This document provides an overview of various topics related to financial markets and institutions. It defines key terms like finance, financial markets, financial services, commercial banking services, and the different types of financial markets. It describes the functions and importance of financial markets in facilitating the transfer of resources, determining security prices, making assets liquid, and lowering transaction costs. It also outlines the primary, secondary and money markets as well as the equity, debt and commodity markets.

1. M.SC.,ACCOUNTING AND FINANCE-2022
FINANCIAL MARKETS AND INSTITUTIONS
COURSE CODE-ACFN551-CREDIT-2HR
CHAPTER-FOUR
FINANCIAL MARKETS
PROF. DR. CHINNIAH ANBALAGAN
PROFESSOR OF M.SC., ACCOUNTING & FINANCE
COLLEGE OF BUSINESS AND ECONOMICS
SAMARA UNIVERSITY, ETHIOPIA, EAST AFRICA
EMAIL ID: DR.CHINLAKSHANBU@GMAIL.COM

2. FINANCE
• Finance is a term for the management, creation,
and study of money and investments.
• Specifically, it deals with the questions of how an
individual, company or government acquires
money – called capital in the context of a
business – and how they spend or invest that
money.
• Finance is then often divided into the following
broad categories:
– personal finance,
– corporate finance, and
– public finance.

3. Financial Theory
• Financial theory is studied and developed within the
disciplines
of management, (financial) economics, accountancy
and applied mathematics.
• Abstractly, finance is concerned with the investment
and deployment of assets and liabilities over "space
and time"; i.e., it is about
performing valuation and asset allocation today, based
on the risk and uncertainty of future outcomes while
appropriately incorporating the time value of money.
• Determining the present value of these future values,
"discounting", must be at the risk-appropriate
discount rate, in turn, a major focus of finance-theory.
• Since the debate as to whether finance is an art or a
science is still open, there have been recent efforts to
organize a list of unsolved problems in finance.

4. Managerial Finance
• Managerial finance is the branch of management that
concerns itself with the managerial application of finance
techniques and theory, emphasizing the financial aspects of
managerial decisions; the assessment is per the managerial
perspectives of planning, directing, and controlling.
• The techniques addressed are drawn in the main
from managerial accounting and corporate finance: the
former allow management to better understand, and hence
act on, financial information relating to profitability and
performance; the latter, as above, are about optimizing the
overall financial structure, including its impact on working
capital.
• The implementation of these techniques - i.e. financial
management - is described above. Academics working in this
area are typically based in business school finance
departments, in accounting, or in management science.

5. Financial Economics
• Financial economics is the branch of economics that
studies the interrelation of financial variables, such
as prices, interest rates and shares, as opposed
to real economic variables, i.e. goods and services. It
thus centers on pricing, decision making, and risk
management in the financial markets, and produces
many of the commonly employed financial models.
(Financial econometrics is the branch of financial
economics that uses econometric techniques to
parameterize the relationships suggested.)
• The discipline has two main areas of focus: asset
pricing and (theoretical) corporate finance; the first
being the perspective of providers of capital, i.e.
investors, and the second of users of capital.
Respectively:

6. Conti…
• Asset pricing theory develops the models used in determining the
risk-appropriate discount rate, and in pricing derivatives. The
analysis essentially explores how rational investors would apply risk
and return to the problem of investment under uncertainty. The
twin assumptions of rationality and market efficiency lead
to modern portfolio theory (the CAPM), and to the Black–
Scholes theory for option valuation. At more advanced levels - and
often in response to financial crises - the study then
extends these "Neoclassical" models to incorporate phenomena
where their assumptions do not hold, or to more general settings.
Asset pricing theory also includes the portfolio- and investment
theory applied in portfolio management.
• Much of corporate finance theory, by contrast, considers
investment under "certainty" (Fisher separation theorem, "theory
of investment value", Modigliani–Miller theorem). Here theory and
methods are developed for the decisioning about funding,
dividends, and capital structure discussed above. A recent
development is to incorporate uncertainty and contingency - and
thus various elements of asset pricing - into these decisions,
employing for example real options analysis.

