Financial markets and banks, different funds, main accounting statements
Unit 1. Financial markets, Stock Exchange, securities, shares.
Learning objectives____________________________________________________
1. Describe the types of financial markets
4. Outline the activity of Stock market
5. Identify all types of securities, discuss their peculiarities
6. Explain the risks involved in investing in securities
7. Assess the necessity of issuing shares and discuss how investors need to be rewarded
8. Differentiate between ordinary and preference shares
Terms to learn________________________________________________________
Securities, equity, bond, derivative, stock market, over-the- counter market, futures, options, swaps, contracts-for-difference forex, stock exchange, primary market, secondary market, IPO, flotation, ordinary shares, preference shares, blue chip companies
Pre-texts discussions
1. What types of financial markets exist?
2. What types of securities do you know?
3. Have you ever invested money into financial tools?
4. What are the most reliable securities at the market?
5. Why do companies issue shares?
Reading______________________________________________________________
Text I. Types of financial markets
The financial market is a broad term describing any marketplace where trade of securities including equities, bonds, currencies and derivatives occur. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade. Markets can be primary and secondary. A primary market issues new securities on an exchange. Primary markets, also known as «new issue markets», are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security. The secondary market is where investors purchase securities or assets from other investors, rather than from issuing companies themselves.
· financial market for stocks is a financial market that enables investors to buy and sell shares of publicly traded companies. The primary stock market is where new issues of stocks are first offered. Any subsequent trading of stock securities occurs in the secondary market.
· over-the-counter market (OTC) is an example of a secondary market. An OTC market handles the exchanging of public stocks not listed in New York Stock Exchange or American Stock Exchange. Companies with stocks trading on the OTC market are usually smaller organizations, as this financial market requires less regulation and is less expensive to be traded on.
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· financial market for bonds. A bond is a security in which an investor loans money for a defined period of time at a pre-established rate of interest. Bonds are issued by corporations, municipalities, states and federal governments. Also referred to as the debt, credit or fixed-income market, the bond market sells securities such as notes and bills issued from the United States Treasury.
· money market is a portion of the financial market that trades highly liquid and short-term maturities. The intention of the money market is for short-term borrowing and lending of securities with a maturity typically less than one year. This financial market trades certificates of deposit, banker’s acceptances, certain bills, notes and commercial paper.
· derivatives market is a financial market that trades securities that derive its value from its underlying asset. The value of a derivative contract is determined by the market price of the underlying item. This financial market trades derivatives including forward contracts, futures, options, swaps and contracts-for-difference.
· Forex market is a financial market where currencies are traded. This financial market is the most liquid market in the world, as cash is the most liquid of assets. The interbank market is the financial system that trades currency between banks.
Text II. Stock Exchange
An exchange is an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them.
Securities that are not listed on a stock exchange are sold OTC, which stands for over-the-counter. Companies that have shares traded OTC are usually smaller and riskier because they do not meet the requirements to be listed on a stock exchange.
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When a business raises capital by issuing shares, the owners of those new shares are likely going to want to sell their stake someday. Whatever is driving their decision, they aren't likely to tie up their funds unless they know somehow, someway, at some point in the future, they'll be able to find a buyer for their holdings without too much trouble in what is known as «the secondary market».
· Primary market is a market for new issues or new financial claims. It’s also called new issue market. The primary market deals with those securities which are issued to the public for the first time.
· Secondary market is a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities.
Primary market is the market where the newly started company issued shares to the public for the first time through IPO (initial public offering). Secondary market is the market where the second hand securities are sold.
Without a stock exchange, these owners would have to go around to friends, family members, and community members, hoping to find someone to whom they could sell their shares. The downside is that there is no transparency. Nobody knows what the best price is for a given stock at any given moment in time.
Types of securities
A security is the financial instrument that represents an ownership position in a company, a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a negotiable financial instrument that represents some type of financial value. Securities include shares of corporate stock or mutual funds, corporation or government issued bonds, stock options or other options, limited partnership units, and various other formal investment instruments. A security is a tradable financial asset. Securities are divided into two categories debts and equities.
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A debt security represents money that is borrowed and must be repaid. These include debentures, bonds, deposits, notes and commercial paper.
E quities represent ownership interest held by shareholders in a corporation, such as a stock. Common stock is the most popular type of equity security.
On the whole there are the following types of securities in the financial markets:
· A derivative is perhaps obviously, derived from some other asset, index, event, value or condition. Derivative traders enter into agreements to exchange cash or assets over time based on the underlying asset. A simple example is a futures contract, an agreement to exchange the underlying asset at a future date.
· Stocks are the best known equity security. Stock prices can fluctuate greatly. Investors try to buy stock when the price is low and sell it when the price is high. Stock has a higher investment risk than most other securities. There is no guarantee that the investor won’t lose money. However, stock usually has the potential for the greatest returns.
· A corporate and government bond is a debt instrument issued by a company. It is a loan to the company when you invest in a bond. You are entitled to receive interest each year on the loan until it is paid off.
· A stock option is the right to buy or sell a stock at a certain price for a period of time. A call is the right to buy the stock. A put is the right to sell the stock. Stock options can be used to help reduce your investment risk.
· A futures contract is an agreement to sell a specific commodity at a future date for an agreed upon price. A futures option is the right to buy or sell a futures contract at a certain price for a specific period of time.
· Investment certificates are securities issued by a bank, and designed to offer the investor an agreed yield under pre-defined conditions stipulated in the prospectus.
· Warrants are options issued by a joint-stock company, which give holders the right to purchase a certain quantity of the respective company’s shares at a pre-determined price. After a certain period, the right to purchase shares terminates.
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· Swap refers to an exchange of one financial instrument for another between the parties concerned. This exchange takes place at a predetermined time, as specified in the contract.
Text III. Raising finance
Why does a company issue shares? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.
Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will be worth more.
The first sale of stock, which is issued by the private company itself, is called the initial public offering (IPO), or flotation. Company shares are listed or quoted on the stock market.
It may be emphasized that there are no guarantees when it comes to individual stock. Some companies pay out dividends, but many others do not. Without dividends an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case the investment is worth nothing.
But there is also a bright side in investments. Taking on a greater risk demands a greater return on the investment, much higher than bonds and saving accounts.
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