Banks and Stock Exchanges

8th March 2010

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Financial Markets and Services

In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis.

Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.

Financial markets facilitate:

» The raising of capital (in the capital markets)

» The transfer of risk (in the derivatives markets)

» International trade (in the currency markets)

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Financial Markets could mean:

1. Organizations that facilitate the trade in financial products. i.e. Stock

exchanges facilitate the trade in stocks, bonds and warrants

2. The coming together of buyers and sellers to trade financial products.

i.e. stocks and shares are traded between buyers and sellers in a

number of ways including: the use of stock exchanges; directly

between buyers and sellers etc.

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Types of Financial Markets

Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities

Money markets, which provide short term debt financing and investment

Derivatives markets, which provide instruments for the management of financial risk

Futures markets, which provide standardized forward contracts for trading products at some future date

Insurance markets, which facilitate the redistribution of various risks

Foreign exchange markets, which facilitate the trading of foreign exchange

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Banking

Banks

A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

Private banking

The providing of banking services to very wealthy individuals and families. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.

Capital market banks

Capital market banks underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products.

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Investment Services

Asset management

Asset management is the term usually given to describe companies which run collective investment funds.

Hedge fund management

Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. (A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. Prime brokerage services are provided by most of the large brokers)

Custody services

Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world were estimated to $65 trillion at the end of 2004.

Reinsurance

Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.

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Intermediation or Advisory Services

Stock brokers (private client services) and discount brokers

Conglomerates

Financial Crime detection

Market share

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NEED FOR A CAPITAL MARKET

Need for a Capital Market

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Need for Capital Market

The capital market is the market for securities, where companies and the government can raise long-term funds

The capital market includes the stock market and the bond market

The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded

Stock Market

A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately

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Markets

Irrational Behavior

Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself

Stock Market Index

The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euro next indices

Derivative Instruments

Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks

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Trading Techniques

Leveraged Strategies

Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale

Short selling

In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall

The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose

Margin buying

In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise

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Taxation and Bond Market

Taxation

According to each national or state legislation, a large array of fiscal obligations must be respected regarding capital gains, and taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in particular in the stock exchanges

Bond Market

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds

Market Structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets

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Types of Bond Markets

Corporate

Government & Agency

Municipal

Mortgage Backed, Asset Backed, and Collateralized Debt Obligation

Funding

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Bond Markets

Bond Market Volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

Bond Investments

Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts.

Bond Indices

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks.

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Primary Market

The primary is that part of the capital markets that deals with the issuance of new securities

Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue

This is typically done through a syndicate of securities dealers

The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO)

Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus

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Features of Primary Market

1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM)

2. In a primary issue, the securities are issued by the company directly to investors

3. The company receives the money and issue new security certificates to the investors

4. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business

5. The primary market performs the crucial function of facilitating capital formation in the economy

6. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’

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Secondary Market

The secondary market is the financial market for trading of securities

that have already been issued in an initial private or public offering

The market that exists in a new security just after the new issue, is

often referred to as the aftermarket

Once a newly issued stock is listed on a stock exchange, investors and

speculators can easily trade on the exchange, as market makers

provide bids and offers in the new stock

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Equity Shares

Equity is the concept or idea of fairness in economics, particularly as to

taxation or welfare economics

In welfare economics, equity may be distinguished from economic

efficiency in overall evaluation of social welfare

Although 'equity' has broader uses, it may be posed as a counterpart to

economic inequality in yielding a "good" distribution of welfare

It has been studied in experimental economics as inequity aversion

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Types of Equity

Venture capital: an investment to create a new company, or expand a

smaller company that has undeveloped or developing revenues

Buy-out: acquisition of a significant portion or a majority control in a

more mature company. The acquisition normally entails a change of

ownership

Special situation: investments in a distressed company, or a company

where value can be unlocked as a result of a one-time opportunity

Merchant banking: negotiated private equity investment by financial

institutions in the unregistered securities of either privately or publicly

held companies

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Common Types

Cumulative preferred stock - If the dividend is not paid, it will accumulate for future payment

Non-cumulative preferred stock - Dividend for this type of preferred stock will not accumulate if it is unpaid. Very common in bank preferred stock, since under BIS rules, preferred stock must be non-cumulative if it is to be included in Tier 1 capital

Convertible preferred stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price

Exchangeable preferred stock - This type of preferred stock carries the option to be exchanged for some other security upon certain conditions

Participating preferred stock - This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions

Perpetual preferred stock - This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation

Puttable preferred stock - These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares

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Debenture

It is defined as a certificate of acceptance of loans which is given under

the company's stamp and it carries an undertaking that the debenture

holder will get a fixed return and the principle amount whenever the

debenture matures

In finance, a debenture is a long-term debt instrument used by

governments and large companies to obtain funds

It is similar to a bond except the securitization conditions are different.

A debenture is usually unsecured in the sense that there are no liens or

pledges on specific assets

It is, however, secured by all properties not otherwise pledged. In the

case of bankruptcy debenture holders are considered general creditors

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New Issue Market

New Issue Market: The market for selling and buying newly-issued

securities. It has no physical existence

The primary is that part of the capital markets that deals with the issuance

of new securities

The process of selling new issues to investors is called underwriting

In the case of a new stock issue, this sale is an initial public offering (IPO)

Dealers earn a commission that is built into the price of the security

offering, though it can be found in the prospectus

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Prospectus

Business Prospects and Competitive Position

Industry Prospects

Company Prospects

» Financial Position

» Management Quality

» Corporate Governance Practices

» Compliance and Litigation History

» New Projects—Risks and Prospects

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Private Placement

A private placement is a direct private offering of securities to a limited

number of sophisticated investors

It is the opposite of a public offering. Investors in privately placed

securities include insurance companies, private equity funds, pension

funds, mezzanine funds, stock funds and trusts

Securities issued as private placements include debt, equity, and hybrid

securities

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Private Placement

Private Placement Memorandum: The Private Placement Memorandum, or

"PPM", is the document that discloses all pertinent information to the investors

about the company, proposed company operations, the transaction structure,

the terms of the investment

Subscription Agreement: The Subscription Agreement sets forth the terms

and conditions of the investment. It is the "sales contract" for purchasing the

securities

Promissory Note: In debt offerings you need to have a Promissory Note

outlining the terms of the loan arrangement with the investors. The note is the

actual "loan document" between the company and the investor

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Banker Customer Relationship

The capability to integrate two or more delivery channels through shared

technology has only recently been deployed in any significant way

IT managers within the bank, as well as business managers that rely on the

delivery channels to service their products, know deep down that integrating the

channels is the right thing to do because some benefits of channel integration

are intuitive if not scientifically provable

Still, many banks have implemented, or are in the process of designing,

integrated delivery channel architectures based on these soft benefits as well as

on the goal of maintaining and deepening the customer relationship in the face

of competitive pressures

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Recent Trends

For coordinating the demand and supply of capital funds, an organized and well-capital market is highly essential for industrial growth of the country.

The supply side is represented by so many individual and institutional investors.

The capital market in pre independence era was not much popular due to the philosophy of mixed economy.

As the country opened foreign operations, many more Indian companies got listed on foreign stock markets of London, New York and Nasdaq, etc.

Trade is confirmed via the internet in no times and by this method, the investors come to know immediately the trade member, time, rates at which the trade takes place.

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THANK YOU

That’s all Folks !