7. Financial Mathematics
• Financial mathematics is a field of applied
mathematics concerned with financial markets. In
terms of practice, the field is referred to as
quantitative finance and / or mathematical finance,
and comprises primarily the three areas discussed.
• Re theory, the field is largely focused on
the modeling of derivatives (with much focus
on interest rate- and credit risk modeling), although
other important subfields include insurance
mathematics and quantitative portfolio
management.
• Relatedly, the techniques developed are applied to
pricing and hedging a wide range of asset-
backed, government, and corporate-securities.

8. Experimental Finance
• Experimental finance aims to establish different market
settings and environments to experimentally observe and
provide a lens through which science can analyze agents'
behavior and the resulting characteristics of trading flows,
information diffusion, and aggregation, price setting
mechanisms, and returns processes.
• Researchers in experimental finance can study to what
extent existing financial economics theory makes valid
predictions and therefore prove them, as well as attempt
to discover new principles on which such theory can be
extended and be applied to future financial decisions.
• Research may proceed by conducting trading simulations
or by establishing and studying the behavior of people in
artificial, competitive, market-like settings.

9. Behavioral Finance
• Behavioral finance studies how the psychology of investors
or managers affects financial decisions and markets and is
relevant when making a decision that can impact either
negatively or positively on one of their areas. Behavioral
finance has grown over the last few decades to become an
integral aspect of finance.
• Behavioral finance includes such topics as:
• Empirical studies that demonstrate significant deviations
from classical theories;
• Models of how psychology affects and impacts trading and
prices;
• Forecasting based on these methods;
• Studies of experimental asset markets and the use of
models to forecast experiments.

10. FINANCIAL MARKET
• A Financial Market is a market in which
people trade financial securities and derivatives at
low transaction costs. Some of the securities
include stocks and bonds, raw materials and precious
metals, which are known in the financial markets
as commodities.
• The term "market" is sometimes used for what are more
strictly exchanges, organizations that facilitate the trade in
financial securities, e.g., a stock exchange or commodity
exchange. This may be a physical location (such as
the New York Stock Exchange (NYSE), London Stock
Exchange (LSE), JSE Limited (JSE), Bombay Stock
Exchange (BSE).

11. FINANCIAL MARKETS
• Financial markets, from the name itself, are a type
of marketplace that provides an avenue for the
sale and purchase of assets such as bonds, stocks,
foreign exchange, and derivatives.
• Often, they are called by different names, including
Wall Street and capital market, but all of them still
mean one and the same thing.
• Businesses and investors can go to financial
markets to raise money to grow their business and
to make more money, respectively.

12. Conti…
• To state it more clearly, let us imagine a bank where
an individual maintains a savings account.
• The bank can use their money and the money of
other depositors to loan to other individuals and
organizations and charge an interest fee.
• The depositors themselves also earn and see their
money grow through the interest that is paid to it.
• Therefore, the bank serves as a financial market
that benefits both the depositors and the debtors.

13. Functions of the Markets
• The role of financial markets in the success and strength
of an economy cannot be underestimated. Here are four
important functions of financial markets:
• 1. Puts savings into more productive use
• As mentioned in the example above, a savings account
that has money in it should not just let that money sit in
the vault. Thus, financial markets like banks open it up
to individuals and companies that need a home loan,
student loan, or business loan.
• 2. Determines the price of securities
• Investors aim to make profits from their securities.
However, unlike goods and services whose price is
determined by the law of supply and demand, prices of
securities are determined by financial markets.

14. Conti…
• 3. Makes financial assets liquid
• Buyers and sellers can decide to trade their
securities anytime. They can use financial
markets to sell their securities or make
investments as they desire.
• 4. Lowers the cost of transactions
• In financial markets, various types of
information regarding securities can be
acquired without the need to spend.

