination, and provision of updated prices for the valuation of securities, documents, and financial instruments.
- Authorities and Self-Regulatory Bodies.
Money Market
- The money market is defined as one in which debt instruments are traded as low risk and high liquidity.
- The main objective of this market is to unite the whole supply and demand of money, balancing the needs of the saving public financing requirements for capital investment projects or working for private companies, parastatals, federal and state governments.
- In general terms, short-term financial instruments that have sufficient liquidity are traded. However, in recent years, the participation of long-term instruments has increased.
- The money market instruments represent ownership of the issuer’s debt.
Money Market Division
1. Primary Market
What are the new placements? The title is negotiated directly from the issuer to the investor. Placement resources go directly to the issuer to meet its funding needs.
2. Secondary Market
It is the market in which supply and demand or securities that have already been cast. The resources are traded among investors.
Direct Operations
The client requests the amount of securities, the period required for the operation, and the settlement date (same day, 24 or 48 hours).
Ticket Outlets
It is when the customer buys or sells securities before their maturity date.
Repo Operations
These are sales of securities in the present, with a binding agreement to repurchase in the future.
Simple Interest
Is that when only the capital earns interest for the entire period of operation, the interest due at the end of the term, for example, after a year of investment, withdraw interest on the capital and then left the same investment. In the second year, it becomes to remove the interest and invest the same capital.
Example
Calculate simple interest. How much is produced by a capital of $35,000 invested for one year and then three years at an annual rate of 5%?
Year 1
M = c (1 + i * n)
M = 35,000 (1 + 0.05 * 1)
M = 36,750
Interest is $1,750.
Year 3
M = C (1 + i * n) = 35,000 (1 + i * 3) = 40,250.
Compound Interest
Recognizes money growth as opposed to simple, i.e., a steady growth of capital. For example, after a year of deposit, interest is not withdrawn near the former capital investing for another year, and so on.
What are Finances?
“Finances can be defined as the art and science of managing money.”
Financial Statements
Balance Sheet
Financial situation at a given date.
A “balance sheet” shows the specifics of the company’s financial position to indicate the resources they possess, the obligations owed, and the amount of equity (investment) in the business.
Income Statement
Results of operations of the company during a specified period.
A “statement of income” also indicates the profitability of the business compared to the previous year (or other period).
Cash Flow Statement
Summary of cash flows of the company.
A “cash flow statement” integrates and summarizes the cash received and payments of the business over the same period covered by the statement of result.
Notes
Additionally, a complete set of financial statements includes many pages of explanatory notes that provide additional information that accountants believe is useful in interpreting financial statements.