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Transcript
Business Studies Topic 2: Section 2.2: HSC Course Financial Planning & Management Financial Markets Relevant to Business Financial Needs Section Overview: 2.2.1 Major participants in financial markets including banks, financial and insurance companies, merchant banks, superannuation/mutual funds, companies, government (Reserve Bank of Australia) 2.2.2 Role of the Australian Stock Exchange as a primary market 2.2.3 Overseas and domestic market influences and trends in financial markets and their implications for business financial needs 1 Section 2.2 Financial Markets Relevant to Business Financial Needs 2.2.1 Major Participants in Financial Markets Including Banks, Financial and Insurance Companies, Merchant Banks, Superannuation/Mutual Funds, Companies, Government (Reserve Bank of Australia) A FINANCIAL MARKET is an arena where individuals, businesses and governments come together to buy or sell financial instruments or products commonly known as SECURITIES. There are a number of major participants in the financial markets including banks, finance and insurance companies, merchant banks, superannuation/mutual funds and the government through the Reserve Bank of Australia. A) Banks Banks are the most dominant and recognized financial institutions in Australia. Commercial banking is dominated by the branch network of the four major banks (National Australia Bank, Westpac, Commonwealth Bank and the ANZ Bank). The banks provide an ever-increasing range of business services to their customers, including cheque accounts, fixed deposits, leasing, lending in the form of overdrafts, personal loans and bank bills, and credit-card systems. B) Finance and Insurance Companies Finance companies supply credit to businesses and consumers. Leasing is one of the main types of debt capital that finance companies lend to businesses. Finance companies get the funds they subsequently lend to business by issuing securities, mainly debentures, to the general public. Insurance companies form one of the largest financial institution groups in the country. They get their funds by issuing contracts to provide future payments if a particular event happens. (i.e. a fire). The fees insurance companies receive are then invested in equities, debt and property. C) Merchant Banks Merchant banks are major suppliers of finance to business. They provide a range of financial products. Large businesses will use merchant banks to access capital 2 Section 2.2 Financial Markets Relevant to Business Financial Needs Capital markets for the issuing of equity shares, the creation of debt securities for sale to the market, or the creation of various other securities in order to raise funds. Merchant banks will not only act as an intermediary between the business and the market, but they will often also provide an ‘under-writing’ service where they guarantee the value of the required funds for the business should the market fail to purchase all the securities on offer. Merchant banks will also provide research services for large businesses and provide an advisory service on mergers and takeovers. D) Superannuation/Mutual Funds Employers are required to contribute an amount which is equivalent to 9% of a persons wage into a superannuation fund whilst the employee remains with the business. As a result, superannuation funds receive a steady stream of income from this source over the working life-time of people. The income is then paid to people during the period of their retirement. In order to maximize the value of these funds, they are invested by the superannuation fund in equities, debt and property. Mutual funds operate in the same way as superannuation funds, but the funds used are voluntary savings that can be withdrawn at any time. E) Companies Like any business, companies will require funds at particular times throughout the year. They can acquire these funds in financial markets by issuing equity or debt securities, or simple borrowing. A company’s excess funds will be invested through financial markets in short-term interest bearing securities such as bank bills. Companies will also manage their financial assets in such a way as to insulate themselves against risks such as interest rate rises and to ensure they can meet their debt obligations. This requires further dealings in the financial system and the juggling of a number of financial assets. Companies that trade overseas can also use financial markets for foreign exchange purposes. F) Government (Reserve Bank of Australia) The government has set-up three major regulators of Australia’s financial system: i) ii) iii) The Reserve Bank of Australia (RBA) The Australian Prudential Regulatory Authority (APRA) The Australian Securities and Investments Commission (ASIC) 3 Section 2.2 Financial Markets Relevant to Business Financial Needs 2.2.2 Role of the Australian Stock Exchange as a Primary Market The Australian Stock Exchange (ASX) was formed in 1987, shortly after