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FINANCIAL MARKETS CONTENT The Money Market The Foreign Exchange Market The Bond Market I. The Money Market 1. DefinitionFinancial market in which only shortterm debt instruments (generally those with original maturity of less than 1 year) are traded It is used by participants as a mean for borrowing and lending in the short term,with maturities that usually range from overnight to under a year. Note: moneycurrency is not traded in the money markets The Money Market 2. Characteristics MARKET No particular trading placesWholesale markets with large transactions (>1m dollars) Prevent most individual investor from directly participating. Flexible and innovative Small investors can access to money market SECURITIES Sold in large denominations Have low default risk Mature in one year or less, normally less than 120 days 3. The Money market purposes Toward investors Toward borrowers I. The Money Market – 3. Purposes 3.1.To “warehouse” the surplus funds 3.2.Provide a higher return than holding cash and money in banks 3.3.A means to invest idle funds and to reduce opportunity cost TOWARD INVESTORS 3.1. To “warehouse” the surplus funds An ideal place for a firm or financial institution to “warehouse” surplus funds until they are needed
GROUP Lê Thị Quỳnh Lê Thị Thanh Thảo Nguyễn Đức Thịnh Chu Thị Thùy FINANCIAL MARKETS CONTENT I The Money Market II The Foreign Exchange Market III The Bond Market IV I The Money Market I The Money Market 01 02 Definitions Characteristics 03 Purposes 04 Operation I The Money Market Definition Financial market in which only short-term debt instruments (generally those with original maturity of less than year) are traded It is used by participants as a mean for borrowing and lending in the short term,with maturities that usually range from overnight to under a year Note: money-currency- is not traded in the money markets I The Money Market - Characteristics MARKET No particular trading places SECURITIES Wholesale markets with large transactions (>1m dollars) Sold in large denominations Prevent most individual investor from directly participating Have low default risk Flexible and innovative Mature in one year or less, normally less than 120 days Small investors can access to money market Toward investors The Money market purposes Toward borrowers I The Money Market – Purposes TOWARD INVESTORS 3.1.To “warehouse” the surplus funds 3.1 3.2 3.3 3.2.Provide a higher return than holding cash and money in banks 3.3.A means to invest idle funds and to reduce opportunity cost I The Money Market – Purposes TOWARD INVESTORS 3.1 To “warehouse” the surplus funds An ideal place for a firm or financial institution to “warehouse” surplus funds until they are needed I The Money Market – Purposes TOWARD INVESTORS 3.2.Provide a higher return than holding cash and money in banks Investors are people who are temporarily warehousing funds and not trying to earn unusual high returns use this market as an interim investment that provides a higher return than holding cash or money in banks 10 IV The Stock Market 61 Common stock Voting rights Common stockholders have voting rights on various issues of business Preferred stock Preferred stockholders don’t have any voting right Dividend distribution Common stockholders don’t always receive dividends Preferred stockholders always receive dividends at a fixed rate Priority Common stockholders are not given priorities since they are considered as owners of the company Preferred stockholders are paid after the debtholders but before the common stockholders Price volatility High Low 62 How Stocks Are Sold Organized Securities Exchanges Over-the-Counter Markets Electronic Communications Networks (ECNs) Exchange Traded Funds (ETFs) 63 Organized Securities Exchanges There is a specified location where buyers and sellers meet on a regular basis to trade securities using an open-outcry auction model Characterised as auction markets that use floor traders Floor trader represent senting various brokerage firms with buy and sell orders, meet at the trading post on the exchange and learn about current bid and ask price Typically, larger firms trade on organized exchanges 64 Over-the-Counter Markets Trading occurs over sophisticated telecommunications networks Dealers that make a market for stocks that trade in low volume are very important to the success of the over-the-counter market Market makers trade on an electronic network where bid and ask prices are set by them Market makers are compensated by the spread between the bid price (the price they pay for stocks) and ask price (the price they sell the stocks for) Typically, smaller firms trade in the over-the-counter market 65 Electronic Communications Networks (ECNs) An electronic network that brings together major brokarages and traders so that they can trade between themselves and bypass the middleman Advantages: Transparency, Cost reduction, faster execution, after-hours trading Primary disadvantage: work well only for stocks with substantial volume 66 Exchange Traded Funds (ETFs) ETFs are formed when a basket of securities is purchased and a stock is created based on this basket that is traded on an exchange ETFs features: •They are listed and traded as individual stocks on a stock exchange •They are indexed rather than actively managed •Their value is based on the underlying net asset value of the stocks held in the index basket 67 Computing the Price of Common Stock 68 The One-Period Valuation Model You buy the stock, hold it for one period to get dividend then sell the stock The Generalized Dividend Valutation Model The Gordon growth model Price Earnings Valuation Method •An alternative method for estimating a stock price •Multiply the firm’s earnings per share times the industry price earnings ratio 69 How the Market Sets Security Prices The interaction among traders in the market is what actually sets prices on a day-to-day basis The trader that values the security the most, either because of less uncertainty about the cash flows, will be willing to pay the most As new information is released, investors will revise their estimates of the true value of the security and will either buy or sell it depending on how the market price compares to their estimated valuation 70 Errors in Valuation Problems with Estimating Growth Competiton will prevent high-growth firms from being able to maintain historical growth rate 2 Problems with Estimating Risk Stock price is highly dependent on the required return 3 Problems with forecasting Dividends The problem of determining how much of the firm’s earnings will be paid as dividends 71 Stock Market Indexes A stock market index is used to monitor the behaviour of a group of stocks By reviewing the average behavior of a group of2stocks, investors are able to gain some insight as to how a broad group performed 72 Buying Foreign Stocks Risk can also be eliminated by diversifying different countries across American depository receipts (ADRs) 73 Regulation of the Stock Market The Securities and Exchange Commission 74 Thank yo u 75 ... Market 01 02 Definitions Characteristics 03 Purposes 04 Operation I The Money Market Definition Financial market in which only short-term debt instruments (generally those with original maturity... Market – Purposes TOWARD INVESTORS 3.1 To “warehouse” the surplus funds An ideal place for a firm or financial institution to “warehouse” surplus funds until they are needed I The Money Market – Purposes