Financial Markets and Institutions - Lecture 01

i zoom in in the book very nice okay so we're beginning this course in Financial Economics with textbook financial markets and institutions by Saunders and Cornett okay I've have one first introductory chapter and then we continue with financial markets and financial institutions today I'll be doing chapter 1 and basically give an introduction to financial economics you have already studied financial economics from your money in banking course so we begin first the subject economics economics is the subject of scarce resources okay it's not about money it's not about good it's about anything which is scale scarce means there is available less than what people want this course of financial market in institutions is a course about financial economics Financial Economics is the subject of the financial system in Iowa in financial economics we study the financial system let's do like the kids for red color so financially comment is about the financial system now what is the financial system financial system has three elements financial system is the subject or we studied financial system number one financial instruments number two financial markets vacation of the Soviet here right from time to time and want to see it any just zoom back out and and it can also keep our Shimizu right number three financial institutions Oh so the financial system we say comprised and sport consists of financial instruments financial markets and financial institutions financial instruments give you the answer of what what people do it right they do financial instruments we say they buy and sell financial instruments in finance we call this trade so to trade means to buy and sell now in financial economics it means to buy and sell financial instruments next financial markets tell you where we're on the financial markets and finally financial institutions tell you who okay back to one so now that I said what is economics I said what is financial economics we define financial economics as the subject of the financial system we explain what is the financial system now we need to get to each element of the financial system so what is a financial issue financial instrument has many different names the next another name is financial clay but another name is financial asset it's the same name just different words different names for the same thing financial ask open it so what is a financial asset or financial plane or financial instrument it is a claim on an entity's future or methodists assets and future earnings it is a claim on entities future burnings and assets examples will be stock bond and so on again we will be studying in the course of financial markets will be studying the instruments ok so let me see what else we got now here what is a financial market financial market is a market where financial instruments are traded so financial instruments are traded on financial markets because you have many the markets you got a cruise market you gotta close market right every time you go shopping you go to the market you can go to the supermarket this is the market for financial instruments okay now number three financial institution is also known as and you have already studied financial intermediary so financial institution is an institution which invests in financial instruments and issues financial instruments of its coal so they issue financial instruments of its own and invest in financial or creates financial instruments the function of financial intermediary the main function is called inter mediation intermediation channel's funds we don't say money doesn't have to be money it's fun so what is a fun and funds in general means a financial resource a financial resource if they ëthank deposits okay not have to be only mine okay so funds means financial resource okay so intermediation is the process of channeling funds from savers to socks off okay okay so let's do this from savers to users saver who what is the Sailor saver is someone with surplus funds meaning have more funds they need users are those with shortage of funds those who have less fun than means so the process of intermediation transfers funds from savers to users okay next one is markets a little bit about markets we do this markets have very many different classifications the first important classification is that primary markets and secular primary market is a market where funds are raised we say where funds are transferred from savers to users okay now savers who in this case the funds those hunt we call financial instruments savers who buy financial instruments for income we call these people if you buy stock very good if you buy a bond with all these people investors okay so in a trimeric market is where investors fund users okay in a secondary Martin other words funds are raised in a secondary markets funds are traded between investors between investments so in the primary market new funds are raised in the secondary market no new funds are raised only one investor sells it to another investor okay in the primary market the one who sells the financial instrument is called issuer and the process of selling the financial instrument is called an issue to issue so a corporation when they want to sell bonds we say that they issue bonds and the corporation is called an issuer or they can sell stock so the corporation issues has become an issue okay in the secondary market gap investor selling to investor so the buyer is always an investor in the primary market the seller isn't sure and in the secondary market the seller is an investor that's the difference next one markets are money markets and capital markets money market cat the correct definition of mana market there's only one proper correct definition is money market is a financial market where money market instruments are traded so money market is a