INTRODUCTION TO Nicolas Levi PhD.

MBA
FINANCIAL MARKETS
LEARNING OBJECTIVES
1. To understand the concepts of market, supply and demand.
2. To know what are capital markets.
3. To understand how capital markets are supporting the global
economy.
4. To determine similarities and differences between capital
markets in selected countries.

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WHAT IS A
MARKET?
A place where will deal with several actors.
These actors may be summarized as being the
supply and the demand.
The market implies several actors
Example of markets: monopoly, duopoly, perfect
economy.
The supply is the willingness to sell a product
according to its price. A price-maker.
The demand is the willingness to buy a product
according to its price. A price-taker.
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CATEGORIES OF MARKETS
Name of the market Definition Example

The Monopoly One producer/unlimited Dictatures, sometimes electric

demand services

The Monopsony One supplier/One customer Jail Industry

The Duopoly Two suppliers/unlimited Boeing&Airbus

demand
The Oligopoly A group of companies Automotive Industry

The Perfect Competition Unlimited Supply & unlimited Major categories of goods.
demand

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 MERCANTILISM
Mercantilism is a national economic policy that is designed to maximize the exports of a
country. The role of the state was very important. Another aim was to maximize reserves
of Gold.
Mercantilism was dominant in modernized parts of Europe from the 16th to the 18th
centuries before falling into decline.
It promotes Government regulation of a nation's economy for the purpose of augmenting
state power at the expense of rival national powers.
Mercantilism includes a national economic policy aimed at accumulating monetary
reserves through a positive balance of trade, especially of finished goods.
Historically, such policies frequently led to war and also motivated colonial expansion.
High tariffs, especially on manufactured goods, were an almost universal feature of
mercantilist policy. 5
DRIVERS OF THE
MERCANTILISM 1/2
The Austrian lawyer and scholar Philipp Wilhelm von Hornick, one of the pioneers of
Cameralism (Management of Public Finances), detailed a nine-point program of what
he deemed effective national economy in his Austria Over All, If She Only Will of 1684,
which comprehensively sums up the tenets of mercantilism:
That every little bit of a country's soil shall be utilized for agriculture, mining or
manufacturing. [capital factor of production]
That all raw materials found in a country be used in domestic manufacture, since
finished goods have a higher value than raw materials. [capital factor of production]
That a large, working population be encouraged. [labour factor of production]
That all exports of gold and silver be prohibited and all domestic money be kept in
circulation. That all imports of foreign goods be discouraged as much as possible.
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DRIVERS OF THE
MERCANTILISM 2/2
That where certain imports are indispensable they be obtained at first hand, in
exchange for other domestic goods instead of gold and silver.
That as much as possible, imports be confined to raw materials that can be finished
[in the home country].
That opportunities be constantly sought for selling a country's surplus manufactures
to foreigners, so far as necessary, for gold and silver.
That no importation be allowed if such goods are sufficiently and suitably supplied
at home.

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THE END OF THE
MERCANTILISM
The mercantilism was jeopardized due to its assumptions.
The state was not able to be involded in each sector of the economy.
The state was not able to manage the whole economy.
The production of goods was not optimum. A specific country was not able to
specialized itself in all branches of the economy.

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CLASSICAL THEORY
The classical economy is an answer to the mercantilism doctrine. The classical economy underlines
the role of markets as the “Invisible Hand” in the economy. It will also promulgate the flexibility of
the economy through its prices, factors of production.
Classical economists maintain that the economy is always capable of achieving the natural level of
real GDP or output, which is the level of real GDP that is obtained when the economy's resources
are fully employed.
While circumstances arise from time to time that cause the economy to fall below or to exceed the
natural level of real GDP, self‐adjustment mechanisms exist within the market system that work to
bring the economy back to the natural level of real GDP.
The classical doctrine—that the economy is always at or near the natural level of real GDP—is
based on two firmly held beliefs: Say's Law and the belief that prices, wages, and interest rates are
flexible.
The main economists of the classical framework are: Adam Smith, David Ricardo, and Stuart Mill.
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NEOCLASSICAL THEORY
The term was originally introduced by Thorstein Veblen in his 1900 article
'Preconceptions of Economic Science', in which he related marginalists in the
tradition of Alfred Marshall et al. to those in the Austrian School.
People have rational preferences between outcomes that can be identified and
associated with values.
Individuals maximize utility and firms maximize quantities in a perfect
market/economy.
People act and make their decisions based on the available information.

