Preliminary Exam Topic 5 Flashcards
(109 cards)
1
Q
Define ‘FINANCIAL MARKETS’
A
Systems that facilitate the buying and selling of financial instruments (stocks, bonds, currencies, etc) enabling resource, allocation, and the risk transfer amoungst investors and entities.
2
Q
What are some things financial markets are able to do?
A
Provide returns for households and businesses that have excess funds.
Make funds available to those who need additional money for consumption or investment.
Utilise income that is not immediately spent by allowing others to borrow the surplus for immediate consumption and investment.
Financial Markets are also the factor markets for capital.
3
Q
Who are the net-savers and net-borrowers in an economy
A
Individuals are classified as net-savers
Businesses are classified as net-borrowers
4
Q
Define ‘FINANCIAL INTERMEDIARIES’
A
Create a bridge between savers and borrowers - hold savings of individuals or firms as deposits, and then make loans to other firms or individuals who can make use of them.
5
Q
Where do savings come from for individuals, businesses and governments (sources of savings)
A
Individuals - any surplus income that is not spent goes into savings (usually stored in a bank or financial institution, however can be kept liquid)
Businesses - can save by not distributing all of their profits to their owners. The funds that are not distributed can be supplied to financial markets until needed.
When the government budgets for a surplus (that is, current revenue is greater than its expenditure), it accumulates savings.
There are also foreign pools of savings supplied by individuals, firms and governments from other countries that Australians can borrow from.
6
Q
Reasons for borrowing
A
Consumers borrow when their demand for G&S exceeds their current capacity to pay for them.
Entrepreneurs/business managers borrow to fund the operation or expansion of their businesses.
The government becomes a borrower of funds when it budgets for a deficit (when its current expenditure is greater than its current revenue).
Australian financial institutions can lend money overseas to borrowers. (While this does occur, in overall terms Australia borrows far more from overseas countries than it lends - Australia is a net borrower)
7
Q
Define ‘SECURITIES’
A
Any form of financial instrument, including shares and bonds, that provides the holder of that instrument with a claim over real assets or a future income stream.
8
Q
Financial markets are commonly divided into two main types: what are they?
A
Primary
Secondary
9
Q
Define ‘PRIMARY FINANCIAL MARKETS’
A
Financial markets that facilitate the creation of financial assets, known as securities, that can be sold into the economy.
If a business wants to raise funds, it can either borrow money by issuing debt securities or expand the ownership of the company by selling new shares.
In a primary market, the money received from investors goes directly to the company.
10
Q
Define ‘SECONDARY FINANCIAL MARKETS’
Give an example
A
Financial markets that involve transactions with financial assets that have already been issued on a primary market some time in the past.
No new financial asset is created; instead the ownership of an existing financial asset is transferred from one individual or business to another.
Most financial market transactions are conducted on secondary markets.
Companies whose securities are traded on the secondary markets do not receive any money from these transactions.
Using a trading app to buy and sell shares is an example of secondary markets.
11
Q
Define the ‘SHARE/EQUITY MARKET’
A
Where ownership shares in companies are issued or exchanged.
12
Q
what are the the main financial markets that exist across the world? (4)
A
The Share or Equity Market
The Debt Market
The Derivatives
The Foreign Exchange Market
In various ways, all financial intermediaries perform the same basic function – channel the excess savings (from net savers) in the economy to those who wish to borrow funds ( net borrowers).
13
Q
Define the ‘DEBT MARKET’
A
Where debt securities (e.g bonds) are exchanged, or cash is lent or borrowed.
14
Q
Define ‘DERIVATIVES’
A
Where people buy and sell financial assets that are based on the value of other financial assets.
15
Q
Define the ‘FOREIGN EXCHANGE MARKET’
A
Where financial assets defined in one country’s currency are exchanged for assets defined in another countries currency.
16
Q
Financial markets don’t need a location - give an example of this
A
Majority of Australian trades occur on the ASX (Australian Securities Exchange), the largest primary and secondary financial market in Australia
ASX: major share market in AUS, where the purchase/sale of most shares in public companies occurs. The share market brings together people wishing to buy and sell shares to allow transactions to occur.
