Financial Markets

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Financial Markets

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Financial Markets

What you learn in the topic:
Financial Products ??“ Shares
Financial intermediaries ??“ banks
Reserve Bank of Australia
Interest rates (cash rates)
Australian Securities Exchange (ASX)
Exchange rate
Non-financial intermediaries – Insurance comp
Money supply

The Role of the Financial Markets
Financial markets perform the essential economic function of channelling funds from those with excess funds (savers), to those who have a shortage of funds (lenders).
Financial intermediaries are firms that receive the accumulated funds of savers, and then make loans out to lenders.

Sources of saving
The proportion of household income not consumed on goods and services. Y = C+S
Profits retained by business. Generally private firms.
Government budget surpluses.
Funds from overseas lenders.

Reasons for borrowing
Consumer borrow to pay fro excess consumption or finance large purchases such as a house or car.
Business borrow to finacne expansion.
Government borrow to finance a budget deficit.
Australian financial institutions lend money to overseas borrowers.

Factor Market for capital
Capital (Money capital is required by businesses as an input into the production process to make good and services.
Savings from various sectores is not only used for futures consumption, but also to invest in captal, which increase the productive capacity of the economy .

The Financial Sector
Consists of a wide frange of financial institutions.
Employs around 400,000 people.
Provides may different services including; Mortgages, credit cards, personal loans, superannuation, insurance and investment advice.
It contributed $130 billion to GDP (gross domestic product) 2010-2011. E.g. mining and tourism

Primary Financial Markets
Is where financial securities such as debt, shares, bonds and options are sold for the first time for raising capital.
Securities are any form of financial instruments, that provide the holder of that instrument with a claim over real assets or a future income stream.
An example of a primary market is the ASX- Australian Securities Exchange.

Secondary Financial Markets
Is where financial securities that have already been acquired through a primary and resold to another investor.
Financial instruments sold through these markets are subject to the forces of supply and demand.
Companies whose securities are traded on these markets do not receive any money from these transactions.

The Main Financial Markets
The Share Market: Ownership shares in companies are issued or exchanged.
The Debt Market: Where debt securities are exchanged or cash lent/borrowed.
The Derivatives Market: Where people buy and sell financial assets that are based on the value of other assets.
The Foreign Exchange Market: Where financial asests defined in 1 countrys currency are exchanged for asests defined in another countrys currency.

Type of Financial Markets
Financial Intermediaries or banks: Accept savings deposits from households, offer all financial services (credit cards, safe-deposit services and loans).
Non-bank Financial Intermediaries: Offer most services that banks provide, include finance companies, investments, banks and credit unions.

Other Financial Institutions
Finance companies: Borrow from general public through issuing debt securities, then funds re-loaned out at higher percentage. E.g GE money/
Investment Banks/Merchant Banks: Borrow from companies with excess funds and lends to other companies.
Credit Unions: are non-profit, co-operative organisations whose members belong to a particular trade, profession or industry. E.g. Teachers union and builders union.
Permanent building societies: Accept deposits from the public and provide funds for home loans.
Mortgage /Originators funds: Obtained money from financial markets to end out with flexible repayments and low percentage rates. E.g. Rams
Superannuation funds: receive contributions from members and invest in financial assets.

Textbook- page 174.
Investigate the level of competition in Australias financial markets: The increased competition in financial markets will improve the allocation of resources throughout the economy. Australias banking sector is highly concentrated with the large banks in Australia, such as ANZ, Commonwealth Bank, NAB and Westpac, overriding the markets for deposits, home loans and other lending. Foreign banks hold a greater amount of shares in a household deposits and credit cards, these only take up a small percentage in the Australian Market.
Discuss which financial products might be required in the following circumstances and what financial institutions might be involved:
a. A parent is slightly low on cash at Christmas but still wants to buy a range of presents for the family. Consumer credit. b. Teletra needs to borrow $10 million for 72 hours. Short term c. A small business wants to finance the purchase of a new company car. Business loan.