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CATEGORIES OF MARKETS
The framework is the neo-classical economy (the continuation of the classical economy - Adam
Smith, Stuart Mill, David Ricardo).
1. The perfect economy
Unlimited demand & unlimited supply.
2. The unperfect economy
The monopoly: a market, where there is only one supplier.
The monopsony: a market, where there is only one consumer (customer). It’s when the state is the
customer, for instance in the case of the demand for the production of jails.
The duopoly: a market, where there are two suppliers
The oligopoly: a market with a limited numer of suppliers, producing goods with similar
characteristics (The auto market: Audi, Mercedes-Benz, Renault,…).
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SUPPLY AND DEMAND
SCHEDULES
A supply schedule, depicted graphically as a supply curve, is a
table that shows the relationship between the price of a good and
the quantity supplied by producers.
A demand schedule, depicted graphically as a demand curve, is a
table that shows the relationship between the price of a good and
the quantity bought by consumers.

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THE EQUILIBRIUM ON A
MARKET

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FIRST FINANCIAL MARKETS
It is since Antiquity that the financial markets would have been born, in particular in
Ancient Rome. The Knights and the Publicans then created the first corporations.
The Stock Exchange would have been born in Italy towards the beginning of the
XIVth century; but the financial center where the majority of transactions took place
in the centuries that followed was Antwerp until the 16th century.
Archivists trace the existence of the Van Den Börse family to the 14th century. This
would have been at the origin of the name “Bourse”: it was in front of the private
mansion of this family that the negotiators met to carry out their transactions. The
negotiations concerned bills of exchange and commercial paper.

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1592 AND FURTHER TIMES
From 1592, a new period begins marked by the transfer of wealth from the world to
Europe. The price of shares sold to the public was therefore determined by supply
and demand, leading to the establishment of the system of physical exchange of
money and securities.
The Stock Exchange was defined as a public place of financial transactions between
individuals, bankers, brokers and commission agents, where traders transmitted their
information by hand signals. On this square, payment, exchange, freight, etc.,
operations were regularly carried out.

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FIRST FINANCIAL MARKETS
The history of the stock exchanges retraces the stages of the emergence of spaces for
the valuation of bonds, which thus dominated until the middle of the 19th century,
and then of equities.
The financing of Venetian and Dutch naval armaments in the form of shares
remained an exception.
Bonds took off in the 18th century in an already globalized market, supported by
central banks and the public treasury.
Bonds: promise of reimbursement.

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VENICE AND LONDON
In Venice, the Rialto district was close to a real stock exchange,
according to historian Fernand Braudel.
Even if the bonds dominate there, the merchants of the great
world trade also exchange there participations in the Venetian
galleys.
Located in the heart of the City, the London Stock Exchange is
one of the oldest financial markets in the world. It was officially
launched in 1801, but has origins dating back to 1698. Over
1,000 UK and international companies are listed on it.
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FINANCIAL MARKET:
DEFINITION
A financial market is a market where people will trade financial securities
(financial assets).

Examples of financial securities: bonds, stocks.

The trade is organized on different places, which will facilitate the trade of
financial securities.

These places may have a physical localization (The WSE, the NYSE, the
PSE,…) or may work on an electronic form (NASDAQ).

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CATEGORIES OF FINANCIAL
MARKETS
 Capital (securities) markets:
Stocks markets: trade of shares
Bonds markets: trade of bonds
Money markets:
Short-term markets comprising of securities with maturities of one year or less (Treasury bills,
commercial paper, negotiable certificates of deposits).
 Commodities markets:
Primary products such as food (cocoa, sugar,…) or raw materials (gold, oil,…)
 Forex market:
Foreign currencies.
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THE MARKET OF SECURITIES
Shares:
Shares are ownership rights and may be defined as the smallest unit of a
company.
When buying a share, an investor (a shareholder) may expect to perceive a
dividend or to expect an increase of the price of a share.
 A dividend is a part of the profit which is distributed to shareholders.
Bonds:
Shares are ownership rights and may be defined as the smallest unit of a
company.
Other financial securities:

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THE MONEY MARKET
• Treasury Bills: These are bonds issued by the governement with a ST maturity, in
this case this will be one year. The degrees of maturity are 4 weeks, 8 weeks, 13
weeks, 26 weeks, or 52 weeks.
• Commercial Papers: A security issued by a company. A CP is a ST debt issued by
companies. The degree of maturity is less than one year. A corporate bond (issued by
a company) has a longer degree of maturity.
• Negotiable certificates of deposits: A security issued by a bank. This security has
the lowest risk-profile, but also provides the lowest interest.
•Short-term bonds.

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PARTICIPANTS IN FINANCIAL
MARKETS
• Financial institutions;
• Sovereign states;
• Corporates;
• Individual buyers of financial assets.

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VOCABULARY
Interest.
Principal.
Maturation date.

