Introduction to Financial Markets
Introduction:
Grading: assignment: Give opinion about an article from Financial Times, …
Exam: MCQ,
1. Unit 1: The Financial System
1.1. The Actors
1.1.1. Haves or Havenots?
2 big groups: (from macro-perspective viewpoint, all the households, all coorporates,
governments,… → if they want to do something, they need money, but money is uneven spread
among these groups)
- Haves: financial industry (bank)
- Havenots: government, corporates, financial industry (bank)
Bank (financial industry): both borrowing and lending
Haves → Money → Havenots
Haves → Money – through Financial Industrie → Havenots
1.1.2. The Main Actor: Households
If the households are the crucial players → how do we look at their wealth?
Net wealth based on Balance sheet: Assets and Debt (liabilities)
Assets (house)
Liabilities (mortgage loan,…)
Net wealth: what do you really have?
1
,Balance sheet:
What do households own?
Activa
- Real assets: tangible assets
o Cars
o Real estate
- Financial Assets:
o Stocks: participations in companies
o Bonds: ‘kind of loans’
▪ Governments or corporates
o Mutual Funds: kind of portfolio you buy with all kinds of stocks inside
o Deposits
o Cash
Passiva
- Mortgage loans
- Consumer loans (when buying a car, spread out over months,…)
Real Versus Financial Assets:
- US:
o Adults have more Financial assets than Real assets
- India:
o Real assets are more than financial assets
The way how people store wealth is different all over the world
2
,Kind of Assets
- Tangible assets/real assets {= synonyms}: you derive value from the fact that you can use
it
- Intangible assets: derive value from a legal claim to some future benefit
[they give you a claim somewhere in the future]
o Financial assets: are intangible assets that represent a claim to future cash
Asset Classes:
We devide financial assets into different categories
- Traditional asset classes: stocks, bonds, all kind of cash instruments
- Alternative asset classes: Real estate, commodities , private equity, hedge funds,
venture capital, currencies
Liabilities:
- Mortgage loans
- Consumers loans
- Tax debts
Growth drivers in net wealth:
What are the drivers of the changes in wealth?
- value changes in assets and liabilities:
o e.g. good investments will lead to changes in wealth
o e.g. both changes in assets or liabilities are possible
- Net-income from labour, capital or transfers:
o Security income
- Inheritances, gifts
=>wealth is something dynamic, and its very relative → if stock markets grow with 50% a year,
we are much more wealthy, if next year there is a big crash → all the wealth we had just
evaporates
3
,Wealth Creation:
‘’Assets put money in your pocket, whether you work or not, and liabilities take money from your
pocket.’’ Robert Kiyosaki
Poor familiy: no assets/liabilities
→salary → rent, food, leisure – everything they own is spent
Middle class: ‘poor families with a home’
→salary → rent, food,… the money, left over they buy a house
Rich class: got really assets on their balance sheet,
which generates an income
• Dividends from stocks, rents they get paid,..
• Collecting assets that generates cash for you
If you want to get rich → you need to get independent and build up asssets that generate an
income itself
Wealth is not uniformly distributed:
- Wealth is not distributed over the world
- Africa is lighter colour → US, Europe, Australia : wealth
- Unevenly distributed
Wealth distribution
- Regional composition of global wealth
- X-as – percentile
- Wealthiest people: North America/ Europe
- Middle class: high in China
- High poverty in: Africa, India, Asia-Pacific
- Poor people in the US/Europe: top left corner
4
,What does This really Mean?
What does it mean in practice? -> websites on slide
Global Wealth Pyramid
If you’re a banker your interested in the top of the pyramid
It becomes interesting, when the family you serve becomes more rich
Wealth Inequality [look picture in slide]
classify the countries (developed economies/emerging markets)
Belgium: developed economy, but low inequality
Netherlands: developed economy, medium inequality
United States: developed economy, very high inequality
Emerging markets: a lot of countries with very high inequality
Final Thought: Families own the world → behind each corporate there are individuals
→Individuals own all the assets in the economy and so bear all the risks
5
, 1.2. How do the Balance Sheets of Other Actors look like?
Corporates: companies
Liabilities:
- Equity: claim of the shareholders (they own the company)
o Profits are increasing shareholders wealth
o Profits will lead to dividends
- Debt: everything the company borrows:
o Bonds
o Investment loans
o Other bank loans
o Trade credit
o Tax debt
People like to work with borrowed money? Why? You hope that the profit margin is higher
than the rent of borrowing money
Assets:
- Fixed assets: longterm commitment
o Intangible: pattents, royalties
o Tangible: trucks, buildings,…
o Financial: shares in other companies (mother- daughter company)
o Long term
- Current assets:
o …
6
,Gearing:
Companies can be funded with
- Shareholders funds (equity) consisting out of the original equity rights issues and the
retained profit
- Debts
When companies use debt to finance their operations, they use leverage.
Most companies use leverage to raise the ROE above the ROA:
- ROE= return on equity i.e. profit/equity:
o Shareholders: how much do I earn on the money that I invested?