17
Q
Define ‘the ASX’
A
ASX: major share market in AUS, where the purchase/sale of most shares in public companies occurs. The share market brings together people wishing to buy and sell shares to allow transactions to occur.
18
Q
Define ‘FINANCE COMPANIES’
A
19
Q
Define ‘FINANCE COMPANIES’
A
Finance Companies: institutions that obtain funds primarily by borrowing from the public or banks through debt securities, and then lend those funds to individuals or businesses at higher interest rates.
20
Q
Define ‘FINTECHs’
A
Fintechs: is a type of financial services business that uses technologies such as artificial intelligence or blockchain to increase efficiency or deliver new services.
21
Q
Define ‘INVESTMENT BANKS’
A
Investment Banks: borrow short-term funds from companies with excess capital to lend to large corporations/government agencies for expansion - offer financial advice for mergers, and trading securities for profit.
22
Q
Define ‘CREDIT UNIONS’
A
Credit Unions: non-profit, cooperative organisations whose members belong to a particular trade, industry or live in a particular area. People can deposit or borrow money, with any profits returned to members.
23
Q
Define ‘SUPERANNUATION FUNDS’
A
Superannuation Funds: receive the contributions of employees/employers and invest them in financial assets in order to provide retirement income for the contributors.
Since the introduction of compulsory superannuation in the early 1990s, the superannuation sector has grown to become a major part of the financial sector.
24
Q
List 6 financial market products
A
- Housing Loans
- Business Loans
- Short-term money market
- Bonds
- Financial Futures
- Foreign Exchange
25
Give Details about 'HOUSING LOANS'
HOUSING LOANS: It is a secured loan.
Offered by banks, as well as mortgage originators such as Aussie and RAMS.
Long-term loan used to purchase property.
Not competitive since 2008, when banks took over many non-bank lenders
Housing loan rates are typically 2% - 3% higher than the Reserve cash rate.
26
Give details about 'BUSINESS LOANS'
Business loans are a form of debt that allows businesses to invest in their business operations, such as with new technology or expanded office space
Business loan rates are typically higher than housing rates, due to a larger amount of risk being involved (which cannot be offset with a mortgage).
Small businesses will pay higher rates than large businesses
27
Give details about 'FINANCIAL FUTURES'
Contracts to trade in financial instruments (such as shares or bonds) at a later date for a certain price.
Futures markets allow investors to protect themselves against adverse movements in interest rates, currency fluctuations or share prices by agreeing on a price and currency at which to buy or sell the financial product now, even though they do not have to make the transaction until a later date.
Holder can make the transaction or can choose not to and let the option expire.
27
Give details about 'SHORT-TERM MONEY MARKET'
Brings together people and businesses who lack funds or have extra funds
Those with surplus funds issue various forms of debt securities (such as bank bills or promissory notes) to those in need of funds.
These debt securities all have a maturity date of less than one year.
28
Give details about 'BONDS'
Longer-term securities for which lenders receive regular fixed payments (known as coupon payments) from the issuing institution, and receive the principal value of the debt (known as the face value
of the bond) at the end of the bond period (known as the date of maturity).
Bonds are issued by the government and a small number of large companies and banks.
29
Give details about 'FOREIGN EXCHANGE'
The market for buying and selling of foreign currencies. Just as individuals require foreign currencies on holiday, investors and businesses require foreign currencies when they do business with people overseas.
The forex market provides a market for people to buy and sell currencies, and it operates 24 hours a day.
30
What type of business does a business have to be to sell shares?
An incorporated company
31
Define 'INCORPORATED COMPANY'
Separate legal entity from the individuals who own/manage it.
Thus, it has limited liability so that the individuals who manage it are protected from bankruptsy.
32
Incorporate businesses can be either public or private - define BOTH of these terms.
Public Companies: an entity whose shares are traded freely on the share market and are not subject to any restrictions on being transferred to other parties.