15. Functions of Financial Markets
Intermediary functions: The intermediary functions of
financial markets include the following:
– Transfer of resources: Financial markets facilitate the
transfer of real economic resources from lenders to
ultimate borrowers.
– Enhancing income: Financial markets allow lenders to earn
interest or dividend on their surplus invisible funds, thus
contributing to the enhancement of the individual and the
national income.
– Productive usage: Financial markets allow for the
productive use of the funds borrowed. The enhancing the
income and the gross national production.
– Capital formation: Financial markets provide a channel
through which new savings flow to aid capital formation of

16. Conti…
–Price determination: Financial markets allow for
the determination of price of the traded financial
assets through the interaction of buyers and
sellers.
–Sale mechanism: Financial markets provide a
mechanism for selling of a financial asset by an
investor so as to offer the benefit of marketability
and liquidity of such assets.
–Information: The activities of the participants in
the financial market result in the generation and
the consequent dissemination of information to
the various segments of the market. So as to
reduce the cost of transaction of financial assets.

17. Financial Functions
– Providing the borrower with funds so as to enable them
to carry out their investment plans.
– Providing the lenders with earning assets so as to enable
them to earn wealth by deploying the assets in
production debentures.
– Providing liquidity in the market so as to facilitate
trading of funds.
– Providing liquidity to commercial bank
– Facilitating credit creation
– Promoting savings
– Promoting investment
– Facilitating balanced economic growth
– Improving trading floors

18. Importance of Financial Markets
• There are many things that financial markets make
possible, including the following:
–Financial markets provide a place where
participants like investors and debtors,
regardless of their size, will receive fair and
proper treatment.
–They provide individuals, companies, and
government organizations with access to
capital.
–Financial markets help lower the
unemployment rate because of the many job
opportunities it offers

19. Components of Financial Market
• Based on market levels
• Primary market: A primary market is a market for new issues
or new financial claims. Therefore, it is also called new issue
market. The primary market deals with those securities
which are issued to the public for the first time.
• Secondary market: A market for secondary sale of securities.
In other words, securities which have already passed through
the new issue market are traded in this market. Generally,
such securities are quoted in the stock exchange and it
provides a continuous and regular market for buying and
selling of securities.
• Simply put, primary market is the market where the newly
started company issued shares to the public for the first time
through IPO (initial public offering). Secondary market is the
market where the second hand securities are sold (security
Commodity Markets).

20. Conti…
• Based on Security Types
• Money market: Money market is a market for dealing with
the financial assets and securities which have a maturity
period of up to one year. In other words, it's a market for
purely short-term funds.
• Capital market: A capital market is a market for financial
assets that have a long or indefinite maturity. Generally, it
deals with long-term securities that have a maturity period
of above one year. The capital market may be further divided
into (a) industrial securities market (b) Govt. securities
market and (c) long-term loans market.
– Equity markets: A market where ownership of securities are
issued and subscribed is known as equity market. An example of
a secondary equity market for shares is the New York (NYSE)
stock exchange.
– Debt market: The market where funds are borrowed and lent is
known as debt market. Arrangements are made in such a way
that the borrowers agree to pay the lender the original amount
of the loan plus some specified amount of interest.

21. Types of Financial Markets
• Financial markets can be divided into different subtypes:
• For the assets transferred
• Money market : It is traded with money or financial assets with short-term
maturity and high liquidity, generally assets with a term of less than one
year.
• Capital market : Financial assets with medium and long-term maturity are
traded, which are basic for carrying out certain investment processes.
• Depending on its structure
• Organized market
• Non-organized markets denominated in English (" Over The Counter ").
• According to the negotiation phase of financial assets
• Primary market : Financial assets are created. In this market, assets are
transmitted directly by their issuer.
• Secondary market : Only existing financial assets are exchanged, which
were issued at a previous time. This market allows holders of financial
assets to sell instruments that were already issued in the primary market
(or that had already been transmitted in the secondary market) and that
are in their possession, or to buy other financial assets.

22. Conti…
• According to the geographical perspective
• National markets. The currency in which the financial assets are
denominated and the residence of those involved is national. 2
• International markets. The markets situated outside a country's
geographical area.
• According to the type of asset traded
• Traditional market. In which financial assets such as demand deposits,
stocks or bonds are traded .
• Alternative market. In which alternative financial assets are traded such
as portfolio investments promissory notes, factoring, real estate (e.g.
through fiduciary rights), in private equity funds, venture capital funds,
hedge funds, investment projects (e.g. infrastructure, cinema, etc.) among
many others.
• Other markets
• Commodity markets, which allow the trading of commodities
• Derivatives markets, which provide instruments for managing financial risk
• Forward markets, which provide standardized forward contracts to trade
products at a future date
• Insurance markets, which allows the redistribution of varied risks
• Foreign exchange market, which allows the exchange of foreign currencies

