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So, welcome to this video on the role of financial markets.

I think we will try to explain together were these a financial market?

What makes it special?

What are the main players in these markets?

What are the characteristics?

How they have evolved over time, and then in a second stage we'll turn to

a more theoretical function of these markets.

Namely what functions do they fulfill in the economy and

to some challenges faced by their future developments.

So let's look at the first picture you see a financial market on

the left side that's the traditional definition,

it's a physical place where you can trade instruments.

Basically you can buy and sell stocks, bonds, convertible bonds,

and, this is the way the New York Stock Exchange used to function,

the London Stock Exchange, the Swiss Markets.

However, this picture doesn't correspond to the current reality where most

of the trading is done, virtually and is computerized but

still fulfills the role of exchanging securities between buyers and sellers.

So precisely let us look at who are the main market participants.

We have four main participants.

First of all, firms, think about Alibaba Group who wants to levy some funds to

develop some new online payment facility.

It will need to raise a lot of capital and will proceed with an initial public

offering where investors would bring their savings to the Alibaba Group.

The second type of participants are of course the investors, so it can be Mr.

or Mrs. Smith, it can be a pension fund, it can be a government, these

are the people who allocate their savings to productive investment opportunities.

But who can also sell their shares between themselves, and

that's what's going to occur, as we will see, on the secondary market.

The third actor or participant is perhaps less obvious,

it's the government, why does the government have a place?

The government has a place to ensure Market integrity,

to protect the investors, and to make sure that prices correctly reflect

the fair value of securities and protect investors against abuse.

And finally we have on the right lower corner of the picture the financial

intermediaries that means, all the chain of brokers,

market makers, banks, and institutions that make

the interface between investors or between the investors and the firms.

So this structure has not very much changed over the centuries,

we still have these four actors being active to different degrees.

Now one important characteristic of these markets is that

we have a primary market and secondary market.

So the primary market is really where the transfer of

resources to productive investment opportunities occur.

Now think about the APO that Facebook launched in 2012, it's the first

time it went to the market and collected a large pool of money from investors.

Of course, once it has launched,

the IPO, securities of Facebook were traded and they can trade any day.

It could be in March 2015, it could be in December 2015 or in January 2016.

The idea of the secondary market it is to allow investors

to trade among themselves to buy and sell securities mainly for

liquidity reasons and for portfolio reallocations.

So what about the size of financial markets?

I'm going to talk here about global equity markets and one way to do that is to look

at what is called the global equity value or the market capitalization.

And you can see the that it started in the early 90s at $10 trillion US dollars.

It peaked before 2000 pretty smoothly and

then we had a bust with the dot com bubble exploding, again,

a steady growth until 2007 and

again a decline of about 45% due to the subprime crisis.

And a slight recovery, and we can see that the markets are worse together today

roughly $40 trillion US dollars which is quite a sizeable fraction of the economy.

So, what does this value of $40 trillion US dollars mean in terms

of global equity value, is it a large or a small number?

One way of measuring the degree of financialization of a country or

a worldwide economy is to look at the ratio of

the global equity value to the gross domestic product.

And if you see on average this ratio has been quite steady,

around 20%, until up till 2002, 2003.

It has peaked to 50% before the subprime crisis, and

is now again trending down to about a level of 30%.

But of course there's great dispersity across countries,

some countries which are highly developed with their financial markets

have ratios of equity value to GDP of about 120% like the US.

Some would have much lower, take the example of India,

the number today would be closer to 70% for India.

So I think at this point you've seen several characteristics that characterize

the financial markets, their developments,

their growths, the degree of financialization of an economy.

During the next video we will focus on a more academic question,

which is the question of the functions that financial markets perform and

what is their value added for the economy?

And that's the points we will address from now on.

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The role of financial markets - Part 1

Understanding Financial Markets

Meet the Instructors