Movie: An introduction to investing in the Share Market

What is a share Shares is part ownership of a business.
What does going public mean Being listed on a public shares and the public is able to buy part of a company.
The buying and selling of company shares takes place where Takes place through the Australian stock exchange.
When was the ASX (Australian Stock Exchange) formed 1987 by dominating the 6 states of shares markets.
List the types of shared available for people investing Income shares, blue chips shares, growth shares, cyclical shares and defensive shares.
Name the ways people can buy shares Online or orders are placed by licensed brokers.
What are the advantages of professional advice Know the market, possible returns, guide you in the direction of successful companies and industries which are making a good income.
Whats the biggest single driver of shares prices Whats happening in the economy, regardless on the price of share, its the industry of the shares your investing in.
When does a trade occur Little bets and plays on a number of shares, rather than big bets on specific shares because you would normally get burned than gain money.
What is the main reason for investing long term You decide how much money you want to put into a business and the way you can become seriously wealthy, , taking a punt on interest rate droppings, (short term- scared of the economy going down and can easily get out).
Define dividend, dividend yield Dividend- Is what the company pays with shares holders. Dividend yield- Is the dividend as the percentage of the price.
What is the calculation of the price earrings ratio
Has to do with profit not dividend.
Price earnings ratio = share price ———————— earnings per share

Research Task:
Websites:[email protected]/Lookup/1301.0Chapter27092009??“10

Research the cause of the global credit crisis in 2007-2008 and its impact on the stability of the Australian financial system.

There was a massive loss of confidence in the US financial system throughout 2007-2008. The main cause of the global financial crisis in 2007-2008 was the extensive increase in the number of US homeowner??™s which had taken out sub-prime loans in which were unable to pay on their mortgage payments. This system quickly started to collapse as the loan defaults spread throughout the entire US financial system.

With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worthless on today??™s market than the bank had loaded out originally. The credit crunch had impacted towards US banks ??“ this was where the banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst.

The long-established US global investment bank, Lehman Brothers, collapsed, filing the largest bankruptcy in American history. The US government was forced to step in and provide a rescue plan of approximately US$700 billion (A$845 billion) to prop up other failing financial institutions. In the space of a few days, hundreds of billions of dollars in value had been wiped off the New York Stock Exchange.

In January of 2009 US President Obama proposed federal spending of around $1 trillion in an attempt to improve the state of the financial crisis. The repercussions of this financial meltdown sent shockwaves through the world??™s financial systems and stock markets. What started as a financial disaster quickly developed into an economic crisis. World stock markets collapsed and world economic growth and trade severely declined with a consequent increase in unemployment.

Expansionary economic policies were needed to act as a buffer against the deteriorating global conditions. In October 2008 the Rudd government announced that it would guarantee bank deposits. With the economy facing a recession, governments of the rich nations launched economic stimulus packages in order to pour millions of dollars into their economies. The Rudd government injected about $53 billion into the Australian economy through two budgetary measures. This included payments to seniors, carers and families.

The payments were made in December 2008, just in time for Christmas spending, and retailers predominantly reported strong sales. The first homebuyers grant was doubled to $14,000 for existing homes, and tripled to $21,000 for new homes.

These packages contained a mixture of immediate stimulus to encourage consumer spending and longer-term infrastructure projects. The government action shielded the Australian economy from the worst of the global recessions.

The effect of the crisis on Australia has been significantly less than other countries effected by the GFC. The Australian economy had better growth outcomes for bank loans than other developed economies for example the United States and United kingdom. Other countries experienced a bad decline and increase in unemployment rates. The Australian financial system was stronger than other countries, this meant that Australian banks didnt require any government funds.

The main effect of the GFC in Australia was the collapse of the Australian dollar- $0.98US in July 2008 to $0.60 in October 2008. This dramatic fall in the overall value of households property was between 13% – 14%; a decrease in household buying, an increase in the households saving rates was between 1.2% March 2008 to 8.5% December 2008 also decreasing the unemployment rate. The reasoning of decreasing prices of households was due to the fact that if banks were to lend more money to shaky income earners, who had ambiguous credit histories, banks would face a higher debt and higher risk in falling into recession. Household owners were not willing to pay a large amount of money as they did not have enough income to pay back banks. Households were overpriced to begin with- real market price value price was low.

In February 2008 the unemployment rate increased from 4.1% to 5.8% August 2009, although it decreased to 5.3% in February 2010 according to ABS 2010. In this period manufacturing, construction and retail sectors lost their jobs compared to those in health and social departments increased in jobs. This occurred because consumers were unable to afford for the consumption of goods and services which led to a decrease in jobs regarding manufacturing, construction and retail sectors, however jobs regarding health and social increased because consumers were willing to spend money in these departments if needed. There was a decrease in full-time employment, an increase in part-time employment according to ABS 2009. These changes of employment in the labour market led to a decrease in the aggregate monthly hours worked. Monthly hours worked decreased from 1551 million August 2008 to 1518 million August 2009, in February 2010 monthly hours increased to 1538 million according to ABS 2010.