23. Conti…
• According to the geographical perspective
• National markets. The currency in which the financial assets are
denominated and the residence of those involved is national. 2
• International markets. The markets situated outside a country's
geographical area.
• According to the type of asset traded
• Traditional market. In which financial assets such as demand deposits,
stocks or bonds are traded .
• Alternative market. In which alternative financial assets are traded such
as portfolio investments promissory notes, factoring, real estate (e.g.
through fiduciary rights), in private equity funds, venture capital funds,
hedge funds, investment projects (e.g. infrastructure, cinema, etc.) among
many others.
• Other markets
• Commodity markets, which allow the trading of commodities
• Derivatives markets, which provide instruments for managing financial risk
• Forward markets, which provide standardized forward contracts to trade
products at a future date
• Insurance markets, which allows the redistribution of varied risks
• Foreign exchange market, which allows the exchange of foreign currencies

24. Financial services
• Financial services are the economic
services provided by the finance industry, which
encompasses a broad range of businesses that
manage money, including credit
unions, banks, credit-
card companies, insurance companies, accountancy
companies, consumer-finance companies, stock
brokerages, investment funds, individual asset
managers, and some government-sponsored
enterprises.

25. Commercial Banking Services
• A commercial bank is what is commonly referred to as simply a bank.
The term commercial is used to distinguish it from an investment
bank, a type of financial services entity which instead of lending
money directly to a business, helps businesses raise money from
other firms in the form of bonds (debt) or stock (equity).
• The primary operations of commercial banks include:
• Keeping money safe while also allowing withdrawals when needed
• Issuance of chequebooks so that bills can be paid and other kinds of
payments can be delivered by the post
• Provide personal loans, commercial loans, and mortgage
loans (typically loans to purchase a home, property or business)
• Issuance of credit cards and processing of credit
card transactions and billing
• Issuance of debit cards for use as a substitute for cheques
• Allow financial transactions at branches or by using automatic teller
machines (ATMs)

26. Conti…
• Provide wire transfers of funds and electronic fund
transfers between banks
• Facilitation of standing orders and direct debits, so payments for
bills can be made automatically
• Provide overdraft agreements for the temporary advancement of
the bank's own money to meet the monthly spending
commitments of a customer in their current account.
• Provide internet banking system to facilitate the customers to
view and operate their respective accounts through the internet.
• Provide charge card advances of the bank's own money for
customers wishing to settle credit advances monthly.
• Provide a check guaranteed by the bank itself and prepaid by the
customer, such as a cashier's check or certified check.
• Notary service for financial and other documents
• Accepting the deposits from customers and providing credit
facilities to them.
• Sell investment products like mutual funds Etc.
• The United States is the largest location for commercial banking
services.

27. Investment Banking Services
• Underwriting debt and equity for the private and
public sector for such entities to raise capital.
• Mergers and acquisitions – Work to underwrite and
advise companies on mergers or takeovers.
• Structured finance – Develop intricate (typically
derivative) products for high net worth individuals and
institutions with more intricate financial needs.
• Restructuring – Assist in financially reorganizing
companies
• Investment management – Management of assets
(e.g., real estate) to meet specified investment goals of
clients.
• Securities research – Maintain their own department
that services to assist their traders, clients and
maintain a public stance on specific securities and
industries.

28. Conti…
• Broker Services – Buy and sell securities on behalf of
their clients (sometimes may involve financial
consulting as well).
• Prime Brokerage – An exclusive type of bundled broker
service specifically meant to service the needs of hedge
funds.
• Private banking – Private banks provide banking
services exclusively to high-net-worth individuals.
• Many financial services firms require a person or family
to have a certain minimum net worth to qualify for
private banking service.
• New York City and London are the largest centers of
investment banking services.
• NYC is dominated by U.S. domestic business, while in
London international business and commerce make up
a significant portion of investment banking activity.