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SEGMENTATIONS OF THE
CAPITAL MARKET
The primary market:
IPOs: Initial public offering
IPOs refer to initial public offerings. These allow companies to open their capital to
investors in order to raise funds to grow their business but also to benefit from a
stronger reputation.
The IPO operation is often complex and long for the company because of the
procedure which requires validation by s specific Financial Markets Authority.
This fundraising, which can reach several million or even billion euros, is done
through banks and various financial advisers who will take care of listing the company
on a market. The sale of these titles is intended for professionals and individuals.

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WHY AN IPO?
An IPO is a financial operation intended to raise funds on a stock market. Depending
on the profile and objectives of the company, three situations may arise:
The company wants to make new investments without calling on its current
shareholders or bankers.
The company wants to reduce its debt. As a reminder, fundraising does not
correspond to a loan in accounting. It is recorded in the balance sheet at the level of
equity of the company and not in the debts. Also, rather than taking out a loan, an
IPO can be advantageous for any company wishing to maintain or even reduce its
debt.
In these first two cases, the company will issue new securities on the market. This is
an IPO by capital increase.
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WHY AN IPO?
The company can decide to open its capital in order to bring in
new investors. In this case, it allows its current shareholders to
leave the company in whole or in part; it is often a requirement of
venture capital funds which, having accompanied a company
during its first years, wish to recover its funds with, if possible, a
strong added value.
In the latter case, the company does not issue new shares (or other
securities). It is therefore not an introduction by capital increase
but by sale of securities.

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WHY AN IPO?
An IPO also helps to strengthen the credibility of the company vis-
à-vis the many intermediaries with which it ensures the
development of its activity (suppliers, customers, banks, etc.). For
example, it is not uncommon for a company to borrow at lower
rates following the operation.
All of these factors ultimately contribute to the internal growth of
the company, by developing new businesses there for example,
and to its external growth (opening up to new markets, meeting
new business partners, etc.).

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SEGMENTATIONS OF THE
CAPITAL MARKET
The secondary market:
• The secondary market, (ie. aftermarket) and follow on public offering, is
the financial market in which previously issued financial instruments
such as stock, bonds, options, and futures are bought and sold.
• In the secondary market, securities are sold by and transferred from one
investor or speculator to another. It is therefore important that the
secondary market be highly liquid.
• As a general rule, the greater the number of investors that participate in a
given marketplace, and the greater the centralization of that marketplace,
the more liquid the market.
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DEVELOPMENT OF FINANCIAL
MARKETS
After a prosperous period in the 19th century, at the time of the colonial
conquest, when the London and Paris stock exchanges entered into rivalry
to attract capital, the situation turned around in the 1930s, when the
financial system had greater recourse to bank financing. : in reaction to the
crash of October 1929, deposit banks are prohibited from participating.
In the United States, the Glass-Steagall Act of 1933 enacts strict
instructions along the same lines.
Financing of the economy takes place almost exclusively via the balance
sheets of banks and in particular investment banks which will take control
of part of the capital of large companies, particularly in Japan and
Germany.
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FINANCIAL MARKETS AFTER
THE SECOND WORLD WAR
1. The introduction of strict solvency regulations for banks (Cooke
ratio and now Basel III) which have tightened capital
requirements for banks.
2. The global liberalization of capital movements since the 1980s.
3. The adoption of the floating exchange rate system in March
1973, which gave rise to the foreign exchange market;

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FINANCIAL MARKETS AFTER
THE SECOND WORLD WAR
4. End of credit control policies, which gave rise to the interest rate
market;
5. The abolition of fixed commissions on securities in the United States
on May 1, 1975, which made possible the liquidity of the stock and,
above all, bond markets;
6. The considerable development of new information and
communication technologies (NTIC) and their generalization to
everyone (democratization). It goes without saying that this
technological revolution has played a decisive role in the
phenomenon of the dematerialization of financial tools (stocks,
bonds, etc.). 31
NTIC AND FINANCIAL
MARKETS
The technological revolution in the financial markets then gave new meaning to the
adage “time is money”, which became “money is information”. Thanks to the
invasion of these innovations, it is possible to buy titles regardless of where you are
in the world, simply by connecting to the computer network.
Following the evolution of prices and inquiring about the real-time value of financial
products issued on the market can now be done with a simple click. Financial
transactions are transformed into an electronic writing game carried out by banks
and brokerage houses.
With the dazzling breakthrough of the internet, new customers can place a buy or
sell order online.

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NTIC AND FINANCIAL
MARKETS
The quotation is assisted continuously by means of an electronic system in the early
1980s. This system was born on the National Association of Security Dealers
Automated Quotations or NASDAQ, in the American market.
The London Stock Exchange then set up the Stock Exchange Automated Quotation
or SEAQ in 1986. This system makes it possible to streamline negotiations as well as
the liquidity of securities.
It is under the name CAC or Cotation Assistée en Continu that the Cats system of the
Toronto Stock Exchange was in turn adopted on the Paris Stock Exchange.

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