INTRODUCTION TO FINANCIAL MARKET AND STOCK MARKET

DEFINITION OF FINANCIAL MARKET AND FINANCIAL ASSET TAXOMONY OF FINANCIAL ASSETS 1. FIXED INCOME SECURITIES; 2. EQUITIES UNDERSTANDING THE STOCK MARKET ROLE OF THE STOCK MARKET
Lecture 1: Financial Theory

Introduction to Financial Asset and Financial Market

What a Financial Instrument is and the principal economic functions of Financial Instrument; Distinction between a Financial Instrument and Tangible Assets; Definition, Function and Classification of Financial Markets; Participants in Financial Market; Introduction to Derivative Instruments
Lecture 1: Principles of Finance

Financial System
Set of markets and financial intermediaries through which households, firms and government channel available savings to investment opportunities. Set of markets for financial instruments, and the individuals and institutions who trade in those markets.
Lecture 1: Principles of Finance

Facilities offered by Financial System

Intermediation between surplus and deficit units; Financial services such as insurance and pensions; Acts as a payment mechanism; and Portfolio adjustment facilities.
Lecture 1: Principles of Finance

Goals of the Financial System

To facilitate the flow of funds from savers to investors Direct and Indirect Finance; Risk Sharing; To generate liquidity of financial assets.
Lecture 1: Principles of Finance

Participants in the Financial System

Savers; Investors and other borrowers; Financial Intermediaries; Brokers and Advisers; and Regulators

Lecture 1: Principles of Finance

Asset Tangible Vs Intangible

Asset Any possession that has value in an exchange; Tangible Asset An asset whose value depends on particular physical properties; e.g land & buildings, machinery. Intangible Asset Represents some legal claims to some future benefits, e.g Financial Instruments.
Lecture 1: Principles of Finance

Financial Instruments
2 Parties to Financial Assets: 1. Issuer The entity that has agreed to make future cash payments; 2. Investor The owner of the financial Instruments.

Lecture 1: Principles of Finance

Definition of Financial Instruments

Financial Assets are Intangible Assets the typical benefit or value is a claim to future cash.

Lecture 1: Principles of Finance

Examples of Financial Instruments

A loan by a bank to an individual to purchase a car; A bond issued by the Government; A bond issued by a private company; A share issued by a public limited company.

Lecture 1: Principles of Finance

Debt Vs Equity Instruments

Debt Instrument A financial asset where the claim of the holder is fixed. Equity Instrument This obligates the issuer of the financial asset to pay the holder an amount based on earnings, if any, after holders of debt instruments have been paid.

Lecture 1: Principles of Finance

Characteristics of Financial Instruments

1. Risk; 2. Liquidity; and 3. Real Value Certainty

Lecture 1: Principles of Finance

Price of a Financial Asset

The price of a financial asset is equal to the present value of its expected cash flow, even if the cash flow is not known with certainty. Cash flow refers to the stream of cash payments over time.

Lecture 1: Principles of Finance

Risk of Financial Assets

1. Purchasing power risk or inflation risk Risk attached to the potential purchasing power of the expected cash flow; 2. Credit Risk or Default Risk The risk that the issuer will default on the obligation; 3. Foreign Exchange Risk The risk that the exchange rate will change adversely; applies for foreign denominated instruments.
Lecture 1: Principles of Finance

Financial Assets Vs Tangible Assets

Both are expected to generate future cash flow for their owners; Ownership of tangible assets is financed by the issuance of some type of financial instruments- either debt or equity. The cash flow for a financial asset is generated by some tangible asset.
Lecture 1: Principles of Finance

Role of Financial Instruments

1. To transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets; 2. To transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.
Lecture 1: Principles of Finance

Definition of Financial Market

A financial market is a market where financial assets are exchanged.

The financial markets are markets which facilitate the raising of funds or the investment of assets. They also facilitate handling of various risks.
Lecture 1: Principles of Finance

Financial Market
Financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). They are used to match those who want capital to those who have it.
Lecture 1: Principles of Finance

Operation of Financial Market

Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.
Lecture 1: Principles of Finance

Why study Financial Markets?

1. Channel funds from people who do not have a productive use for them (savers) to those who do (investors), thereby promoting economic efficiency. 2. Affect personal wealth and behaviour of business firms.
Lecture 1: Principles of Finance

Functions of Financial Market

1. Borrowing and Lending Allows the transfer of funds or purchasing power from one agent to another for either investment or consumption purposes; 2. Price Determination Mechanism for the determination of prices of both newly issued financial assets and for existing stock of financial assets;
Lecture 1: Principles of Finance

Functions of Financial Market

3. Information Aggregation and Coordination Act as collectors and aggregators of information about financial asset values and the flow of funds from lenders to borrowers; 4. Risk Sharing Transfer of risks from those who undertake investments to those who provide funds for those investments;
Lecture 1: Principles of Finance

Functions of Financial Market

Liquidity Provide holders of financial assets with a chance to resell or liquidate these assets; and Efficiency Reduce transaction costs and information costs.