- ROA = return on assets i.e. profit/assets
o The return you get with all the money you use
- ROE = ROA x LM (leverage multiplier)
Leverage can be measured in different ways:
As a Debt/Equity ratio:
- Gearing ratio: ratio between long-term debt and equity
o Balance: 100-equity, 200, debts => assets:300 => 200/100 = 2 debt equity ratio
o 2 euro’s of debt for every equity
As a Assets/Equity ratio i.e. a leverage multiplier:
- 300assets/100 from me = leverage multiplier: 3
7
,Financial Sector - Bank
Is a bank different from a company? → who is using most leverage?
Banks: taking money from depositors and lending it out to someone else
Banks: more debts, than assets → leverage is very important for banks
Assets:
- Tangible assets
- Financial assets
- Trading book: assets which the bank has for trading, assets held for trading purposes
- Banking book: regulating all the loans
o Mortgage loans
o Consumer loans
o …
- Bond portfolio: transform deposits into something that gives an higher return
- Deposit
A typical bank: small part of equity, lot of debt
Normal corporate: much more equity, much less debts
Mutual fund:
8
,Insurance companies:
- 2 big branches: 2 business models
o Casualty insurance: if you have a car accident → insurance company might pay
for it
o You pay money in the insurance company, and the insurance company is going to
invest that for you
→they have to cover the losses by investments
The Government
Liabilities:
- Government debt (huge)
Assets: (not a lot)
- Government buildings
➔equity is negative → not a problem → because the families own everything and they are
wealthy enough so government can use the taxes
1.3. The Financial System
1.3.1. Importance
Why is it important?
• It is crucial to our economy
There is a Link between economic growth and financial development
Who is the most dominating country in the world? →US
Who has the most sophisticated markets? → US
Before US 90th century? Great Britain
70th century? → The Netherlands
The role of the financial system is to facilitate production, employment and consumption.
Resources are funneled through the system so resources flow to their most efficient uses.
9
, 1.3.2. The Financial System
Lender-savers: [savers] - Haves
1. Households
2. Business firms
3. Government
4. Foreigners
Borrowers-spenders [spenders] – Havenots
1. Business firms
2. Government
3. Households
4. Foreigners
How do we get the money from the Haves to the Havenots?:
1) You can directly give the money from the savers to the borrowers [direct financing]
E.g. you want to buy a car to go to school, you ask parents for a small loan, they give you
the money, but it is a loan, so you have to pay them back
Informal market
10
Introduction:
Grading: assignment: Give opinion about an article from Financial Times, …
Exam: MCQ,
1. Unit 1: The Financial System
1.1. The Actors
1.1.1. Haves or Havenots?
2 big groups: (from macro-perspective viewpoint, all the households, all coorporates,
governments,… → if they want to do something, they need money, but money is uneven spread
among these groups)
- Haves: financial industry (bank)
- Havenots: government, corporates, financial industry (bank)
Bank (financial industry): both borrowing and lending
Haves → Money → Havenots
Haves → Money – through Financial Industrie → Havenots
1.1.2. The Main Actor: Households
If the households are the crucial players → how do we look at their wealth?
Net wealth based on Balance sheet: Assets and Debt (liabilities)
Assets (house)
Liabilities (mortgage loan,…)
Net wealth: what do you really have?
1
,Balance sheet:
What do households own?
Activa
- Real assets: tangible assets
o Cars
o Real estate
- Financial Assets:
o Stocks: participations in companies
o Bonds: ‘kind of loans’
▪ Governments or corporates
o Mutual Funds: kind of portfolio you buy with all kinds of stocks inside
o Deposits
o Cash
Passiva
- Mortgage loans
- Consumer loans (when buying a car, spread out over months,…)
Real Versus Financial Assets:
- US:
o Adults have more Financial assets than Real assets
- India:
o Real assets are more than financial assets
The way how people store wealth is different all over the world
2
,Kind of Assets
- Tangible assets/real assets {= synonyms}: you derive value from the fact that you can use
it
- Intangible assets: derive value from a legal claim to some future benefit
[they give you a claim somewhere in the future]
o Financial assets: are intangible assets that represent a claim to future cash
Asset Classes:
We devide financial assets into different categories
- Traditional asset classes: stocks, bonds, all kind of cash instruments
- Alternative asset classes: Real estate, commodities , private equity, hedge funds,
venture capital, currencies
Liabilities:
- Mortgage loans
- Consumers loans
- Tax debts
Growth drivers in net wealth:
What are the drivers of the changes in wealth?
