Key Roles for Financial Markets I A Level and IB Economics
Summary
TLDRThis video script delves into the pivotal roles of financial markets, explaining their function as platforms for trading financial instruments like equities, bonds, and commodities. It outlines three main markets: the money market for short-term finance, the capital market for medium to long-term funding through securities, and the foreign exchange market for currency trading. The script also highlights the UK's financial service sector's economic impact, emphasizing its contribution to GDP, job creation, and tax revenue, while underscoring the importance of efficient financial markets in savings, borrowing, capital allocation, facilitating transactions, providing forward markets, and equity raising.
Takeaways
- 💼 Financial markets are exchanges or platforms where financial instruments like equities, bonds, currencies, and commodities are traded globally.
- 🏦 The money market is for short-term loan finance involving businesses and households, including the interbank market where banks lend to each other.
- 📈 The capital market is where securities like shares and bonds are issued to raise medium to long-term finance, such as companies issuing new shares or governments issuing bonds.
- 🌐 The foreign exchange market is where currencies are traded, and it's influenced by various factors, including political events like Brexit affecting the value of currencies like the pound sterling.
- 💷 The UK financial service sector significantly contributes to the economy, with over 130 billion pounds to UK GDP, making it the seventh biggest in the OECD relative to GDP.
- 🏙️ London is a major hub for financial services, generating nearly half of the sector's output, and is important for trade, with the majority of financial service exports going to the European Union.
- 💼 The financial service sector provides around a million jobs in the UK, which is about 3% of all employment, highlighting its importance for employment.
- 💰 Financial markets have six key roles: providing a means to save, a platform to borrow, allocating funds for productive uses, facilitating trade, providing forward markets for hedging, and offering a market for equities and capital raising.
- 🏦 Efficient financial markets are crucial for the economy as they help in the optimal allocation of capital to where the risk-adjusted return on investment is the highest.
- 🔄 Forward markets allow corporations to hedge against future price uncertainty and ensure against price volatility, which is vital for risk management.
- 🌟 The financial markets' roles are universal and apply to both high-income advanced countries and emerging nations, emphasizing their global significance.
Q & A
What is a financial market?
-A financial market is an exchange or platform that facilitates the trading of financial instruments, such as equities, bonds, currencies, and commodities.
What are the three main types of financial markets mentioned in the script?
-The three main types of financial markets are the money market, the capital market, and the foreign exchange market.
What is the purpose of the money market?
-The money market is for short-term loan finance for businesses and households who need to borrow money, and includes the interbank market where commercial banks lend to each other.
What does the London Interbank Offered Rate (LIBOR) represent?
-The LIBOR represents the rate at which commercial banks are prepared to lend to each other when one or more of them is short of liquidity.
What is the role of the capital market in financial markets?
-The capital market is where securities such as shares (equities) and bonds are issued to raise medium to long-term finance.
How does the script describe the foreign exchange market?
-The foreign exchange market is where currencies are traded, and it is influenced by various economic factors and events, such as the Brexit referendum affecting the sterling exchange rate.
What is the significance of the financial service sector to the UK economy?
-The financial service sector contributes significantly to the UK GDP, with over 130 billion pounds, and is a major source of employment and tax revenue.
What is the role of financial markets in providing a means for people to save?
-Financial markets provide a system where people can store money efficiently, maintain its value, and earn interest, which is both easy to operate and trusted.
How do financial markets facilitate borrowing for businesses and individuals?
-Financial markets act as intermediaries between savers and borrowers, repackaging cash flows and allowing for borrowing through instruments like mortgages and business loans.
What is the role of financial markets in allocating funds for productive uses?
-Efficient financial markets allocate funds to where the risk-adjusted rate of return on investment is highest, thus directing capital to its most productive uses.
How do financial markets assist in the transactional function of exchanging goods and services?
-Financial markets facilitate the final exchange of goods and services through methods like contactless payment cards, enabling easy transactions and access to trade credits and foreign exchange.
What is the purpose of forward markets in financial markets?
-Forward markets allow agents, particularly corporations, to hedge against future price uncertainty and volatility by buying currency or other assets ahead of time.
How do capital markets contribute to business expansion and investment?