29. Foreign Exchange Services
• Foreign Exchange machine
• FX or Foreign exchange services are provided by many
banks and specialists foreign exchange brokers around
the world. Foreign exchange services include:
• Currency exchange – where clients can purchase and
sell foreign currency banknotes.
• Wire transfer – where clients can send funds to
international banks abroad.
• Remittance – where clients that are migrant workers
send money back to their home country.
• London handled 36.7% of global currency transactions
in 2009 – an average daily turnover of US$1.85 trillion
– with more US dollars traded in London than New
York, and more Eurostraded than in every other city in
Europe combined

30. Investment Services
• Collective investment fund– A fund that acts as an
investment pool so investors can put money into a fund that
will reinvest it into a variety of securities based upon their
common, outlined investment goal.
• Investment Advisory Offices – Run by registered investment
advisors who advise clients in financial planning and invest
their money.
• Hedge fund management – Hedge funds often employ the
services of "prime brokerage" divisions at major investment
banks to execute their trades.
• Private equity – Private equity funds are typically closed-end
funds, which usually take controlling equity stakes in
businesses that are either private or taken private once
acquired. Private equity funds often use leveraged buyouts
(LBOs) to acquire the firms in which they invest. The most
successful private equity funds can generate returns
significantly higher than provided by the equity markets.

31. Conti….
• Venture capital – Private equity capital typically provided by
professional, outside investors to new, high-growth-potential
companies in the interest of taking the company to an IPO or
trade sale of the business. Startup companies are typically
fueled by an angel investor.
• Family office – Investment and wealth management firm
that handles a wealthy family or small group of wealthy
individuals with financial plans tailored to their needs. Similar
to private banking.
• Advisory services – These firms (or departments within a
larger entity) service clients with financial advisers who serve
as both, a broker as well as a financial consultant.
• Custody services – the safe-keeping and processing of the
world's securities trades and servicing the associated
portfolios. Assets under custody in the world are
approximately US$100 trillion.
• New York City is the largest center of investment services,
followed by London

32. Insurance
• National Insurance Services (NIS) – St. Vincent the
Grenadines – panoramio
• Insurance brokerage – Insurance brokers shop for
insurance (generally corporate property and casualty
insurance) on behalf of customers. Recently several
websites have been created to give consumers basic
price comparisons for services such as insurance,
causing controversy within the industry.
• Insurance underwriting – Personal lines
insurance underwriters actually underwrite insurance
for individuals, a service still offered primarily through
agents, insurance brokers, and stock brokers.
Underwriters may also offer similar commercial lines
of coverage for businesses. Activities include insurance
and annuities, life insurance, retirement
insurance, health insurance, and property
insurance and casualty insurance.

33. Conti…
• Finance and insurance – a service still offered
primarily at asset dealerships. The F&I manager
encompasses the financing and insuring of the
asset which is sold by the dealer. F&I is often called
"the second gross" in dealerships that have
adopted the model
• Reinsurance – Reinsurance is insurance sold to
insurers themselves, to protect them from
catastrophic losses.
• The United States, followed by Japan and the
United Kingdom are the largest insurance markets
in the world.

34. Other Financial Services
• Angel investment networks – A group of angel investors can create
their own network to be the financial foundation for future
companies.
• Credit card networking – Companies that serve as the bridge
between the retailers and the banks who issue the bank cards.
Major credit card networks are: Mastercard, Visa
Inc., Rupay, American Express and Discover Financial.
• Conglomerates – A financial services company, such as a universal
bank, that is active in more than one sector of the financial
services market
• e.g. life insurance, general insurance, health insurance, asset
management, retail banking, wholesale banking, investment
banking, etc.
• A key rationale for the existence of such businesses is the
existence of diversification benefits that are present when
different types of businesses are aggregated. As a
consequence, economic capital for a conglomerate is usually
substantially less than economic capital is for the sum of its parts.

35. Conti…
• Debt resolution – A consumer service that assists
individuals that have too much debt to pay off as
requested, but do not want to file bankruptcy and wish
to pay off their debts owed. This debt can be accrued in
various ways including but not limited to personal
loans, credit cards, or in some cases merchant
accounts.
• Financial market utilities – Organizations that are part
of the infrastructure of financial services, such as stock
exchanges, clearing houses, derivative and
commodity exchanges and payment systems such
as real-time gross settlement systems or interbank
networks.
• Payment recovery – Assistance in recovering money
inadvertently paid to vendors by businesses, such as by
accidental duplicate payment of an invoice or failure to
return a deposit.