financial market where money market instruments are trade so now we need to define money market instruments mana market instrument is a again financial instrument of short-term maturity or we say is a short-term financial instrument is a short-term financial instant in finance short-term has a very specific meaning short-term means less than one year less than one year which is not quite correct it's not less than one year or less in other words if it's one here it is short term so we'll say that's annoyed it's got to be less than or one year okay one year or less capital markets are financial markets for now we can say capital market instruments or we can say for long term instruments long-term instrument is an instrument of maturity of more than one year maturity is a period of time for which a financial instrument must be aid in full in other word financial instrument dies a different way to describe is financial instrument lives in other words it gives you the life or the length of life of a financial instant a five-year bond will have a life of five years okay but six months deposit will have a life of six months so mature is kind of like synonymous with life now maturity comes from the word mature and mature means in finance what a bond matures dwell two mature means to be Pamela pale to become payable so upon to mature means that the bond becomes payable by the issue you gotta use these words there are no other words these are the only words that use you see that all these of these aren't terms they are very specific okay example I was in your other class and with the fourth-year student asking what is the pain and they say oh it is a place where whatever what is this place okay what is this place this place is called a financial institution okay and then they say huh you make a deposit and I say who are you you oh you gotta say you can say in masters you can say savers but again it's very tricky it's better to say financial institution which issues deposits and you want to say hooha so it's the financial institutions it issues the closet and makes commercial bones I said a commercial bank is a financial institution shus deposits or we can say makes deposits in provides commercial loans very precise so maturity means the length of time until the instrument becomes payable let's see what else we've got here our primary secondary okay so the main function of secondary markets is called liquidity is to provide liquid liquidity means the ability to sell an asset quickly and for full price remember some people think oh you can sell quickly no that's not true it's not true enough is a watch or liquid asset or not illiquid asset not so a watch is an illiquid asset question now is it's easy but i all three what can I sell it quickly or to not sell it quickly I have to go to the market is it that bad I mean I can't sell it here in class I can write whoa let's see this is a nice Seiko okay right and it's kinetics very special technology it's partially automatic and guess what right right let's advertise a little bit sake all right and it charges a battery so it is charged by the movement of the hand but if I put it on for two weeks the battery is getting charged so it will not stop okay and it gets better than that this is a sapphire crystal okay and what else the yellow thing is actually gold plating okay and what else won't cost 100 two dollars right now we do an auction anybody buying 400 no but I'm pretty sure if I I say you want it for a dollar so I can pretty much sell it within a minute or so if I want to sell it for a dollar okay so the asset can just sold quickly but not a real true genuine market price if you got a house I'm sure you can sell it very quickly I can pull out a hundred dollars right away buy a house right that shouldn't be a problem and now here people I see all motorcycles are it's very liquid right hard to sell no no so hard to sell I'll pull out let's say $20 right okay $20 and I'll buy right away right you say yeah but $20 is no good right okay the point is not whether you can sell it quickly but whether you can sell it quickly for a full price okay so that's the key to liquidity the second part is more important to get a price close to the market price quickly so you can get a full price on your house but if they take three months you can still take a full price when you motorcycle but it may take two three four weeks okay and I can get a good price on my watch - maybe it's brand-new $150 maybe now it's use going to cost 30 adults movie is market then but it may take 3-4 weeks okay to sell so liquidity is measured by the time that it takes to get it price close to the market price okay let's see what else a second function which the secondary market provides is information as in pricing information so simply pricing pricing information so it gives you the price you know what the price is and it gives you information the information is is the price going up or is the price going down is it getting more available or less so the secondary market provides pricing liquidity and information in general let's see what else I have if a instrument is not liquid we say that the instrument is a liquid a liquid means not we this divided capital markets generally in two categories we can separate them here we can separate them here into that market could that market and equity equity market a debt is a financial instrument we like to say is a financial obligation for specific payments at specific time so the omega-6 interest rate payments may be monthly maybe three months we may be six years six months okay and usually that has a specific looking maturity so it provides for specific payments on specific dates and as a specific maturity in other words specific date on which it must be a fool and equity is a residual claim on assets residual claim on assets which means I got a define residual