the deregulation of the financial industry. The stock exchange is a financial intermediary that assists businesses to raise funds by providing a marketplace where securities of companies can be bought and sold. This function is carried out in both the primary and secondary markets. Primary markets are concerned with the formation of new securities. For example, when a company is formed and the shares are first issued, this takes place in the primary market. Later, some of these shares may be sold on to other investors. These activities take place in what is called the secondary market – where existing securities are bought and sold. The ASX provides a forum for these activities to take place. In addition, it has significant supervisory responsibilities over market participants (stockbrokers) and over listed companies. Figure 2.2.1 below depicts the financial arrangement of a primary market. Australian Stock Exchange Supervises issue of prospectus Listing rules Supervises business reporting Individual Investor Buy shares in new business New Business Issues prospectus describing the business Pays a return to investors Dividend on shares Figure 2.2.1 Invests in real assets Real Assets People Machines Raw Materials Real assets are used to make goods & services which produce cash flows Primary Market Financial Arrangement 4 Section 2.2 Financial Markets Relevant to Business Financial Needs 2.2.3 Overseas and Domestic Market Influences and Trends in Financial Markets and Their Implications for Business Financial Needs The financial markets are subject to a range of domestic and overseas environmental influences which, in turn, have implications for business financial needs. In Australia, there have been five major influences on financial markets, each with resulting changes to business. 1) Deregulation The deregulation of the financial industry in the mid 1980’s had an enormous impact on Australia’s financial system. Deregulation saw the removal of numerous rules governing the operation of Australia’s financial institutions, and the movement and ownership of financial assets. Following deregulation, overseas companies were allowed to list in Australia, and restrictions on capital movements in and out of Australia were removed, as were many restrictions governing the behaviour and structure of financial institutions. 2) Compulsory Superannuation The introduction of compulsory superannuation in the 1980’s saw many Australians gain an indirect share holding through investments in superannuation funds. Compulsory superannuation saw the growth of managed funds in Australia escalate as millions of dollars of forced savings were invested here and overseas. Compulsory superannuation has substantially increased costs for businesses. In a competitive labour market, businesses are not able to offer employees lower wages. Instead, businesses are forced to pay the additional burden of 9% superannuation payments on top of wages. 3) Privatisation Privatisation is the sale of government owned businesses to the public. During the 1990’s, the privatization of a few key Australian icons such as the Commonwealth Bank of Australia, Qantas and parts of Telstra had an enormous impact on Australian financial markets. For business, privatization has increased competition, and has often brought regulatory removals with it. Industries such as telecommunications have not only seen the partial privatization of Telstra, but also the introduction of numerous competitors which, prior to a decade ago, was forbidden. 5 Section 2.2 Financial Markets Relevant to Business Financial Needs 4) Growth of Technology The growth of technology around the globe facilitates the ease and efficiency with which financial transactions can take place. Technology has increasingly influenced how markets have operated in recent decades, increasing the speed and ease with which trades can be made. 5) Globalisation Australia’s financial system is not isolated, rather it is connected to and influenced by numerous economic systems around the world. Globalisation and the associated advances in technology have created a 24-hour market for financial assets. The growth of Internet trading and the merging of international financial markets means that Australia’s financial system is ever more influenced by international markets, particularly markets in the United States. DEFINITIONS: Financial Market An arena where individuals, businesses and governments come together to buy or sell financial instruments or products commonly known as securities. Security Any type of written undertaking to repay money that is owed. A share certificate, for example, is a security. HOMEWORK ACTIVITIES: Activity 1: Complete the Case Study “Strathfield to raise $15m” on P.94 of text. Activity 2: Complete the Activity on P.97 of the text. Activity 3: Briefly outline what is meant by a “Financial Market”. Activity 4: Explain how primary and secondary markets differ. Activity 5: What is the role played by the ASX in financial markets? 6