-Capital markets provide a platform for businesses to raise equity and debt to fund their investment and expansion, supporting growth and development.
Outlines
💼 Introduction to Financial Markets
This paragraph introduces the concept of financial markets as exchanges or platforms for trading financial instruments, such as equities, bonds, currencies, and commodities. It explains the three main types of financial markets: the money market for short-term loans, the capital market for issuing securities like shares and bonds, and the foreign exchange market for currency trading. The paragraph also touches on the significance of the UK financial service sector to the economy, highlighting its contribution to GDP, the importance of London, and the impact of Brexit on the pound sterling.
🏦 Roles of Financial Markets in the Economy
The second paragraph delves into the six key roles that financial markets play in any economy, whether developed or emerging. It discusses the importance of financial markets in providing a means for people to save, facilitating borrowing for businesses and individuals, efficiently allocating funds for productive uses, enabling the exchange of goods and services, offering forward markets for hedging against price volatility, and providing a platform for businesses to raise equity and debt. The paragraph also emphasizes the substantial trade surplus in financial services that the UK enjoys, particularly with the European Union, and the tax contributions of the financial sector.
Mindmap
Keywords
💡Financial Markets
💡Equities
💡Bonds
💡Currency Trading
💡Money Market
💡Capital Market
💡Foreign Exchange Market
💡Financial Instruments
💡Interbank Market
💡Financial Services Sector
💡Trade Surplus
Highlights
Financial markets are exchanges or platforms for trading financial instruments like equities, bonds, currencies, and commodities.
There are three main types of financial markets: money market, capital market, and foreign exchange market.
The money market involves short-term loans for businesses and households and includes the interbank market.
The capital market is for issuing securities like shares and bonds to raise medium to long-term finance.
The foreign exchange market is where currencies are traded, impacting the value of currencies like the British pound.
The UK financial services sector contributes significantly to GDP, with nearly half of the output generated in London.
Financial markets have six key roles, including providing a means for saving, borrowing, allocating funds, facilitating transactions, offering forward markets, and raising equity.
Financial markets help savers store money efficiently, hold its value, and earn interest.
Markets provide a platform for businesses and individuals to borrow money, such as for mortgages or business expansion.
Efficient financial markets allocate capital to where the risk-adjusted return on investment is highest.
Financial markets facilitate the final exchange of goods and services, making trade easier for businesses.
Forward markets allow corporations to hedge against future price uncertainty and volatility.
The capital market enables businesses to raise equity and debt to fund investment and expansion.
The UK financial services sector is the seventh biggest in the OECD, measured by its significance to GDP.
There are over a million financial service jobs in the UK, accounting for 3% of all employment.
Exports of financial services from the UK were worth over £60 billion in 2017, with a trade surplus of over £800 million.
The UK's financial service sector contributed nearly £30 billion in tax revenue in 2018.
The UK's trade relationship with the EU, particularly regarding passporting rights in banking, will be a major decision.
Transcripts
welcome to a short video looking at some
of the key roles of financial markets
financial markets is now an important
part available syllabus this will take
you through some of the key functions of
financial markets
a financial market is any exchange any
platform
that facilitates the trading of what we
call financial instruments
now that could be things like equities
stocks and shares are issued by
companies it could be bonds issued by
governments and corporations it could be
the trading of currency or foreign
exchange insurance or indeed any
globally traded primary commodities such
as oil and gas commodities in many ways
can now be treated as financial assets
traded around the world
there are three main financial markets
to get to grips with
the first is the money market
this is the market that typically
involves businesses such as commercial
banks it's the market for short-term
loan finance for businesses and
households who need to borrow money
and it also includes the inter bank
market which is where commercial banks
such as hsbc and barclays they provide
liquidity for each other by lending to
each other at the interbank interest
rate
this chart shows the three-month london
interbank offered right
it's a rate
at which the commercial banks are
prepared to lend to each other
when one one or more of them is short of
liquidity
and you can see if you look on the left
hand side
that the interest rate is fairly low it
tends to track pretty closely the base
rate of interest set by the bank of
england
the second market is the capital market
now this is a financial
market where securities such as shares
otherwise known as equities and bonds
are issued to raise medium to long-term
finance so typically for example a
company might decide to issue some fresh
equity
by issuing new shares onto the capital
market on the stock exchange the
government could go to the bond market
to issue a new bond perhaps a 10-year
loan to help finance its government
spending and here's a chart showing the
recent changes in the share price
indices for a variety of indexes
shanghai composite the footsie or share
index
standard and poor's 500
and the morgan stanley
composite index for emerging market
share prices
the third financial market to be aware
of and to understand is
the foreign exchange market and no doubt
you will have done some
of the economics of what moves
occurrences up and down foreign exchange
market
is the market where currencies
are traded dollars yen yuan menimbi and
sterling
here's a chart showing the sterling
exchange rate index this is an index
weighted according to the value of trade
that the uk does with different
countries around the world notice for
example in
2016 how the sterling index fell quite
sharply there was a significant
depreciation of sterling in the
immediate aftermath of the brexit
referendum
sterling has then traded within a fairly
narrow range from 75 to 80 on the index
over the last three or four years it
fell again last year uh perhaps because
of substantial political brexit
uncertainty but the sterling index has
increased quite a bit in the last
year or so
as we've headed into 2020.
