Financial Market

A financial market is a market for money.

Suppliers of Money include:

• High net worth individuals
• Pension Funds
• Asset Managers Demanders of money include:
• Governments
• Companies
• Individuals (for mortgage, etc.)

Banks §

Banks facilitate this exchange between suppliers and demanders (they exist as Escrows for supply/demand, i.e underwrites or guaratees the exchange). Different types of banks make money in different ways

1. Central banks don’t need to make money, and has a monopoly on increasing money supply (using Fractional Banking)
2. Commercial Banks are the banks that take deposit from households. Most banks in day-to-day life. They make money with the differece in interst between buy side and issue side (Net Interest Margin, NIMs).
3. Investment Banks underwrite bigger loans from demanders like governments and companies. This is in the form of loans, bonds, or equity.

Central Banks §

Commerical Banks §

Investment Banks §

Investment banks are corporations in itself, and make money in the following ways:

1. Primary Market, fundraising. The market for money; profit is also from NIM.
   1. Loans are simple interest-bearing loans
   2. Bonds are tradable loans.
   3. Equities are loans that need not be paid back, because they offer ownership
   4. Derivatives are tradable contracts upon any securities
   • IBs also take money from fees by facilitating the process of raising money, company valuations (e.g. during IPOs).
2. Secondary Market, market-making. The exchange of securities and derivatives. Investment banks are market-makers that provide liquidity a securities exchange. They’re allowed to buy low, and sell high for providing this liquidity; the difference between them is the spread.