Property Investment in Istanbul

An Overview of the Financial System

An Overview of the Financial System

Financial markets (bond and stock markets) and financial intermediaries (banks, insurance companies, pension funds) have the basic function of getting people together by moving funds from those who have surplus funds to those who have a shortage of funds.

Function of Financial Markets

Financial markets perform the essential economic function of channeling funds from those who have saved surplus funds, because they spend less than their income, to those who have a shortage of funds, because they wish to spend more than their income.

The principal lenders-savers are households, but business firms and the government ( particularly state  and local government) as well as foreigners and their governments sometimes also find themselves with excess funds and so lend them out.

Structure of Financial Markets

Debt and Equity Markets :

There are two ways that a firm or an individual can obtain funds in a financial market. The most common method is to issue a debt instrument , such as a bond or a mortgage, which is a contractual agreement by the borrower to pay the holder of the invesment fixed dollar amounts at regular intervals (interest payments) until a specified date (the maturity date) when a final payment is made. The maturity of a debt instrument is the time (term) to that instrument’s expiration date. A debt instrument is short term if its maturity is a year or less and is longer term if its maturity is ten years or longer. Debt instruments with a maturity between one and ten years are said to be intermediate term.

The second method of raising funds is by issuing equities, such as common stock, which are claims to share in the net income ( income after expenses and taxes) and the assets of a business firm. Equities usually make periodic payments (dividends) to their shareholders and are considered to be long-term securities because they have no maturity date.

Primary and Secondary Markets :

A primary market is a financial market in which new issues of a security., such as a bond or a stock, are  sold to initial buyers by the corporation or government agency borrowing the funds. A secondary market is a financial market in which the securities that have been previously issued (and are thus secondhand) can be resold.

Exchanges and Over-the-Counter Markets :

Secondary markets can be organized in two ways. One is to organize ex-changes, where buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades.

The other method of organizing a secondary market is to have an over-the-counter(OTC) market, in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities ” over-the-counter ” to anyone who comes to them and is willing to accept their prices.

Money and Capital Markets :

Another way of making a distinction between markets is on the basis of the maturity of the securities traded in that market. The money market is a financial market in which only short-term debt instruments (maturity less than one year) are traded , while the capital market is the market is in which longer-term debt (maturity greater than one year) and equity instruments are traded.

Financial Intermediaries

Depository Institutions (Banks) :

  • Commercial Banks
  • Savings and Loan Associations
  • Mutual Savings Banks
  • Credit Unions

Contractual Savings Institutions :

  • Life Insurance Companies
  • Fire and Casualty Insurance Companies
  • Pension Funds (Private) and State and Local Retirement Funds

Investment Intermediaries :

  • Finance Companies
  • Mutual Funds
  • Money Market Mutual Funds

Financial Market Instruments

Money Market Instruments :

  • United States Treasury Bills
  • Negotiable Bank Certificates of deposit (CDs)
  • Commercial Paper
  • Bankers’ Acceptances
  • Repurchase Agreements (RPs)
  • Federal (Fed) Funds
  • Eurodollars

Capital Market Instruments :

  • Stocks
  • Mortgages
  • Corporate Bonds
  • US Government Securities
  • US Government Agency Securities
  • State and Local Government Bonds.
  • Consumer and Bank Commercial Loans

A Simple Approach to Portfolio Choice: The Theory of Asset Demand

  1. The theory of asset demand tells us that the quantity demanded of an asset is (a) positively related to wealth, (b) positively related to the expected return on the asset relative to alternative assets, (c) negatively related to the riskiness of the asset relative to alternative assets, and (d) positively related to the liquidity of the asset relative to alternative assets.
  2. Diversification (the holding of more than one asset) benefits investors because it reduces the risk they face, and the benefits are greater the less returns on securities move together.