Private Companies: restricts ownership of shares to only a few individuals and places restrictions on share transfers so that ownership cannot be freely bought or sold between individuals
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The sharemarket only deals in shares of ------ companies
Public
34
Define a 'SHARE'
a type of financial asset that provides an indidividual with ownership over part of a business or company
35
Define 'THE SHARE-MARKET'
Why is it important for businesses and individuals?
A financial market in which investors buy and sell shares, which are financial assets that give part ownership of their company.
The share market plays an important role in an economy because businesses can sell shares in their companies to raise funds needed for growth, and individuals can gain returns on their surplus funds.
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What is the share-market in australia?
The ASX (The Australian SECURITIES exchange) - brings together buyers and sellers in the exchange of shares.
Both primary and secondary market - mainly secondary tho
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What are buyers in terms of the sharemarket
Investors
38
What are lenders in terms of the sharemarket (2)
Companies (primary)
Previous investors wishing to sell (Secondary)
39
What are the main role/functions of the sharemarket for investors?
The main role/function of share markets for INVESTORS are:
To gain a stake in any company profits and to make capital gains from increases in share prices.
Owning shares also gives investors the right to vote for a company’s board of directors, who decide how the company will act to maximise the wealth of shareholders.
Entitled to a proportion of the profits (dividends).
Risks are limited to investors as they have ‘limited liability.’ If a company loses money or closes due to business failure, shareholders only stand to lose the amount they initially invested in the shares.
40
Define 'CAPITAL GAIN'
Capital Gains: are the profits made by investors who sell their shares or assets at a price above the level that they originally paid for them.
41
Define 'DIVIDENDS'
Dividends are the profit returns received by the shareholders (owners) of a business.
42
What are the main role/functions of the sharemarket for companies?
The share market provides an opportunity to raise new funds for investment and business growth.
A company can sell new shares to generate funds at any time in the primary market by issuing a prospectus.
The sale of new shares is a primary financial market transaction.
Issuing new shares reduces the control existing shareholders have over the company, as they will own a smaller proportion of the company.
43
Define a 'FLOAT'
A float occurs when a company lists itself on the stock exchange and offers its shares to the general public for the first time.
44
A company’s share price is set by the market forces of supply and demand, and it reflects factors such as: (4)
Confidence in management
Previous earnings
Expected earnings
Overall economic conditions
45
Share market values are often a reflection of a countries economic conditions.. elaborate
Increased market prices means increased economic prospects for companies as a result of positive economic conditions
Decreased market prices means decreased economic prospects for companies as a result of negative economic conditions.
46
How can downturns / upturns in the sharemarket be measured?
The all ordinaries index
47
Define the 'ALL ORDINARIES INDEX'
A stock market index measuring changes in the overall value of companies listed on the Australian Securities Exchange.
48
Is the sharemarket more or less stable than the economy?
The share market is much less stable than the real economy, and small changes in economic growth can contribute to enormous changes in share values.
49
The share market also acts as a method of allocating resources to different types of production. HOW?
Companies/sectors with the best growth prospects will attract more investments in the share market - so efficient share markets will raise medium-term growth prospects in the economy.
Share prices will be higher for firms in industries that shareholders expect will experience high growth. Assuming perfect market conditions higher share prices will reflect the growth areas of the economy.
50
What is the problem with the sharemarket being able to influence resource allocation? (Speculation)
When we argue that the market is the barometer of the economy and a guide to allocating resources, we are assuming that all share purchases are based on the rational beliefs of shareholders.
Many share purchases, however, are speculative – shares are bought to resell within a short period - investors are not buying for long-term income but rather short-term capital gains.
The problem with speculative investment is that speculators base their decisions on “hype” in the market - not profitability of firms. This leads to certain shares/industries having overvalued prices, drawing further investment and leading to a misallocation of resources.
51
Define 'SPECULATION'
Speculation occurs when investors buy assets with the intention of reselling them for a higher price within a short period.
52
Australian financial market are integrated with global financial markets in what way?
How does this effect australia?
Imports / Exports
Foreign Ownership of Australian Businesses
Australians can invest in Overseas companies and Vice Versa
The integration of the Australian financial sector with global markets means that Australia is more influenced by developments in markets around the world.