36. Market Participant
• Market participants include individual retail investors, institutional
investors (e.g., pension funds, insurance companies, mutual
funds, index funds, exchange-traded funds, hedge funds, investor
groups, banks and various other financial institutions), and also
publicly traded corporations trading in their own shares. Robo-
advisors, which automate investment for individuals are also major
participants.
• Demographics of market participation
• Indirect vs. Direct Investment
• Indirect investment involves owning shares indirectly, such as via a
mutual fund or an exchange traded fund. Direct investment involves
direct ownership of shares.
• Direct ownership of stock by individuals rose slightly from 17.8% in
1992 to 17.9% in 2007, with the median value of these holdings
rising from $14,778 to $17,000.

37. Conti…
• Participation by income and wealth strata
• Rates of participation and the value of holdings differ significantly
across strata of income. In the bottom quintile of income, 5.5% of
households directly own stock and 10.7% hold stocks indirectly in the
form of retirement accounts. The top decile of income has a direct
participation rate of 47.5% and an indirect participation rate in the
form of retirement accounts of 89.6%. The median value of directly
owned stock in the bottom quintile of income is $4,000 and is
$78,600 in the top decile of income as of 2007.The median value of
indirectly held stock in the form of retirement accounts for the same
two groups in the same year is $6,300 and $214,800 respectively.
Since the Great Recession of 2008 households in the bottom half of
the income distribution have lessened their participation rate both
directly and indirectly from 53.2% in 2007 to 48.8% in 2013, while
over the same period households in the top decile of the income
distribution slightly increased participation 91.7% to 92.1%.

38. Conti…
• Participation by race and gender
• The racial composition of stock market ownership shows households
headed by whites are nearly four and six times as likely to directly own
stocks than households headed by blacks and Hispanics respectively. As of
2011 the national rate of direct participation was 19.6%, for white
households the participation rate was 24.5%, for black households it was
6.4% and for Hispanic households it was 4.3%. Indirect participation in the
form of 401k ownership shows a similar pattern with a national
participation rate of 42.1%, a rate of 46.4% for white households, 31.7%
for black households, and 25.8% for Hispanic households. Households
headed by married couples participated at rates above the national
averages with 25.6% participating directly and 53.4% participating
indirectly through a retirement account. 14.7% of households headed by
men participated in the market directly and 33.4% owned stock through a
retirement account. 12.6% of female-headed households directly owned
stock and 28.7% owned stock indirectly.
• Determinants and possible explanations of stock market participation
• In a 2003 paper by Vissing-Jørgensen attempts to explain
disproportionate rates of participation along wealth and income groups
as a function of fixed costs associated with investing. Her research
concludes that a fixed cost of $200 per year is sufficient to explain why
nearly half of all U.S. households do not participate in the market.

39. Investment Strategies
• Many strategies can be classified as either fundamental
analysis or technical analysis. Fundamental analysis refers to analyzing
companies by their financial statements found in SEC filings, business
trends, and general economic conditions.
• Technical analysis studies price actions in markets through the use of
charts and quantitative techniques to attempt to forecast price trends
based on historical performance, regardless of the company's financial
prospects. One example of a technical strategy is the Trend
following method, used by John W. Henry and Ed Seykota, which uses
price patterns and is also rooted in risk management and diversification.
• Additionally, many choose to invest via passive index funds. In this
method, one holds a portfolio of the entire stock market or some segment
of the stock market (such as the S&P 500 Index or Wilshire 5000). The
principal aim of this strategy is to maximize diversification, minimize taxes
from realizing gains, and ride the general trend of the stock market to rise.
• Responsible investment emphasizes and requires a long-term horizon on
the basis of fundamental analysis only, avoiding hazards in the expected
return of the investment. Socially responsible investing is another
investment preference.