- value changes in assets and liabilities:
o e.g. good investments will lead to changes in wealth
o e.g. both changes in assets or liabilities are possible
- Net-income from labour, capital or transfers:
o Security income
- Inheritances, gifts
=>wealth is something dynamic, and its very relative → if stock markets grow with 50% a year,
we are much more wealthy, if next year there is a big crash → all the wealth we had just
evaporates
3
,Wealth Creation:
‘’Assets put money in your pocket, whether you work or not, and liabilities take money from your
pocket.’’ Robert Kiyosaki
Poor familiy: no assets/liabilities
→salary → rent, food, leisure – everything they own is spent
Middle class: ‘poor families with a home’
→salary → rent, food,… the money, left over they buy a house
Rich class: got really assets on their balance sheet,
which generates an income
• Dividends from stocks, rents they get paid,..
• Collecting assets that generates cash for you
If you want to get rich → you need to get independent and build up asssets that generate an
income itself
Wealth is not uniformly distributed:
- Wealth is not distributed over the world
- Africa is lighter colour → US, Europe, Australia : wealth
- Unevenly distributed
Wealth distribution
- Regional composition of global wealth
- X-as – percentile
- Wealthiest people: North America/ Europe
- Middle class: high in China
- High poverty in: Africa, India, Asia-Pacific
- Poor people in the US/Europe: top left corner
4
,What does This really Mean?
What does it mean in practice? -> websites on slide
Global Wealth Pyramid
If you’re a banker your interested in the top of the pyramid
It becomes interesting, when the family you serve becomes more rich
Wealth Inequality [look picture in slide]
classify the countries (developed economies/emerging markets)
Belgium: developed economy, but low inequality
Netherlands: developed economy, medium inequality
United States: developed economy, very high inequality
Emerging markets: a lot of countries with very high inequality
Final Thought: Families own the world → behind each corporate there are individuals
→Individuals own all the assets in the economy and so bear all the risks
5
, 1.2. How do the Balance Sheets of Other Actors look like?
Corporates: companies
Liabilities:
- Equity: claim of the shareholders (they own the company)
o Profits are increasing shareholders wealth
o Profits will lead to dividends
- Debt: everything the company borrows:
o Bonds
o Investment loans
o Other bank loans
o Trade credit
o Tax debt
People like to work with borrowed money? Why? You hope that the profit margin is higher
than the rent of borrowing money
Assets:
- Fixed assets: longterm commitment
o Intangible: pattents, royalties
o Tangible: trucks, buildings,…
o Financial: shares in other companies (mother- daughter company)
o Long term
- Current assets:
o …
6
,Gearing:
Companies can be funded with
- Shareholders funds (equity) consisting out of the original equity rights issues and the
retained profit
- Debts
When companies use debt to finance their operations, they use leverage.
Most companies use leverage to raise the ROE above the ROA:
- ROE= return on equity i.e. profit/equity:
o Shareholders: how much do I earn on the money that I invested?
- ROA = return on assets i.e. profit/assets
o The return you get with all the money you use
- ROE = ROA x LM (leverage multiplier)
Leverage can be measured in different ways:
As a Debt/Equity ratio:
- Gearing ratio: ratio between long-term debt and equity
o Balance: 100-equity, 200, debts => assets:300 => 200/100 = 2 debt equity ratio
o 2 euro’s of debt for every equity
As a Assets/Equity ratio i.e. a leverage multiplier:
- 300assets/100 from me = leverage multiplier: 3
7
,Financial Sector - Bank
Is a bank different from a company? → who is using most leverage?
Banks: taking money from depositors and lending it out to someone else
Banks: more debts, than assets → leverage is very important for banks
Assets:
- Tangible assets
- Financial assets
- Trading book: assets which the bank has for trading, assets held for trading purposes
- Banking book: regulating all the loans
o Mortgage loans
o Consumer loans
o …
- Bond portfolio: transform deposits into something that gives an higher return
- Deposit
A typical bank: small part of equity, lot of debt
Normal corporate: much more equity, much less debts
Mutual fund:
8
,Insurance companies:
- 2 big branches: 2 business models
o Casualty insurance: if you have a car accident → insurance company might pay
for it
o You pay money in the insurance company, and the insurance company is going to
invest that for you
→they have to cover the losses by investments
The Government
Liabilities:
- Government debt (huge)
Assets: (not a lot)
- Government buildings
➔equity is negative → not a problem → because the families own everything and they are
wealthy enough so government can use the taxes
1.3. The Financial System
1.3.1. Importance
Why is it important?
• It is crucial to our economy
There is a Link between economic growth and financial development
Who is the most dominating country in the world? →US
Who has the most sophisticated markets? → US
Before US 90th century? Great Britain
70th century? → The Netherlands
The role of the financial system is to facilitate production, employment and consumption.
Resources are funneled through the system so resources flow to their most efficient uses.
9
, 1.3.2. The Financial System
Lender-savers: [savers] - Haves
1. Households
2. Business firms
3. Government
4. Foreigners
Borrowers-spenders [spenders] – Havenots
1. Business firms
2. Government
3. Households
4. Foreigners
How do we get the money from the Haves to the Havenots?:
1) You can directly give the money from the savers to the borrowers [direct financing]
E.g. you want to buy a car to go to school, you ask parents for a small loan, they give you
the money, but it is a loan, so you have to pay them back
Informal market
10