53
What is FOREX
- When did australia open itself up to FOREX?
Foreign Exchange
Foreign exchange markets enable the movement of funds around the world:
E.G If a Japanese investor could not exchange their yen for AUD, they could not invest in Australian companies or loan money to Australian borrowers.
Australia has been more open to foreign exchange markets since 1983, when the Australian dollar was floated and exchange controls were abolished.
By mid-2022, the value of daily transactions on Australian foreign exchange markets averaged US$150 billion, around 7 per cent of the global total. It was the world’s fifth-most traded currency worldwide.
The Australian share market is still primarily a domestic market with foreign participation, rather than a global market. It is regulated by ASIC.
In 2023, Australian ownership of foreign companies = $2 trillion - foreign ownership of Aus companies = $1.7 trillion.
54
Define 'GLOBAL DEBT MARKETS'
Elaborate:
- Why are they important to Australia?
- Who facilitates most of these?
Global debt markets: systems through which debt securities are issued, traded, and managed internationally to raise capital from investors around the world.
Global debt markets are important for Australia’s economic development because of its reliance on foreign borrowing.
Australia is therefore a net borrower because it borrows more funds from overseas than it lends to foreigners.
Most of these movements of funds are facilitated by Australia’s four major banks, which source finance for domestic loans from overseas.
Interest charged to borrowers around the world is different: Australia interest rate is 4.35%
55
Define 'FLOATING EXCHANGE RATE'
Floating Exchange Rate: Where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. Moves naturally with supply and demand.
56
Elaborate on equity markets
Equity markets are regulated by national governments, so they exist primarily within individual countries (e.g as the New York Stock Exchange) but there are regional stock exchanges such as Euronext.
International movements of funds between equity markets are dominated by financial institutions such as banks.
57
Regulation by governments is important for the stability and efficiency of financial market: Global financial markets are not subject to the same level of regulation as domestic markets, but some limited functions are performed by international organisations.
Name these organisations
The Bank for International Settlements: international organisation that helps central banks (E.g RBA) promote financial stability through appropriate market regulations.
A related organisation, the Basel Committee, sets standards for banking regulations with the broad objective of promoting effective and uniform financial regulatory systems around the world.
The International Monetary Fund oversees the general stability of the international financial system, through monitoring economies and markets and providing financial assistance to countries that are having difficulty meeting their international financial obligations.
58
Discuss advantages of global share markets
Allow Australians to access foreign capital for individual and business investment
Without access to international finance, Australians would face higher borrowing costs or might not be able to access finance as easily.
International financial markets also enable Australians to invest and earn returns from businesses overseas
59
What is a disadvantage of a global share market
Regular disturbances in markets overseas are more quickly transmitted to Australia, especially through financial market speculation.
60
Instability in financial markets can undermine confidence in the economy and reduce economic growth - Maintaining financial market stability through regulation is a key objective of government economic policy.
In Australia, four government bodies have responsibility for the regulation and supervision of the financial system, they are?
The Reserve Bank of Australia (RBA)
Australian Prudential Regulation Authority (APRA)
Australian Securities and Investments Commission (ASIC)
Australian Treasury
61
61
SHORT outline of the roles of the RBA
Responsible for monetary policy, payment system regulation, providing banking services to the gov, the supply of banknotes and the stability of the financial system
62
SHORT outline of Australian Prudential Regulation Authority (APRA)
Responsible for prudential supervision and regulation of all deposit-taking institutions, life and general insurance, and superannuation funds.
63
SHORT outline of Australian Securities + Investments Commission (ASIC)
Responsible for corporate regulation, consumer protection and oversight of financial service products
64
SHORT outline of Australian Treasury
Advises the government on macroeconomic and financial stability issues as well as the legislative and regulatory framework for the financial system.
65
Define 'THE COUNCIL OF FINANCIAL REGULATORS
Example of how it works
The Council of Financial Regulators (CFR): informal coordinating body that brings together the country's key financial regulatory authorities to promote stability and effectiveness in the financial system.
