An introduction to financial markets - MoneyWeek Investment Tutorials

so in this video we're going to take a quick look at some of the key jargon that surrounds financial markets we're going to ask the question what are financial markets how are they different to capital markets really what's the point who uses them and who are the key players or institutions that you come across right so financial markets why do they exist and what's the point essentially if we put financial markets in the middle the first question we could ask is what do we mean by financial markets who's in that box well the term conceals a whole load of organizations banks building societies and so on so within this box you have names such as HSBC Goldman Sachs JP Morgan and a whole raft of other financial institutions many of which work in the city of London but also capital centres around the world so what's the purpose what are them doing well if we put one of them in banks their objective is very simple to make money that's it really so their objective is to simply make a profit the more of it they make but happier they are but how okay it's part of the financial markets they form a vital role they bring together two groups of people investors all lenders now that just means people who have money and are prepared to either lend it or invest it for a fixed period normally and on the other side you've got borrowers these are people looking for capital and to be honest there are two big groups of them you've got governments so you've got the UK government and also companies looking to borrow money so for example if easyJet decides it wants to expand its fleet of aircraft it's got to get the money from somewhere either it's made past profits great so no need to go anywhere near financial markets or maybe it needs to borrow so companies and governments are big sources of borrowing in the financial markets and banks as part of this group in the middle bring them together and try and make some money because as a borrower you are gonna pay a cost now that cost is often interest okay so to take money out of the markets you'll have to pay some kind of return or perhaps what you're doing as a company is selling investors shares in which case you'll be paying dividends but on this side of the equation there's always some kind of cost interest or dividends being the typical examples over here I'll return the ambassador I don't give my money away for free that'd be ridiculous so I expect something back how do banks make a profit well the answer is quite simple in a way if you can basically get away with charging these people a lot to set up a loan as a borrower and give away less of that to these people looking for a return you can skim off a profit and that's traditionally the way conventional retail banks make money they basically take money away from investors and then hope to charge more to give it out to borrowers and the difference is a margin for a profit so it brought terms for natural market simply exists to bring together two groups of people investors and borrowers and the people in the middle thanks being a prime example exist simply to make money okay so what are financial markets if we step away from banks for a moment what does this term actually mean and how many different ways of investing are okay some more jargon coming up so let's go back to this idea of financial markets and introduced a few more bits of terminology so you can break for that your markets down leaving aside the individual institutions for a moment to the banks and building societies you can break them down into what alone as money markets now money markets is a general term for a place where short-term investment deals are done so governments for example and companies need to borrow a short term and they pay an appropriate interest rate or return for that so we talk about money market instruments and there are organizations that natural markets investment banks that specialize in organizing this side of the financial markets longer-term you get capital markets involved in other words if money markets still roughly speaking with time periods of up to about 12 months when companies and governments want to say borrow longer-term they'll tap into the capital markets and you can break capital markets down a little bit further there are two broad types you've got the equity markets that's where companies for example sell shares to investors hoping to raise capital so they're bring in new owners and you've got the debt markets so as an alternative the company might choose to borrow money and the capital markets can be an easy place to facilitate that they're not borrowing for three months they're borrowing for ten years let's say and two more bits of jargon when companies issue big blocks of equity so think of easyJet trying to fund some new Boeing aircraft that's a long term investment you're not going to borrow three months worth of money you get all the money for five or ten years or more so two ways of doing it or either bring in new owners that's called selling shares in my business or I go to the capital markets for an investment bank and I look to raise debt in the form of bonds now bond is a phrase that put some people off it just means tradable debt so if I raise a hundred million by issuing new shares find as a company I bring in new owners they will want some kind of return so maybe I have to start paying dividends or I could approach investment banks for debt instead this means I'm bringing in borrowers effectively are gonna raise capital and to make it as easy as possible for my investors I can make that debt tradable so I could take a hundred million worth and chop it into a hundred million one pound box for example and those can then be sold on and traded by investors so in summary financial markets exists to facilitate lending or investing and borrowing the organizations in the middle take out a profit and you can split them down into short term activity money markets along with activity capital markets and in here look two very important parts of the financial markets the equity and debt markets

Channel: MoneyWeek

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Keywords: finance, financial, educational, markets, investing, moneyweek, tim, bennett

Id: UOwi7MBSfhk

Length: 8min 49sec (529 seconds)

Published: Fri Apr 01 2011