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INTRODUCTION TO
FINANCIAL MARKETS
AND INSTITUTIONS
1
INTRODUCTION
General concept of financial markets and
institutions
The role and importance of financial
markets and institutions
Financial markets and institutions in
Malaysia
2
Learning objectives
Students will be able to:
◦ Explain the definition and the importance of
financial markets and institutions
◦ Identify the financial landscape in Malaysia
◦ Discuss the role and evolution of financial
system in Malaysia
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Glossary
Assets: anything owned by a person or business that has a
market value
Liabilities: a legally enforceable claim on the assets of a
business or individual
Financial instruments/ financial securities/ financial assets: claims
that those who lend their savings have on the borrowers
who use those funds for investments: ie. bond., stocks, etc
Debt: refers to something owned by one party (borrower) to
a second party (lender); a contractual claim, usually paying
dollar amounts (interest); repayment= principal + interest
Shareholder’s equity: the portion of the balance sheet that
represents the capital received from investors in exchange of
stocks + retained earnings; income = a residual claim on
earnings after creditors are satisfied (dividend)
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Liquidity: the ease with which an asset can be sold or
redeemed for a known amount of cash at shirt notice
and at low risk of loss of nominal value
Consumption: the real amount of spending by
households on good and services.
Production: process of combining various inputs to
produce output, services and goods which have value
and contributes to the utility of individuals
Wealth: an individual’s total resources
Financial intermediation: indirect finance through the
services of a financial institutions (middleman) that
channels funds from savers to those who ultimately
make capital investments.
Maturity : the time until final principal and interest
payments are due to the holders of a financial
instruments.
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Financial system
=
Financial markets (ie: equity market, bond
market, derivatives market, money market,
foreign exchange market etc.)
+
Financial institutions (ie: banking institutions
[commercial banks, Islamic banks,
investment banks]; non-bank financial
intermediaries [NBFIs] etc.)
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Why study Financial Markets & Institutions?
7
Financial markets
Definitions:
◦ A financial market is a market in which
financial assets (securities) such as stocks and
bonds can be purchased or sold.
◦ Financial market – markets in which funds are
transferred from people who have an excess
of available funds (surplus units) to people
who have a shortage of funds (deficit units)
◦ A market for the exchange of capital and
credit.
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Financial markets
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Financial Markets
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Primary versus Secondary Markets
Primary markets
◦ markets in which users of funds (e.g.,
corporations and governments) raise funds by
issuing NEW financial instruments (e.g., stocks
and bonds)
Secondary markets
markets where EXISTING financial
instruments are traded among investors (e.g.,
NYSE, Nasdaq & Bursa Malaysia)
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PRIMARY MARKETS VS SECONDARY MARKETS
Money markets
◦ markets that trade debt securities with
maturities of one year or less (e.g., Certificate
of Deposits and Treasury bills)
Capital markets
◦ markets that trade debt (bonds) and equity
(stock) instruments with maturities of more
than one year
13
Securities Traded in Financial Markets
14
The importance of financial market
15
Function of Financial Markets
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Financial Institutions (FIs)
Financial Institutions
◦ institutions through which suppliers channel
money to users of funds
◦ Assisting in financial transactions
Financial Institutions are
distinguished by whether they
accept deposits
◦ depository versus non-depository financial
institutions
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Depository versus Non-Depository FIs
Depository institutions
◦ commercial banks, savings associations, savings
banks, credit unions
◦ They are legally allowed to accept deposits from
customers
◦ Importance role in economy: transform deposits
into loans
Non-depository institutions
◦ insurance companies, securities firms and
investment banks, mutual funds, pension funds
◦ They are legally not allowed to accept deposits
from customers
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The role of financial institutions
Who make financial markets work:
-They are the players in the financial markets
-They facilitate activities in the financial markets
Improve the market efficiency of the economy:
market efficiency is when the security prices fully
reflect all available information
When market is inefficient, investors can use
available information ignored by the market to
earn abnormally high returns on their
investments.
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Flow of Funds in a World without FIs
(direct financing)
Financial Claims
(equity and debt
instruments)
Suppliers of Funds
Users of Funds (households)
(corporations)
Cash
20
Flow of Funds in a World with FIs
Indirect financing
FIs
Users of Funds Suppliers of Funds
(brokers)
FIs
(asset
transformers)
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ASYMMETRIC INFORMATION AND FINANCIAL
INTERMEDIATION
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Comparison of Roles Among Financial Institutions
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Summary of Institutional Sources and Uses of Funds
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FIs Benefit Suppliers of Funds
Reduce monitoring costs: FIs undertake
the monitoring role
Increase liquidity: help the issuers and
investors in the transaction, thus, the
process of buying and selling would
become more easy.
Reduce transaction costs: economies of
scale: reduction in average cost per
unit as the level of output increases.
Provide maturity intermediation
Provide denomination intermediation
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