Coordinates cooperation and collaboration among its four members – the RBA, APRA, ASIC and Treasury.
E.g. When the global financial crisis struck in 2008, the Council of Financial Regulators produced a joint Memorandum of Understanding dealing specifically with how the organisations would respond.
66
Define the 'WALLIS COMMITEE'
What did it do? What changes did it make??
The Wallis Committee: made changes to regulation to keep pace with financial sector changes, including new technologies, increased competition + breakdown of distinctions between different types of institutions
Largest changes to financial sector regulation since the deregulation of the financial sector, removed many government controls and exposed the industry to greater influence from domestic and global market forces.
The structure of responsibilities for financial market regulation between the four agencies has been in place since the late 1990s and was established in response to an influential inquiry known as the Wallis Committee.
Recommended significant changes to regulation to keep pace with financial sector changes, including new technologies, increased competition, and the breakdown of old distinctions between different types of institutions.
67
What did the deregulation of the financial system in the 1980's result in?
Greater efficiencies in our financial sector and more competition
Allowed for more foreign investments to come in
A floating exchange rate
68
Describe the GFC
The Global Financial Crisis (GFC), which began in 2007 and peaked in 2008, was a severe worldwide economic crisis precipitated by the collapse of the housing bubble in the United States. The crisis was fueled by excessive risk-taking in the financial sector, including subprime mortgage lending. As housing prices plummeted, many borrowers defaulted on their loans, leading to significant losses for financial institutions. This resulted in a liquidity crisis, forcing major firms to bankrupt and led to widespread bank failures. The crisis caused significant global recession, high unemployment rates, and massive government intervention, including stimulus packages and monetary policy measures. The GFC highlighted systemic weaknesses in financial regulation and oversight, prompting reforms aimed at increasing industry transparency and reducing the likelihood of future crises, such as the Dodd-Frank Act in the United States.
69
Define the 'CASH RATE'
What is the Australian Cash rate?
The cash rate is the interest rate set by a central bank at which commercial banks can borrow or lend money to each other overnight, influencing overall economic activity and monetary policy.
The current official cash rate (interest rate) as determined by the Reserve Bank of Australia (RBA) is 4.35%.
70
Define the 'RBA'
Australia’s central bank. Its main roles are to conduct monetary policy and oversee the stability of the financial system - independent (not gov controlled).
Created in 1959 under the Reserve Bank Act - Prior was the Commonwealth Banks
71
What are the main roles of a central bank - what makes them different from real banks
A central bank generally has the role of executing monetary policy on behalf of the government, printing banknotes and regulating a country’s banking system.
Central Banks differ from real banks as they’re:
Are not set up as a financial business with the desire to make profit
Does not provide accounts for individual customers.
Primary purpose is the overall management of the financial system in accordance with the economic objectives of the Commonwealth Government.
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Goals of reserve bank
- low inflation
- price stability
- full employment
- economic prosperity
74
What are the 7 roles of the RBA
1. Conducting monetary policy
2. Financial System Stability
3. Control of Note Issue
4. Regulation of payment systems
5. Banker to banks
6. Responsibility for holding Australia’s reserves of gold and foreign currency dealings
7. Banker and source of financial and economic advice to governments
75
Define 'MONETARY POLICY'
Explain in relation to the RBA
Most important role of RBA- Monetary policy is the Reserve Bank actions designed to influence the cost and availability of money in the Australian economy through influencing interest rates.
It aims to achieve a sustained low inflation rate while encouraging economic growth.
Monetary policy: process by which a central bank or monetary authority manages the money supply and interest rates to achieve specific economic objectives.
76
How does the RBA ensure financial system stability?
Monitors risks and developments in the financial system, provides guidance to APRA - helps APRA implement + enforce regulations
The RBA also seeks to maintain the longer-term stability of the financial system by avoiding (or at least reducing the risk of) financial crises.
One example of this is ensuring banks hold a minimum amount of their assets in a very safe or “liquid” form.
76
How does the RBA control note issue?
