Download 2.2 - Financial Markets Relevant to Business

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
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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
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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)
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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
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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.
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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?
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