Domestic and Global Markets

Australian financial market is an important part of global financial markets. There are several:
Foreign Exchange Market: (Youtube- Forex- all introduction to forex trading) Enable the movement of funds around the world. Increasingly important since 1983 with the flow of the Australia dollar, it involves the trading of one currency to another. For example the Australian dollar decreased majorly, what impact will it have on the Australia People may not want to invest in the Australian dollar. Encourage tourism in Australian. Interesting Australia is the most 5th but only contributed 3-4% in world trade. The main reason why the Australian dollar is traded is because it will speculated.
Global debt Markets: (Youtube- Are important for Australias economic development because of its reliance on foreign borrowing.
Equity Markets: (Youtube- Are regarded by national governments so they exist primarily within individual counties.

(Youtube- Forex- all introduction to forex trading)

Regulation of financial markets

RBA- Reserve Bank of Australia (Monetary policy- interest rates/cash rate). The RBA is Australias central bank. Its main roles are to conduct monetary policy and oversee the stability of the financial system.
APRA- Australian Prudential Regulation Authority (Look after banks). ARPA os the government body established to regulate all deposits-taking institutions, life and general insurance organisations and superannuation funds.
ASIC- Australian Securities and Investments Commission. ASIC is the government body with responsibility for corporate regulation, consumer protection and the oversight of financial service products.
Treasury- Part of the government (policy, budget)Treasury is the Australian Government department responsible for development fiscal policy through the Federal Budget and advising the government on financial stability issues.

Financial Regulation
Share financial markets are critical for the functioning of the economy
Instability can undermine confidence and can have serve consequences for households and businesses.
Maintaining financial market stability through regulations is a key objective of government economic policy.

Financial Market Regulators
Reserve Bank of Australia: Responsible for monetary policy, payments system regulation and the stability of the financial system.
Australian Prudential Regulation Authority: Responsible for prudential supervision and regulation for all deposit-taking institutions, life and general insurance and superannuation funds.
Australian Securities and Investments Commission: Responsible for corporate regulation, consumer protection and oversight of financial service products.
Australian Treasury: Advises the government on financial stability issues and the legislative and regulatory framework for the financial system.
Council of Financial Regulators
It is a coordinating body for financial market regulation that provides for cooperation and collaboration among its four members – the RBA, APRA, ASIC and Treasury.
It is an informal body that allows information sharing and coordinating advice.

Wallis Committee
This committee is responsible for the current financial market structure that has been in place since the 1990s.
It recommended changes to regulation to keep pace with global changes in financial markets, including; new technologies increased competition.

The Reserve Bank Australia (RBA)
The RBA was established by Commonwealth Legislation in 1959, under the Reserve Bank Act.
It does not provide services to the general public.
It is not guided by profits or share markets interest access banks.

RBA Charter
According to the Charter, the RBA has 3 main broad objective:
1. The stability of Australias currency. (Main objective- engages in financial/foreign markets to keep the Australian currency at a specific level, act on behalf of the government to buy the Australian dollars to supplier)2. The maintenance of full employment. 3. The economic prosperity and welfare of the people of Australia.

Functions of the RBAA:
Prints and circulates currency ($A)
Monitors the circulation of cheques through banks.
A banker to the Federal Government.
It issues social securities.
Collects tax
Pays government employees.
Issues and redeems government bonds (securities).
Makes long term loans to business in the rural sector.
Prudentially supervises banks.
Monitors foreign exchange.
Attempts to influence employment, inflation and economic activity through its monetary policy.
Custodian of international reserves.
Banks may temporarily borrow from the Reserve Bank should they run short of funds.
This is know as the the lender of the kast resort facility.

Australian Prudential Regulation Authority (APRA )
APRA provides prudential regulation for authorised deposit-taking institutions.
Deposit taking institutions include: – Banks – Superannuation companies- Insurance companies- Credit unions – Building societies

APRAs Role
APRAs role is to ensure that deposits are able to be retrieved when they are desired.
APRA must ensure that organisations maintain adequate cash ratios to facilitate withdrawals.
APRA will investigate organisations, sort out financial difficulties and intervenue in these financial organisations affairs.

ASICs roles is to protect the Australian financial system.
ASIC constantly monitors and investigates the possible illegal actions of individuals and corporations who act to undermine the integrity of the Australian financial system

ASICs Role
ASIC is the primary regulator of corporations including their:
– Formation – Operation – Registration – Financial reporting

ASIC is alose the primary regulator of the Australian Stock Exchange.

Australian Treasury
It is the main source of economic policy advice to the government.
The Treasury can influence how th government devise budgets, collect taxes, allocate expenditure and implement other polices such as: Monetary Policy, labour market policy and market regulation.

Question time:
Research any key investigation with ASIC has recently been involved in or currently conducting