Financial Markets

Explain what is meant by financial markets.

Financial markets is where the financial sector and households/firms meet, providing
products that provide returns for households and businesses that have excess funds
and make funds available to those who need additional money for consumption or
investment

Explain what is meant by the phrase that financial intermediaries create a bridge between
the savers and borrowers in the economy
Since they hold the savings of firms/households as deposits, and can make loans to
other borrowers, they are a bridge to both savers and borrowers

TYPES OF FINANCIAL MARKETS/INSTITUTIONS

Primary Market Secondary Market

Definition
Markets that create financial assets
(Securities) that can be sold into the
economy.
Markets that involve transactions
with securities that have already
been issued on a primary market in
the past. Ownership of an asset is
transferred from one individual or
business to another.

Examples Westpac – Issuing new shares to the Stock exchanges.

public

 Banks - Banks are the largest part of the financial sector – Providing a range of financial
services like savings, loans, issuing credit cards, financial advice etc.
 Finance Companies - Financial Companies obtain funds from the general public, debt
securities or non-financial businesses – they want to make profit through loaning to
households/businesses at high interest rates
 Investment Banks – Investment banks differ from borrowing on a short-term basis from
companies, lending these funds to other large companies – advising them with financial
services and trading securities for profit
 Mortgage Originators - are banks that offer long-term housing loans used to buy property.
 Superannuation Funds - Superannuation Funds invest a proportion of an employee’s income
into many financial products and assets that can be available to the employee when they
retire

What is meant by the term Credit in financial markets?

Credit is the loans given to individuals, businesses and governments for spending on
consumption and investment
‘
FINANCIAL MARKET PRODUCTS

 Consumer Credit - Consumer credit allows consumers to pay for goods and services in
advance rather than actual payment with money. Allowing them to tap in to future sources
of income that they are likely to receive in order to fund consumption in the present. This is
mainly done through credit cards consumers use to pay for things with more interest at a
later date
 Housing loans - Are offered by banks. They are long-term loans used to purchase
property and require repayments over time with added interest
 Business loans - A form of debt that allows businesses to invest in their business
operations like capital, technology, office expansions etc. Small businesses lend from
financial firms and banks, whereas larger companies typically borrow from
investment banks
 Short term money market - This brings people and businesses together with
temporary shortages or surpluses of funds. Banks with surplus funds issue various
forms of debt securities to those in need of funds
 Bonds - Long-term securities for which lenders receive regular fixed payments from
the issuing institution, all while receiving the principal value of debt at the end of the
bond period
 Financial futures and options - Are contracts to trade in financial instruments (shares
or bonds) at a later date for a certain price. This allows investors to protect
themselves against adverse moments in interest rates, currency fluctuations or share
prices by agreeing on a price to buy or sell the financial product
 Foreign Exchange - The market for buying or selling foreign currencies. Investors and
businesses require this for doing overseas business, while individuals may need it on
holidays
 Bonds – Longer-term securities where the lender receives regular, fixed payments from the
issuing institution whilst receiving the principal value of debt (face value) by its maturity
date.

SHARE MARKET

Where investors buy/sell shares. Is important because businesses can sell shares to raise funds for
growth, and individuals can gain returns on their excess funds.

Public company – A company whose shares are not subject to any transfer restrictions, and so can
be traded freely on the share market.

Private company – A company that restricts ownerships of shares to only a few individuals and
places restrictions on transfer so ownership cannot be freely bought between people.

Investors wish to make capital gains from the increases in shares, and key investors usually have
influence to a company’s executive employment.

 Dividends – a sum of money paid by a company to its shareholders.

 Capital gains – The profits made by investors who sell their shares at a price above the level
they originally paid.
 Float/IPO – when a company lists itself on the stock exchange and sells its shares to the
public for the first time.
EFFECT ON ECONOMY:
Share market values often reflect the country’s economic conditions.

All Ordinaries Index – measures changes in the overall value of companies listed on the ASX. In
combination with looking at a country’s economic growth rate, it can be seen that the market
generally rises and falls in line with the economic conditions.

Share market can also be a method of allocating resources to parts of the economy – if a sector is
performing well and raising high amounts of capital, shareholders will be attracted to it and so share
prices will increase.

DOMESTIC & GLOBAL FINANCIAL MARKETS:

Foreign exchange markets enable the movement of funds globally.

Debt markets are crucial to economic development due to its reliance on foreign borrowing.
Australia is a net borrower as it borrows more funds from overseas than it lends overseas.

Equity markets are markets where stakes and shares of companies are traded.

Balance of payments – regards how an economy transacts with the rest of the world, how resource
flow in and out. Includes current account (Net flow of money from international trade) and the
combined capital and financial account (net change in ownership of assets and liabilities).

The regulation of global financial markets:

- Bank for International Settlements: Helps central banks promote financial stability through
appropriate market regulations.
- International Monetary Fund: Oversees the general stability of the international financial
system through monitoring economies and markets whilst providing financial assistance to
foreign companies that are experiencing financial deadlines.

Global financial markets:

Advantages:

* Offer opportunities to invest and gain returns from international businesses,

* Allow Australians to access foreign capital for investment into houses/businesses. Without it,
Australians would face higher borrowing costs.

Disadvantages:

 Regular disturbances in the global market system are often transmitted to Australia
REGULATION OF FINANCIAL MARKETS:
Instability of markets can result in savings being lost, companies going bankrupt, and an overall lack
of confidence in the economy that can lead to recession.

RBA:

 Stabilises financial systems through monetary policy – ensuring things like inflation, interest
rates, and economic growth are in line with the current economic conditions.
 Flows money between bankers to the banks

APRA Australian Prudential Regulation Authority:

* Ensures deposit-holders can take back their deposit money when they want it

 Insurance companies meeting their policy regulations

 Ensuring super funds perform well
 Support institutions if they experience financial difficulties

Supervises financial intermediaries through 4 Tools:

1. Licensing: Licensed banking, insurance, and super companies are allowed to operate
under reasonable circumstances.
2. Prudential standards: Institutions must follow these standards, including financial
soundness, risk management, and governance issues. Done so institutions meet these
expectations that suits the size and nature of their businesses.
3. Supervision: APRA can supervise them by examining data, reports, and visiting the
institution staff. Identifies any potential weaknesses as early as possible.
 Enforcement: If institutions aren’t cooperating, APRA can use a range of enforcement
opportunities

ASIC Australian Securities and Investment Commission:

Regulates Australian companies/financial markets with the aim of protecting investors and
consumers. They monitor and investigate and act when the integrity of the financial system has been
jeopardised.

Australian Treasury:
Main source of economic policy for Australian government

Influences how government:

- devise budgets

- Collect taxes
- Allocate expenditure
- Implement other policies

Provides advice to government on regulatory settings for financial markets, corporate practices, and
consumer protection.