The Financial Markets

PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS

INTERNATIONAL BUSINESS SCHOOL 

Finance

Course work

« The Financial Markets »

                                                                                                        Student:

                                                                                    Group №                                            

                                                                                              Supervisor:

Moscow

Table of content

Introduction

Chapter 1

1.1    Concept of financial market.

1.2    Stock market structure.

1.3    Classification of securities and their property.

Chapter 2

2.1 Features of stock market in Russia.

2.2 The market of government securities.

2.3 The market of corporate securities.

Chapter 3

3.1 Prospects of the international financial market.

3.2. Prospects of the Russian financial market.

Conclusion

The list of literature

Introduction.

The financial market represents very difficult mechanism which isn't described yet by any theory up to the end. And despite some uncertainty and set of methods of market research, share values – "goods" most attractive for today for set of investors. By means of financial markets the interbranch, international modulation of capitals is performed. Mechanisms of these markets are in this respect much more effective than direct investment of means and allow to optimize structure and dynamics of public reproduction. And though many economists try to confute from time to time it, this statement has already passed testing by time.

The purpose of the given work is illumination of the basic theoretical aspects financial and mostly stock market, studying of the Russian features, conditions of both sectors of the market – the state and corporate securities, and also attempt of the summary forecast and an estimation of prospects of the Russian market in interdependence in the international stock market on the basis of forecasts of specialists of analytical agencies, the international credit organizations and specialists of Ministersv of economy and the finance of the Russian Federation.

Chapter 1.

1.1     Concept of financial market

The financial market consists of a money market and the market of capitals. It is caused by different character of the financial resources serving basic and a working capital. On the money market the means address providing short-term loans move. In the market of capitals there is a movement of long-term accumulatings.

In financial market the stock market functions. The securities, which value should be determined by assets, are the object of trades in the financial market. The security market serves both a money market and the market of capitals. But securities serve only a part of movement of financial resources (except them there are inter-firm credits and inter-company credits, direct bank loans, etc.).

Thus, the financial market consists of two parts - of a money market and the market of capitals. The stock market entering into its structure is a segment of both these markets. Movement of means on financial market has a direction from savers to users. By means of financial market the modulation of financial resources from one sectors of economy in others can be performed. In total allocate 4 sectors: households, business concerns, public sector and financial intermediaries. The most part of the capital of house economy is formed at the expense of own means. Here the basic excess of financial resources directed on financing of business concerns is formed, the states and takes place at financial institutions (investment funds, banks etc.). The greatest requirement for financial resources is tested by the largest sector – the state. It is the largest borrower on financial market, but also acts as the largest creditor of households, business concerns and financial intermediaries. Intra-sector movement of means takes place also. However these monetary flows are repaid since finally the sum of savings (financial assets) is equal to the sum of investments (financial liabilities).

Dwelling upon stock market, it is necessary to note such process, as securitization. Its essence consists in increase of a role of securities as means of increase of efficiency of attraction of financial resources: low-liquid assets are transformed to securities and offered investors. It allows to do without credit intermediaries (banks) and to involve resources much cheaper and faster.

Thus, the stock market arises from objective necessity of attraction of additional financial resources for the enterprise, corporation, the state. At the same time there is a number of persons (both legal, and physical), having temporarily free money funds. In stock market there is a purchase and sale of financial resources. The stock market plays a considerable role in system of market relations which can be reduced to following factors: 1) attraction of available assets in the form of investments for production development, 2) provision of a modulation of the capital from fading industries in quickly progressing industries, 3) attraction of means for a budgeted deficit covering, 4) generation of indicators on which it is possible to estimate state of the economy as a whole, 5) influence on change of inflation rates.

1.2     Stock market structure

As any market, the security market is a difficult organizational system of law with certain technology of carrying out of operations and the auctions. The stock market consists of three interconnected elements:

       Securities and their derivatives (a trade subject);

       Professional participants;

       Adjustment system.

Considering special character of activity in stock market, the state incurs function of the organization of relations in the market. First of all it means rigid system of the admission of the organizations or physical persons to work in stock market. For professional activity realization in this market it is necessary to obtain the license for the right of work with securities.

In the Russian Federation activity licensing in stock market is performed since 1992. Initially licenses were given out by the Ministry of Finance of the Russian Federation which granted licenses to the investment institutes functioning in stock market in quality: the intermediary (the financial broker), the investment adviser, investment company, investment fund. Simultaneously the Ministry of Finance was performed by licensing of activity of stock exchanges and share departments of commodity exchanges.

In process of stock market development there was a necessity for creation of the special body regulating activity in stock market. The Federal service on financial markets at the Government of the Russian Federation became such body. According to acting order, licensing is assigned to Federal service on financial markets: activity of management companies of share investment funds and registration of their prospectuses of issue, activity of the specialized registrars performing conducting of shareholder registers, broker and dealer, and also depositary, clearing and activity on the securities trading organization.

It is necessary to notice that except professional participants of stock market on it the great number of the institutional investors possessing considerable financial resources which, getting on the market in many respects works determine a situation on it. It is possible to carry banks, non-state pension funds and the insurance companies to such participants.