the uk financial service sector is
significant for the economy as a whole
let's have a quick look at some of the
numbers
the industries so that includes banking
finance trading of currencies and
derivatives and insurance the financial
service sector contributed over 130
billion pounds to uk gdp last year
that's just under seven percent of
national output and london of course was
the i feel like the epicenter of
financial services nearly half of the
sector's output was generated in and
around the city of london
financial service sector in the uk was
the seventh biggest
in the oecd measured by the proportion
or the significance of the sector
relative to gdp luxembourg has the
biggest financial sector service
in that way just over a million
financial service jobs in the uk which
is about three percent of all employment
the financial service sector is also
important for trade exports of financial
services need insurance or banking
services are worth over 60 billion
pounds in 2017 imports
much less than that and that gave a
rounded down trade surplus in financial
services of over 800 million pounds a
week 44 billion in 2017.
uh the bulk of our financial service
exports went to the european union
and the super third of financial
services imports came from the eu so the
the likely shape of a trade relationship
between the uk and the opinion in
particular when it comes to
things like passporting rights in the
banking sector will be a major decision
the financial service sector contributed
nearly 30 billion pounds in tax
in 2018.
so this slide gives you a feel i hope a
feel for the significance
of financial markets to the uk economy
well what are the six key roles of
financial markets for virtually any
country developed or developing in
merging
the first is that financial markets
provide a means by which people can save
we have regular flows of income coming
in we need to be able to have a system
where we can store money quickly and
easily
a system in which money holds its value
and in which we can earn interest we
need a system which is uh both efficient
easy to operate out of which people have
trust
a second key role of financial markets
is to provide a platform by which
businesses and individuals can borrow
money be it a mortgage for a home
purchase
or a small business needing loan finance
to expand
their output and their employment
financial markets including the money
markets and the capital markets they
provide an intermediary
between
savers and borrowers essentially they
repackage the cash flows of savers
and allow people
to borrow money
the third role is really quite important
over time
an efficient financial market one that's
working well
with relatively few market failures
financial markets allocate funds for
productive uses so typically
if they're working efficiently the stock
market and the bond markets would
allocate scarce capital
to where the risk adjusted rate of
return on an investment
is highest of course that doesn't always
work out so you need to check out our
video on financial market failure
the fourth is if you like a
transactional function and that's to
facilitate the final exchange of goods
and services so many of you will use
your contactless payment card that's an
easy way for goods and services to be
purchased businesses need to be able to
facilitate trade and access export
credits and foreign exchange when they
when they need it
the fifth rule is to provide forward
markets in currencies and commodities so
forward markets is when for example you
can hedge against future price
uncertainty in particular markets and it
allows agents particularly corporations
uh to ensure a little bit against price
volatility
so forward markets are basically markets
where you can buy ahead of the game if
you like your currency or other assets
the sixth crucial role is to provide a
market for equities the capital market
that allows businesses to raise equity
and of course they can also raise debt
if they go to the capital market to fund
their investment
and their expansion
so here we have six
key roles of financial markets so they
can be applied pretty much to any any
country both high income advanced
countries and emerging nations
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