Financial Markets: An Overview
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Financial markets and financial intermediaries help
mobilize financial resources.
Financial intermediaries, such as banks, pension funds and
insurance companies, move funds where they are available
to where they are needed.
Financial markets, such as stock market, bond market,
money market, options and futures markets, facilitate
active trading in financial securities/instruments in
“efficient” & regulated market-place.
Dr K Patel, Department of Land Economy, University of Cambridge
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Securities Trading in the UK
Companies
issue new
equity
capital
Stock Exchange
Licensed
Dealers/Market
makers
(Goldman Schas,
NatWest Securities
Merrill Lynch
Schroders....)
Institutional
&
Private Investors
buy/sell
existing
shares
Dr K Patel, Department of Land Economy, University of Cambridge
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Types of Financial Securities
Equity capital
Common stock/Ordinary Shares
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Involves fractional ownership of the firm
Share certificate issued to the equity holder
- entitles the equity holder to future benefits
- may be sold at any time in the stock market
Preferred stock
Fixed, present cash flows
Dr K Patel, Department of Land Economy, University of Cambridge
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Increasing Maturity, Risk & Ownership Rights
Sources of Corporate Funds
Commercial
paper/bills
Long term
bonds
Private
placement
Preference
stock
Public
issue
Ordinary/common
stock
Retained
earnings
Rights
issue
Dr K Patel, Department of Land Economy, University of Cambridge
Public/private
placement
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2
Debt capital
Bonds
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F
Involve lending funds to the firm
Bond issued to the bondholder
- entitles bondholder to stated cash payments
- may be sold at any time in the bond market
Hybrid securities
F
F
F
F
Convertible preferred stock
Convertible bonds
Callable bonds
Warrants
Dr K Patel, Department of Land Economy, University of Cambridge
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The Rewards to Security holders
To Stockholders
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Dividends: Potential return of a portion of earnings to
the firm’s owners
- Cash dividends
- Stock dividends
Capital gains: sales price exceeds purchase price
To bondholders
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Coupon payments: fixed, assured payments
Capital gains: sales price exceed purchase price
Dr K Patel, Department of Land Economy, University of Cambridge
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The Risks
To stockholders:
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No assurance of any benefits
Capital gains could be capital losses
To bondholders:
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Default risk: Firm violates its agreement with its
bondholders and fails to make payment.
Price risk: Interest rates change over time and cause the
value of the bond to change.
Dr K Patel, Department of Land Economy, University of Cambridge
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Sources of Equity Finance
Other Firms
Retained Earnings
Investments
Projects
Dividends
Profits
Dividends
FIRM X
Present
shareholders
Rights issue
Public issue
New
shareholders
Dividends
Dr K Patel, Department of Land Economy, University of Cambridge
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Financial Times Share Information Service
1 The title of the security
2 The closing middle price (in pence)
3 The change in the closing price compared with the
end of the previous trading day (except on
Monday)
4 The highest and lowest price recorded for each
stock during the past 52 weeks
Dr K Patel, Department of Land Economy, University of Cambridge
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5 The dividend yield
gross dividend in pence
the current price per share
- past dividend distribution record and future prospect
are important factors governing investors’
shareholding decisions
- small/rapidly growing companies tend to have relatively
low dividend payout while more mature,
well established, companies tend to maintain relatively
high/steady dividend payout
Dr K Patel, Department of Land Economy, University of Cambridge
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6 The price/earnings ratio: P/E
current price per share
company’s earnings per share
-
generally, a P/E ratio is taken as an indication of
the esteem in which the market holds a share:
high P/E indicates the market considers the
companies earnings are likely to grow quickly
7 Total market capitalisation:
(current price per share) X (no. of shares outstanding)
Dr K Patel, Department of Land Economy, University of Cambridge
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