Define footer - Name of the presentation / Your name / Unit, Office 1 Chapter no. 2: Financial markets Define footer - Name of the presentation / Your name / Unit, Office 2 Content §Introduction and purpose statement §Primary and secondary market §Direct vs. Indirect finance §Functions of financial market §Types of financial market §Money market §Bond market §Stock market §Asymmetric information §Up-to-date trends §Important terms, revision and conclusion § § § § § Financial market §= a market in which people and institutions trade financial securities, commodities, and other items of value §= the set price is a result of supply and demand §Does not have physical existence Define footer - Name of the presentation / Your name / Unit, Office 3 Primary and secondary market §Primary market §a financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers §Investments banks usually help with the first/initial process of selling §IPO = Initial Public Offering (flotation) §Secondary market §A financial market in which securities that have been previously issued can be resold 4 Define footer - Name of the presentation / Your name / Unit, Office Direct vs. Indirect finance §Direct finance §Without any middlemen §For some types of trades such connection is not possible §Indirect finance §The communication between a buyer and a seller is administered by an intermediary (middleman) §Higher transaction costs – why? 5 Define footer - Name of the presentation / Your name / Unit, Office Direct and Indirect finance 6 Define footer - Name of the presentation / Your name / Unit, Office Functions of financial market §Transfer of resources •Money is transferred from surplus do deficit units, using different types of tools §Price determination •The price is set due to the demand and supply on the market §Productive usage §Enhancing income •The financial market enables surplus units to enhance their financial sources §Information •Various types of information are available on the market § 7 Define footer - Name of the presentation / Your name / Unit, Office Magic triangle §Can you reach all of the poitns at the same time? 8 Define footer - Name of the presentation / Your name / Unit, Office Výsledek obrázku pro magical triangle of investments Money market §= short-time investments §Products: §Cheque §Banking products (e.g.: savings account) §Assets with due date in shorter period than one year § §What is the main advantage? § § 9 Define footer - Name of the presentation / Your name / Unit, Office Bond market §= a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate §Less risky than shares but more risky than products of money market §Various types of bonds - 10 Define footer - Name of the presentation / Your name / Unit, Office Stock market §Share/stock = a claim on the company's assets and earnings §Different types of shares: ordinary, preferred shares, common stocks §Different forms of shares §Rights related to shares holding: §A part of the decision-making process §Right to payment of the liquidation value §Right to be paid dividends § §More risky but more profitable (comparing to bonds/debentures or products traded on the money market) § § 11 Define footer - Name of the presentation / Your name / Unit, Office Asymmetric information: Adverse Selection + Moral Hazard §Adverse Selection §Originally used in insurance §situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality § §Moral Hazard §the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles 12 Define footer - Name of the presentation / Your name / Unit, Office Market bubbles §Market bubble §speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon §Based on wrong assumption of society behaviour §People tend to believe in the value of something which is actually worthless or has very low value §Various bubbles which happened in the past §Tulip mania (around 1637) §Dot-com bubble (1991-2001) §Railway mania (1840) §Housing bubble (2007-2008) § § § 13 Define footer - Name of the presentation / Your name / Unit, Office Up-to-date trends on the financial market §Globalization §Internationalization §International trade §Dematerialization § §Financial literacy §Behavioural finance § § 14 Define footer - Name of the presentation / Your name / Unit, Office Terms to be familiar with §IPO (flotation) §Initial Public Offering §The very first offer of a company‘s shares §Transaction costs §The time and money spent in carrying out financial transactions §OTC market §Bonds/shares/stocks/stakes §Financial derivatives – different types §Bond coupon §Principal § § § Define footer - Name of the presentation / Your name / Unit, Office 15 Questions for revision §What is the difference between stocks and bonds? §What is the main disadvantage of stocks/shares from the point of an investor? §What is the difference between direct and indirect finance? §What are main functions of financial market? §What are financial derivatives? §Which types of financial derivatives do you know? §Describe the intuition of moral hazard. § What are main attributes of shares/stocks in comparison with bonds and products of money market? § § Define footer - Name of the presentation / Your name / Unit, Office 16 Thank you for your attention 17 Define footer - Name of the presentation / Your name / Unit, Office References §MISHKIN, Frederic S. Financial markets and institutions. Eight edition, global edition. Boston: Pearson, 2016. Always learning (Pearson). ISBN 978-1-292-06048-4. §Moral Hazard Definition | Investopedia. Investopedia [online]. [cit. 2016-09-29]. Dostupné z: http://www.investopedia.com/terms/m/moralhazard.asp §Adverse Selection Definition | Investopedia. Investopedia [online]. [cit. 2016-09-29]. Dostupné z: http://www.investopedia.com/terms/a/adverseselection.asp §BODIE, Zvi, Alex KANE a Alan J. MARCUS. Investments. 10th global ed. Maidenhead: McGraw-Hill Education, 2014. ISBN 978-0-07-716114-9. § Define footer - Name of the presentation / Your name / Unit, Office 18