All currency is manufactured by Note Printing Australia (owned by the Reserve Bank)
The volume of notes and coins on issue at any particular time will vary according to the community’s demand for cash.
At certain times of the year (e.g Christmas) the demand for cash will be greater than at other times, and the RBA will seek to accommodate this demand for money.
76
How is the RBA a banker to banks?
Banks hold exchange settlement accounts with the Reserve Bank - accounts are used to allow banks to settle debts between themselves, as well as with the Reserve Bank, at the end of the trading day.
They can also be used by banks to buy and sell government securities from the RBA.
77
How is the RBA responsible for holding Australia’s reserves of gold and foreign currency dealings
The RBA’s reserves provide the funds that can be used to make international payments, or for Reserve Bank operations in the foreign exchange market. The RBA also oversees dealers in the foreign exchange market.
77
Define 'ASIC'
AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION: government body with responsibility for corporate regulation, consumer protection and the oversight of financial service products.
ASIC regulates Australian companies and financial markets, with the aim of protecting investors and consumers and improving the performance of the financial system.
Has power to monitor, investigate and act in situations where the integrity of the financial system has been undermined by illegal acts of individuals or the creation of unethical investment products.
- Protects consumers against misleading/deceptive/unconscionable conduct affecting financial products and services.
Specific offence regulated: Insider trading - where company directors use non-public information about the company to buy and sell shares on the share market to make a profit.
77
How does the RBA regulate payment systems?
Ensuring the efficiency of payment methods – such as credit cards, electronic cash, travellers’ cheques and stored-value cards - done by the payment systems board within RBA.
77
GO AND READ THE ENTIRETY OF CHAPTER FIVE U IDIOT
IM NOT JOKING RIGHT NOW
77
How is the RBA a source of financial and economic advice to governments
The Reserve Bank provides banking and financial agency services to the Commonwealth Government, as well as some state governments.
The government can lodge excess funds with the Reserve Bank - can complete transactions on behalf of the government such as welfare and pension support payments to Australian citizens.
The RBA publishes regular assessments of the state of the economy and financial markets. Its publications are highly respected and have a significant influence on economic policymaking.
77
APRA has two main regulatory roles:
What are they?
APRA encourages behaviour by institutions that will ensure their obligations to the people who place money with them.
For Example:
- Ensures deposit-holders can take back their deposit money when they want it
- Ensures that insurance companies can meet their policy obligations
- Ensures superannuation funds perform well and can pay people who withdraw their savings.
- Requires its deposit-taking institutions to maintain certain levels of funds on hand and to manage risks according to specific financial models.
For ADIs, insurance companies or superannuation funds that experience financial difficulty, APRA sorts out the institution’s financial position to ensure deposit-holders receive their funds.
78
Define the 'AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY'
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY (APRA): is the government body established to regulate all deposit-taking institutions, life and general insurance organisations and superannuation funds.
Provides prudential regulation for all authorised deposit-taking institutions (ADIs).
ADIs include banks, superannuation funds and insurance companies, credit unions and building societies.
78
Why do businesses borrow?
Overall, the business sector accesses the most funds of any sector in the economy.
Businesses need access to funds in order to:
- Expand production
- Invest in research and development
- Complete other special projects.
78
Define 'THE AUSTRALIAN TREASURY'
Government department responsible for managing the country's economic framework, fiscal policy, financial resources, and advising on economic issues + formulating government budgets.
- Main source of gov economic advice
- Influences how the gov devises the budget
- Influences how gov collects taxes
- Influences how gov allocates expenditure
- - Influences how implement other policies such as labour market policy
For example, the Treasury designed the JobKeeper program in 2020 that kept a number of Australians employed even as businesses were closed during the lockdowns on economic activity.
78
What are the two ways in which businesses can borrow?
Businesses can do this directly by issuing shares to raise equity or issuing bonds to raise debt OR indirectly by borrowing money from a financial institution such as a bank.
78
PLS go and read the overview for borrowers in topic 5
GO NOW YOU NEED TO READ IT
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Why do individuals borrow money from financial institutions?
- Personal reason
- Mortgage on a house - With a mortgage, the lending bank is given the house as security on the loan.
