INTRODUCTION TO FINANCIAL MARKETS

AND FINANCIAL INSTITUTIONS

Students will be able to:

explain the definition and the importance of
financial markets and institutions.
identify the financial landscape in Malaysia.
discuss the role and evolution of financial
system in Malaysia.
Financial Markets
Financial Institutions
A financial market is a market in which financial
assets (securities) such as stocks and bonds can be
purchased or sold.
Financial markets are markets in which funds are
transferred from people who have an excess of
available funds (surplus units) to people who have a
shortage of funds (deficit units)
It is a market for the exchange of capital and credit

Company A
needs fund
(deficit unit)
Investors (surplus unit)
Sell new shares
An example of a transaction in a financial market
Purchase the new
shares
Financial Markets facilitate (role):
The raising of capital
The transfer of risk
Price discovery
Global transactions with integration of financial
markets
The transfer of liquidity
International trade
Financial markets are structures through
which funds flow
Financial markets can be distinguished along
two dimensions
primary versus secondary markets
money versus capital markets

Primary markets
markets in which users of funds raise funds by
issuing financial instruments
Secondary markets
markets where financial instruments are traded
among investors

Money markets
markets that trade debt securities with maturities of
one year or less
Capital markets
markets that trade debt and equity instruments
with maturities of more than one year

The Importance of Financial Markets:

Financial markets are crucial to promoting
greater economic efficiency by channeling
funds from people who do not have a
productive use for them to those who do

Well functioning financial markets are a key
factor in producing high economic growth.
The Function of Financial Markets:

To link the surplus units and deficit units
through the issuance of securities.

Surplus units: participants who have excess cash such as
investors.

Deficit units: participants who are lack of cash, such as
borrowers.

Securities: claims on issuers


Financial Institutions

institutions acting as intermediaries through which
suppliers channel money to users of funds

Examples:
commercial banks, savings institutions, insurance
companies, investment banks, mutual funds, pension
funds etc

Make financial markets work!


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Users of Funds
(corporations)

Suppliers of Funds
(investors)
Financial Claims
(equity and debt
instruments)
Cash
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Financial
Institutions as
Financial
Intermediaries
Users of Funds
Suppliers of Funds
Financial Claims
(equity and debt securities)
Financial Claims
(deposits and insurance policies)
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Benefits of having the financial institutions:
Reduce monitoring costs
Increase liquidity and lower price risk
Reduce transaction costs
Provide maturity intermediation
Provide denomination intermediation