1.3    Classification of securities and their property

According to clause 142 of the Civil Code of the Russian Federation the security is understood as the document certificating with observance of the established form and obligatory requisites property rights, realisation or which transfer are possible only at its presentation. Thus it is necessary to consider that the presentation in this case is understood not simply as demonstration of availability of the physical carrier of a security, and the proof of ownership rights on a security. But from the point of view of the theory of stock market this determination of a security cannot be recognised by optimum as does not consider all its properties.

For more total characteristic of a security it is necessary to consider its basic properties:

       The security testifies to an ownership right on the capital (shares);

       The security reflects loan relations between the investor (the buyer of a security) and the emitter of this paper (the bond, the bill, etc.)

       Securities in the form of shares give a participation right in management of joint stock company;

       Securities grant the right to share reception in enterprise property at its liquidation.

Allocate one more, the basic property of a security - its capability to serve as a purchase and sale subject in stock market because securities freely or with some restrictions address in the market, providing a modulation of the capital from one emitter to another, and also extraction of the income of a gain of course cost, accomplishment of mortgage function at credit reception etc. Capability of circulatuion distinguishes a security from other financial records.

Classification of securities can be performed by various criteria. So, the Federal act “About the security market” enters concept of the issue security which characteristic consists in the following:

       Takes place releases;

       Fixes set of the property and non-property rights which are subject to the certificate, a concession and unconditional realization according to acting order;

       Has equal volumes and terms of realization of the rights in one release without dependence from time of acquisition of a security.

Shares concern such securities, bonds and investment shares. Release of issue securities isn't always accompanied by development of the prospectus of issue, however their release should be registered in financial bodies. Paper issue can be performed in two forms: open (public) placing of securities among potentially unlimited circle of investors, and also the closed (private) placing of securities among the limited circle of investors.

Depending on the form of granting of the capital the investor to the emitter and reflexions of these means in a property complex of the enterprise differentiate share and debt securities. The equity security fixes the rights of the owner to a part of property of the enterprise at its liquidation, participation in forming of an authorised fund, the right to reception of a part of profit and to participation in management. An example – shares. Debt papers reflect first of all credit relations between their owner and the emitter who undertakes to redeem these securities after certain time and to pay certain percent. Bonds concern such papers.

Classification of securities on emitters subdivides them into following kinds:

       state (issued by the federal government),

       municipal (are issued by regional authorities)

       corporate (issued by the enterprises and the private sector organizations, basically joint stock companies).

Also securities can be classified how realization of the rights fixed by a security is performed. On this sign securities are subdivided on demand, nominal and order. The rights certificated by demand securities, belong to the person who represents these securities and presentations of such security enough for realization of the rights fixed by it. These papers are most simple in circulation. Transition of the rights is performed by simple delivery of this paper. On these papers the register of owners isn't led. An example of such security – bonds of the state savings loan. In the Russian Federation the volume of release of demand shares is limited by a certain share from size of the paid authorized capital. This specification establishes to Federal service on financial markets. Unlike demand, nominal securities provide unequivocal identification of all owners of securities, i.e. Nominal securities are meant as such papers, the information on which owners is contained in the register and transition of the rights on which, as well as realization of the rights fixed by these papers identification of the owner demand. Order securities provide, the rights on them can belong to the person named in the security who can perform itself these rights or appoint the order (order) other authorized person. The rights on an order paper are transferred by fulfillment on this security of an endorsement – an endorsement.

In the release form differentiate the documentary securities issued in the cash form in the form of forms of securities and paperless, issued in cashless form. Fixing of the rights on bank entry securities is produced by the emitter or special firm by register conducting.

On circulation stages differentiate primary market securities on which they are on sale or transferred by the emitter to their first owners and secondary market securities on which transactions of purchase and sale of the securities which have passed primary placing are made.

Depending on advanced repayment possibility differentiate irrevocable securities which can't be withdrawn and extinguished the emitter ahead of schedule. It should be provided conditions at their release and is fixed in the issue prospectus, as well as for the revocable papers, accordingly able to be withdrawn and extinguished ahead of schedule. Usual conditions of a withdrawal are provided for bonds and shares.

Whenever the possibility of free circulation securities are subdivided into following kinds: transferable securities which can freely be bought and on sale not addressing which are allocated only by means of a primary market (they can be redeemed only the emitter) and securities with the limited possibility of circulation.

Also securities can be classified on volume of the given rights: the primary securities which are the rights to primary resources (the earth, real estate, money funds, etc.) - concern such securities of the share, bonds, bills, bills of lading, etc. and the derivative securities certificating the rights of their owner on purchasing or sale of primary securities (shares, bonds) - concern such papers options, warrants, futures and forward contracts.

According to the Civil code of the Russian Federation in stock market of Russia following kinds of securities are admitted to circulation:

       Government bonds;

       Bonds;

       Bills;

       Checks;

       Deposit certificates;

       Savings certificates;

       Bank savings books bearer;

       Bills of lading - the securities expressing an ownership right on the concrete goods specified in them;

       Shares;

       Privatization securities;

       Other securities. Which the securities act can be carried to number of those;

Chapter 2.