Lecture 1: Principles of Finance

Classification of Financial Markets

1. Money Vs Capital Market (classification by the maturity of the claim) A money market is a financial market for short term instruments while a capital market is a market for longer maturity instruments;

Lecture 1: Principles of Finance

Classification of Financial Markets

2. Debt Vs Equity Market (Classification by type of financial claim) 3. Primary Vs Secondary Market Primary markets deal with claim that are newly issued while secondary market exist for exchanging claims previously issued.

Lecture 1: Principles of Finance

Classification of Financial Markets

4. Cash Vs Derivative Markets A cash market is a market in which financial asset trades for immediate delivery while in the derivative market the holder has the obligation or the choice to buy or sell a financial asset at some future date.

Lecture 1: Principles of Finance

Types of Derivative Instruments

1. 2. 3. 4. Futures Contracts Forwards Contracts Options Contracts Swaps

Lecture 1: Principles of Finance

TYPES OF INVESTORS
1. INDIVIDUAL

Individuals usually consume part of their income and save the remaining for future consumption. Individual investors rely basically on their personal skills to invest.
Lecture 1: Principles of Finance

TYPES OF INVESTORS
2. INSTITUTIONAL

These funds are usually managed by professionals. Ex include: Pension funds, Mutual funds, insurance companies, investment funds, offshore funds and so on.

Lecture 1: Principles of Finance

INTRODUCTION TO THE STOCK EXCHANGE OF MAURITIUS

The Stock Exchange of Mauritius Ltd (SEM), was incorporated in Mauritius on March 30, 1989. The SEM operates two markets: the Official Market, the Development & Enterprise Market (DEM).

Lecture 1: Principles of Finance

Official Market
The Official Market started its operations in 1989 with five listed companies and a market capitalisation of nearly USD 92 million. Currently, there are 40 companies listed on the Official Market representing a market capitalisation of nearly US$ 4,374.64 million as at 31 July 2007.
Lecture 1: Principles of Finance

LISTING REQUIREMENTS ON THE OFFICIAL MARKET

1. The company must have an expected market capitalisation of Rs 20 million; 2. Issue at least 25% of the company shares to the public. A detailed analysis of the listing requirements for companies that want to be listed on the stock market is available on the SEM website.
Lecture 1: Principles of Finance

Development & Enterprise Market (DEM)

Development & Enterprise Market (DEM), is a market designed for Small and Medium-sized Enterprises (SMEs). The DEM has been launched on 4 August 2006 and there are presently 50 companies listed on this market with a market capitalization of nearly US$ 1,502.10 million at 31 July Lecture 1: Principles ofas Finance

LISTING REQUIREMENTS ON THE DEM

An applicant must have:

published financial statements for at least 1 year , which must have been prepared according to IFRS and audited according to ISA without qualification; a minimum market capitalisation of MRU 20 million; and a minimum of 100 shareholders and 10% in public hands.
Lecture 1: Principles of Finance

 access capital for growth, both at the time of floatation and later through further issues obtain an objective market value for its business raise a companys visibility and enhance its status with the customers and suppliers at home and overseas
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WHY CHOOSE A LISTING ON THE STOCK EXCHANGE OF MAURITIUS?

WHY CHOOSE A LISTING ON THE STOCK EXCHANGE OF MAURITIUS?

have better bargaining position towards financiers enhance management practices foster employee motivation

Lecture 1: Principles of Finance

READING THE SEM FACTBOOK

TURNOVER: This refers to the value of transactions carried out on a stock exchange. It is usually defined as the value of securities changing hands.
Lecture 1: Principles of Finance

READING THE SEM FACTBOOK

MARKET CAPITALISATION It refers to the total value at market prices of the securities at issue for a company or a stock market or sector of the stock market. Rs 157,319,155,635.15

Market Cap = No of common shares of the company * current share of the shares
Lecture 1: Principles of Finance

BUY & SELL ORDER

An investor can place a buy order or a sell order, in other terms, he can ask the stock broking company to buy or sell shares for him.

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MARKET ORDER AND LIMIT ORDER

Market Order: As low as possible for a buy order and as high as possible for a sell order.

Lecture 1: Principles of Finance

MARKET ORDER AND LIMIT ORDER

Limit Order 1. The investor asks the broker to buy when the share price is lower than or equal to the limit price.
Lecture 1: Principles of Finance

MARKET ORDER AND LIMIT ORDER

Limit Order The investor who places a sell order will accept to sell if the share price is equal to or superior to the limit price.
Lecture 1: Principles of Finance