- Large purchases (car / travel / HECS
- Credit on credit cards
These loans are mostly unsecured, which means there is no asset the financial institution can claim if the borrower defaults on the loan - THUS usually have higher interest rates relative to those of mortgages.
80
Individuals with surplus funds must decide what form in which they should keep those funds. The choice is to either:
1. Hold them as money (currency and bank deposits)
2. Purchase financial assets (bonds or shares)
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Advantages of keeping funds in money form (currency bank deposits)
The benefit of holding money is liquidity. This allows for the easy use of funds when necessary.
Liquidity: ease which a financial asset can be transformed into cash to use as a medium of exchange.
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Define liquidity
ease which a financial asset can be transformed into cash to use as a medium of exchange.
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Disadvantages of keeping funds in money form (currency bank deposits)
No return is earned by holding cash. In fact, the value of cash is eroded by inflation over time.
Main OC of holding liquid funds is the interest that would have been earned by holding financial assets.
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Advantage of using money to purchase financial assets
Earn by holding financial assets. E.g, owners of shares receive a proportion of the profits in dividends.
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Disadvantage
Financial assets carry risks, as their value can change depending on market conditions.
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There are a THREE MOTIVES why some people prefer to hold money (or highly liquid assets) rather than invest surplus funds in financial assets that offer a return:
What are they?
1. Transactions motive
2. Precautionary motive
3. Speculative motive
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Define 'transactions motive' for holding money
People have day-to-day transactions (purchases) for which they need to use money. This includes making regular payments for G&S.
Individuals have to hold a certain quantity of currency for carrying out day-to-day transactions, as most financial assets, such as shares, cannot be used to pay for everyday purchases.
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Define 'PRECAUTIONARY MOTIVE' for holding money
Quite apart from regular and predictable transactions, there are numerous unpredictable circumstances and emergencies (such as sickness) for which people need to have liquid funds.
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Define 'SPECULATIVE MOTIVE' for holding money
Buying financial assets carries the possibility of making capital gains or losses. If the price or value of shares or bonds goes up, the individual makes a capital gain; VICE VERSA.
Individuals will try to avoid capital losses, so if they expect the value of financial assets to fall, they will seek to sell their financial assets and convert them into money.
90
Go read the financial innovations part of chapter 5 (second last)
NOW
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Examples of financial innovation
Internet-based discount stockbrokers, such as eToro and CommSec, making it cheaper and easier for small individual investors to participate in financial markets.
“buy-now-pay-later” products offered by companies such as Afterpay, allowing consumers to pay for goods in instalments without a credit card or traditional loan.
Mortgage brokers, who help individuals find the most suitable loan products, have replaced banks as the conduit to a housing loan for a large percentage of borrowers.
Contactless payment systems, such as PayPass, allow consumers to pay without having to sign/provide a PIN, reducing overall transaction time compared with debit and credit cards.
Cryptocurrencies (digital currencies) Bitcoin.
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Individuals, businesses and governments participate in financial markets as lenders when they are seeking a return on their wealth.
Individuals, businesses and governments participate in financial markets as lenders when they are seeking a return on their wealth.
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Individuals who place deposits in financial institutions are, in effect, lending their money to that institution for the purpose of getting a return on it.
Individuals who hold wealth but do not wish to spend it have a range of options:
Some may invest in assets, such as residential property.
May buy shares
Those who want to avoid risk will generally place their money into an interest-bearing deposit in a financial institution.
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A successful business may have a very strong cash flow and good profits, but it may not have immediate plans for expansion or buying out another business. What does it do then?
In such circumstances, it may deposit its funds in a financial institution.
If interest rates are at a level where maintaining deposit funds is likely to be more lucrative than investing in expanding the business, the firm is more likely to deposit the funds.
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Governments can also become lenders, although historically governments have participated in financial markets mostly as borrowers.
When the government prescribes a budget surplus, its revenue exceeds spending and this allows it to either pay off outstanding debts or maintain positive financial balances (that is, loan money through financial sector).
96
Read the lenders section now
pls