40. Taxation
• Taxation is a consideration of all investment
strategies; profit from owning stocks, including
dividends received, is subject to different tax rates
depending on the type of security and the holding
period. Most profit from stock investing is taxed via
a capital gains tax.
• In many countries, the corporations pay taxes to
the government and the shareholders once again
pay taxes when they profit from owning the stock,
known as "double taxation".

41. Investment Management
• Share prices listed in a Korean Newspaper
• "The excitement before the bubble burst" - viewing prices
via ticker tape, shortly before the Wall Street Crash of 1929.
• Modern price-ticker. This infrastructure underpins
contemporary exchanges, and allows, ultimately, for
individual day trading, as well as wholesale computer-
executed program trading and high-frequency trading.
• Investment management is the professional asset
management of various securities - typically shares and
bonds, but also other assets, such as real estate and
commodities - in order to meet specified investment goals
for the benefit of investors.
• As above, investors may be institutions, such as insurance
companies, pension funds, corporations, charities,
educational establishments, or private investors, either
directly via investment contracts or, more commonly, via
collective investment schemes like mutual funds, exchange-
traded funds, or REITs.

42. Conti…
• At the heart of investment management is asset allocation -
diversifying the exposure among these asset classes, and
among individual securities within each asset class - as
appropriate to the client's investment policy, in turn, a function
of risk profile, investment goals, and investment horizon. Here:
• Portfolio optimization is the process of selecting the best
portfolio given the client's objectives and constraints.
• Fundamental analysis is the approach typically applied
in valuing and evaluating the individual securities.
• Overlaid is the portfolio manager's investment style -
broadly, active vs passive , value vs growth, and small
cap vs. large cap - and investment strategy. In a well-diversified
portfolio, achieved investment performance will, in general,
largely be a function of the asset mix selected, while the
individual securities are less impactful.

43. Risk Management
• Crowds gathering outside the New York Stock Exchange after
the Wall Street Crash of 1929.
• People queuing outside a Northern Rock branch in the United
Kingdom to withdraw their savings during the financial crisis of
2007–2008.
• Risk management, in general, is the study of how to control risks
and balance the possibility of gains; it is the process of measuring
risk and then developing and implementing strategies to manage
that risk. Financial risk management is the practice of protecting
corporate value by using financial instruments to manage
exposure to risk, here called "hedging"; the focus is particularly
on credit and market risk, and in banks, through regulatory
capital, includes operational risk.
• Credit risk is risk of default on a debt that may arise from a
borrower failing to make required payments;
• Market risk relates to losses arising from movements in market
variables such as prices and exchange rates;
• Operational risk relates to failures in internal processes, people,
and systems, or to external events.

44. Financial Risk Management
• Financial risk management is related to corporate
finance in two ways.
• Firstly, firm exposure to market risk is a direct
result of previous capital investments and funding
decisions; while credit risk arises from the business'
credit policy and is often addressed through credit
insurance and provisioning.
• Secondly, both disciplines share the goal of
enhancing or at least preserving, the
firm's economic value; here, businesses devote
much time and effort to forecasting
and performance monitoring generally, and
specifically re risk, understanding their operating
leverage and break even dynamics.

45. Securities Market
• Security market is a component of the wider financial
market where securities can be bought and sold
between subjects of the economy, on the basis of
demand and supply. Security markets
encompasses stock markets, bond
markets and derivatives markets where prices can be
determined and participants both professional and
non professional can meet.
• Securities markets can be split into two levels: primary
markets, where new securities are issued, and
secondary markets where existing securities can be
bought and sold. Secondary markets can further be
split into organised exchanges, such as stock
exchanges and over-the-counter, where individual
parties come together and buy or sell securities
directly.

46. Conti…
• For securities holders knowing that a secondary market
exists in which their securities may be sold and
converted into cash increases the willingness of people
to hold stocks and bonds and thus increases the ability
of firms to issue securities.
• There are a number of professional participants of a
securities market and these
include; brokerages, broker-dealers, market
makers, investment managers, speculators as well as
those providing the infrastructure, such as clearing
houses and securities depositories.
• A securities market is used in an economy to attract
new capital, transfer real assets in financial assets,
determine prices which will balance demand and
supply and provide a means to invest money both short
and long term.

47. THANKS