Inside the Capital Markets
the primary goal of the capital market is to help customers buy and sell securities.
Capital Market customers:
there are usually three types of customers for the international banks.
- Institutional Investors: Public and Private pension funds, mutual funds, Wealth Management Companies, Soveregin wealth funds, life insurance companies
- Other Financial institutions: Smaller financial institutions, Corporates for trading securities.
Providers of the Capital Market Services:
the primary providers are Large Banks, Execution Venues (like Exchanges), and Clearinghouses (Communicating Networks of Buyers, sellers and execution venues connecting information for trade confirmations).
which capital market provider includes central markets which gather the central markets for trade? Exchanges or execution venues
Financial Market involves the issuing and trading of the securities. The Securities are financial instruments or investment contracts that represent an ownership interest in an issuer, a creditor relationship with the issuer or the right of ownership in the issuer. securites are generally organized into asset classes:
- Derivatives: are the asset classes which their prices are derived from other underlying assets.
Financial Market: The market for Trading of All types of securities are collectively called the financial market. the Financial market brings together the buyers, seller and the issuer of the securities together. Financial Market allows the issuers to find the funds for the ongoing operations and to have organic growth in the acquisitions. they also allow the investors to gerenate the income through dividends and interest payments by buying and holding securites also trading.
There are different Segments:
Primary and Secondary
Asset Classes and Geographies
money market: these are securities that mature in less than a year. highly liquid. generally, unsecured. high quality issuers or the ones who generate the money market, have to have some guarantees on the credit worthiness of the securities.
Issuers use this to generate the short term capital to smooth out when the money is available. this is different from investment merket and capital market.
Capital Market: Securities are greater than one year. and the goal is more investment prospective. like equity transactions, long term bonds, …
Financial Market (Primary and Secondary):
primary markets are where the security is issued for the first time. the secondary market is for trading and transacting the already issued assets. for businesses, financial institutions and governments to issue their initialy published assets.
Asset Classes: Group of Assets that have similar characteristics, behave similarly in the market and obey the same laws and regulations. the primary asset classes:
- Equity: Securities representing the ownership
- Fixed Income: Debts, bonds, that pays a fixed(known) rate of income in the form of an interest payments
- Commodities: Raw materials or Hard assets
- Derivatives: Contracts on underlying assets like equity, commodity or …
Products and Services:
- Trade Execution: Process in which the financial institution completes or executes the clients request to buy and sell. they act as a broker (When Connecting a buyer and a seller) or a dealer (Puting its own capital at risk, buys and sells later).
- Securities clearing: trade settlement is a process in which the buyer and seller actually exchange the security and payment. trade settlement occurs after clearing (clearing sends the detail to depository). The depository has the number of owners of the shares of the buyers and sellers. The depository forms a confirmation from the clearinghouse to the participants. the buyers and sellers are then able to affirm the process. this is to ensure that each party is able to exchange the fund.
- Trade settlement: actual payment cross the customers fund. right now it is T+2. but the goal is to make it T+1. The banks pays for stock transaction after the trade is made + 2 days.
- Market making: financial insutuion stands always to buy and sell certain securities to let the others trade special securities. they provide the qoutes to the markets. the bid and ask prices (offer prices). most market making is provided by High Frequency Trading firms.
- Proprietary Trading: is securites’ trading on financial institutions own behalf and not its clients. They Actively trade for a short period of the time and try to capture the differnces between a bid and ask. they are actively looking for see short term inefficiencies in the market, and looking for buy low and sell high. (Risks: Owns money, Ususally traded in the day and do not keep) they are mainly involved in a risk-less environment. it means that they have the facilitation role and find buyers before they do the trade.
other services related to the primary ones:
- Etrading: Electronic trading is trading through the online trading platform. it originally helped lower the costs. as Financial institutions used the E-trading, it led to lowering the costs of the transactions, which in turn led to the lower profit, and to be profitable, they needed to have more clients, which led to lowering the costs more.
- Quant Trading
- Prime Brokerage
- Funding and financing
- Trading on margin
- Algo trading