Topic 7 - Financial Markets Flashcards
(14 cards)
What is a Financial Market
A market where money, financial securities, and commodities are traded
Price Setting in financial markets
The price of an asset is the amount that someone is willing to pay to own it
What is Price Discovery
When an individual or institution finds out the value of an asset based on the price that the asset is being bought or sold at
What is Asset Valuation
The process of determining an asset’s worth, based on market prices
What is Arbitrage
When investors exploit the price difference in underdeveloped financial markets, as assets are traded at different prices in different locations. Helps drive prices towards equilibrium
How do businesses and Individuals raise Capital
Businesses - Issuing bonds, shares etc
Individuals - loans, mortgages etc.
How do financial markets support Commercial Transactions
They facilitate transactions between individuals or institutions in different locations
How do financial products help manage Risk
Derivatives can protect against risks like unfavourable exchange rate change before a foreign payment is received
Why do Individuals and Institutions Invest (x2)
To earn a return on unused money.
Returns have 2 components:
- Capital gain: increase in asset value, only realised once asset is sold
- Yield: ongoing income
Investors preferences for gain vs yield shape investment choices
What are 3 examples of institutional investors and their characteristics
Hedge funds: accept money from a few wealthy investors, less consumer regulation, pursue high returns aggressively
Pension funds: Invest retirement savings from a large number of individuals, more risk-averse
Mutual funds: pool money from many individuals, invest according to stated goals of the fund
What is the Money Market
The market for short term debt instruments with maturities of one year or less
What is the Capital Market
The market where money is borrowed or lent for more than one year
What is the Primary Market
The market where new securities are issued and sold for the first time by companies or governments
What is the Secondary Market
The market where previously issued securities are bought and sold among investors