2.1 Features of stock market in Russia.

The security market existed in imperial Russia and developed about 150 years (1769-1913) in a close connection with evolution of economy and a country policy. Here it is possible to allocate three periods:

The first – since 1769 till the end of 50th of 19 centuries – time of origin and the beginning of formation of the security market when there was mainly a circulation of government securities.

The second period – since 60th years of 19 centuries for 1897 - has coincided with currency reform end ("gold currency" entering). This period is considered the major as covers intensive development of stock market.

The third period – since 1987 for 1913 (the First World War beginning) – corresponds to lines of formation of the "mature" security market.

As well as in other countries, in Russia as the first share values on financial market government securities acted. Circulation of such securities, as bills and shares in parallel developed. The first Bill charter has been constituted under Peter I decree under the sample of the Leipzig Bill charter. In 18-19 centuries it was repeatedly processed. In 1902 the new bill charter representing considerable achievement in comparison with previous, created on foreign samples has been confirmed. After serfdom cancellation joint stock companies have started to be created and to 1914 2235 societies had capitals in the 4,7 billion sum rub, from them on a share 1621 industrial societies it was necessary to 3,2 billion.

To the beginning of 90th Russia became on a way of revival of the security market considering both our historical traditions, and experience of the developed market economies. The security market can develop only at normal commodity - monetary relations and property relations. And thereupon the considerable role is played by privatization. And in the conditions of undeveloped stock market the privatization directly connected with shares, is an initial impulse for its forming as allows to participate in it to the majority of the enterprises and the population.

Privatization has caused to life a new kind of securities – privatization checks (vouchers). These are government securities bearer, granting the right to acquisition of a part of state ownership which was gratuitously transferred to citizens of the Russian Federation in the course of privatization. Last, on the one hand, is connected with occurrence in the market of vouchers; with another – promotes formation of joint stock companies as the leader organizational – the legal form of the enterprises. It acts as the reason of issue not only new shares and bonds, but also derivative securities, expands circulation of corporate securities. Thus, privatization process has served as the initial stage of revival of the security market.

2.2 The market of government securities.

Government securities have arisen with development of economic functions of the state for which realization the system of public finances in which the budgetary subsystem is included has been created. The budget of the modern state, as a rule, is characterized by excess of expenses over incomes, i.e. it is in deficit. Central government budget deficit shouldn't be considered as entirely negative phenomenon, and in connection with features of development of the country at a concrete historical stage. Deficit is negative, if it – a consequence of wars, militarization of economy, decrease in a level of production. If deficit reflects active participation of the state in economic growth of the country, and its overcoming meets less difficulties.

Central government budget deficit can be covered at the expense of credits of Central bank of the Russian Federation. If credit reception is impossible or it is insufficient, resort to issue of bank notes or to release of debt obligations. Last decade their release tends to increase and central government debt formation in all countries.

For an estimation of a condition and prospects of the Russian security market it is necessary to consider it in a retrospective show of latest developments. It is possible to allocate the major factors which most strongly have affected a situation in the Russian stock market:

       An adverse situation in world stock markets;

       Strengthening of political instability in Russia;

       Deterioration of an economic situation of Russia.

Let's consider serially all three factors on an example of crisis of 1998 which has left a huge trace on history and development of Russia. In 1998 growth rates of the American stock market have decreased. Dow-Johns stock index (D.J.) has reached in July of a historical maximum – 9400 points. As the reason for it flight of investors from the countries with more risky investments into the most reliable market of the USA, and also the advantages received by the American multinational corporations at the expense of decrease labour and material costs has served. Essential influence on growth of an index was rendered by numerous merges of the oil companies as a result of price reduction on oil, and as consequence – increase of profitability. All it was a consequence of crisis in the Asian countries. However in the second half of the year the situation has changed. Sales volumes of the large companies because of devaluation of some the Asian currencies have essentially fallen. Growth of gross national product for the second quarter has constituted 1.8 % against 5.5 % in the first. Financial crisis in Russia became the important factor which has affected world stock market. For short term the Dow Jones index has fallen to 7600 points (to 19 %). The reputation of the USA as reliable financial refuge for investors has been undermined. ФРС the USA has gone on emergency measures and has lowered a benchmark interest rate from 5.50 % to 4.75 % therefore the Dow Jones index in November has again reached the historical maximum – 9400 points, but not for a long time and soon has again decreased.

Considering the factor of deterioration of an economic situation in Russia, it is necessary to consider influence world in general economic conjuncture. So, in 1998 on an economic situation in Russia negative influence has rendered sharp falling of the world prices for energy carriers because of decrease in consumption of oil owing to proceeding global financial crisis. So, the prices for monthly futures of mark Brent at the London stock exchange have fallen from $18 for barrel in the beginning of January to $9.9 in the middle of December. The basic export mark of Russian oil Urals is quoted even more low - more cheaply Brent on $1-2.