residual claim is a claim on assets after all other obligations have been fully and completely satisfied for a company after taxes have been made after workers salaries have been paid other suppliers have been paid after electric company has been paid after all other creditors have been paid okay next suppliers of debt those people that provide debt are called creditors creditors are providers of debt a different way of saying is that creditors are our buyers of debt financial instruments they buy the financial instruments these are called creditors in that comes the most difficult and confusing words is about the providers of equity with all these investors and now comes the confusing part so what is really an investor the correct proper technical definition of investor is a buyer herb equity okay that's the correct definition okay but some people like to think if you buy a house you're still an investor okay you should buy a bond you're still an investor okay so investing has two meaning the purchase of equity financial instrument and the second is the purchase of any financial instrument so we have a narrow meaning in a bra now there is a third even broader meaning of investor investors someone who purchases an asset could be financial as it could be real ask okay real acid we say for return okay next comes the concept and financial economics but you draw a line over here again the concept of profits in finance and in financial economics there is no profit profit doesn't exist profit is not the subject when you buy a stock you don't have a profit whether by a bond there is no profit when you buy a house and the price goes up it's not a profit so what is the profit so profit is income which results from economic activity in other words profit comes from the source of profit is business you find sell motorcycles you buy and sell laptops you provide haircuts or for guys like me shaving okay you do tailoring okay you provide some sort of economic activity so the source of profit is economic is in business in finest there are no profits in finance there's only return and return is simply the income from from what treating finish Winston that's trading means buying and selling what if you don't train what if you buy but you never sell it so it's not necessarily trading from simply financial instruments you may buy and you ain't holding you may buy and you may sell you sink any income from financial instruments okay nobody says trading okay it doesn't have to be from trading so that's the right turn so you got a bond you got a return on the bond you got a stock you got a return on the stock okay now comes the trickier part okay let's do the next part before that the following next part is called an asset and an asset class okay so what is an asset I mean you've started it in accounting you had accountant and it started it in economics and you've started it in financial economics meaning money and banking let's try guesses goodness intelligent guesses what's an asset assam account okay property that we own what else yeah what else if what if you don't trade it okay no no one acid is a instead of properties of resource berry just in general something of value something's got to be valuable if it's not there that's not exciting so the first key characteristic is van the second key characteristic of an asset is you own it the third key characteristic just because you own it doesn't mean it's yes yes your asset there's got to be something other part you gotta control it you got a game of peg you can add motorcycle right but somebody stole your motorcycle yeah it's you yours but it's not your asset anymore so the guys have a control yelling you meet for a day and I'll pay you right away somehow you gotta have a control of Gaza so you gotta be able to control it and you can control it part of heaven an asset is actually you using it now you may give it to somebody else for use but it's control and use and there is one last piece somehow an S it should be generating revenue is in income an example of not satisfying this definition is the air we breathe okay it is very but you can't exactly on it or anything really control here over here okay but you can use it somehow to generate income another example which is not unanswered is the Sun okay the Sun is well sure it's got bad but you can't possibly control it yes you can generate will more about the lights up here it's time to take a break yes we don't worry the light is in an ass I does have a value mean just like here no no yeah do we own it well they don't mean the universe in general not UNT University in Genesee darling sure that's the universe in general the trolley yeah it's got a switch does it generate income in direct in other words it provides a service that generates the income so life isn't asked okay so we got the definition of an acid which is the most fundamental in economics accounting business science now we come to the financial concept of an asset class an asset class is a group of assets with similar characteristics and meaning similar properties characteristics and similar returns so they are kind of like you know a classical could be that say different books will be class ok different motorcycles will be class a bigger class will be vehicles like cars and trucks and motorcycles ok so that's an asset class ok and in finance here are five main the five main the five primary asset classes we also call them they got a special name we call them investment class okay so in this particular case asset class in finance becomes investment class in there are five investment classes a sacrified only five okay there's a sixth class which I'll define a little later but all primary are five of them it's time to think and then and break

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Length: 43min 24sec (2604 seconds)

Published: Wed Mar 02 2016