Theme 10. International securities market

The Fed performs a number of important func­tions in the American economy, the most important of which is controlling the nation's money supply. Let us briefly examine some of the other functions of the Fed before we study in detail how it affects the amount of money in circulation.

One of the major functions of the Fed is clearing checks. Each year billions of checks are written by individuals, businesses, and the var­ious agencies of government. Each of these checks represents an order to transfer funds from the account of the check writer to the recipient of the check. Sometimes the check-clearance procedure can be very simple. For example, suppose you write a check for $20 to a local store in payment for merchandise. If the store owner banks at the same bank as you, when he or she deposits the check at the local bank, the bank can simply subtract $20 from your account and add $20 to the account of the store owner. However, the check clearance procedure for many checks is far more compli­cated, and the Federal Reserve Banks play an important role in the process. In order to better understand how the check clearance system works, let us look at a specific example.

Suppose Pamela Rissler of Albany, New York, mails an order for art supplies along with a check to an art supply store in Sacramento, Cal­ifornia. Figure 12—3 shows the various steps involved in clearing this particular check. As you can see from the chart, the art supply store will deposit Pamela's check in its account at a Sacramento bank. The Sacramento bank in turn will deposit the check in its account at the Fed­eral Reserve Bank of San Francisco. The Feder­al Reserve Bank of San Francisco will ,send the check to the Federal Reserve Bank of New York, which will deduct the amount of the check from the account of Pamela's bank in Albany and then forward the check to Pamela's bank. Finally, Pamela's bank will deduct [the amount of the check from her account and mail the canceled check to Pamela along with her other checks that have been processed that month.

The Fed also serves as a fiscal agent for the federal government. The U.S. Treasury collects

huge sums of money through taxation and then deposits much of this money in Federal Reserve
Banks. The Treasury then keeps checking accounts for such things as tax refunds and
Social Security payments. Moreover, the Fed helps the Treasury in its efforts to borrow money by selling government securities, such as U.S. Treasury bonds.

In addition, the Fed performs various supervisory functions intended to ensure that the member banks are in compliance with the banking laws and that they are engaging in sound banking practices. Among these func­tions are making sure that member banks have adequate funds, overseeing bank mergers, and setting limits for loans by member banks. Because national banks are supervised by the Comptroller of the Currency, a federal agency the Fed's primary supervisory responsibility is overseeing the operations of member state banks. The Fed also works closely with another federal agency, the Federal Deposit Insurance Corporation, in making sure that all bank deposits are insured.

Another responsibility of the Fed is to hold required reserves. Banks and other financial institutions are required by law to keep a cer­tain percentage of money that is deposited with them as required reserves to back up the depos­its. One of the important functions of each Federal Reserve Bank is to hold the required reserves of the depository institutions within its district. As you soon will learn, changing the percentage of deposits that must be kept as required reserves is one of the ways the Fed can increase or decrease the money supply of the nation.

The Fed also is responsible for supplying paper currency. As you learned in Chapter 11, paper currency in the United States consists almost exclusively of Federal Reserve notes issued by the Federal Reserve Banks. The actu­al printing of the notes is done by the Bureau of Engraving and Printing in Washington, D.C. However, each Federal Reserve note has a seat' on the left side of the front indicating which of the 12 Federal Reserve Banks issued it. For example, Federal Reserve notes issued by the Chicago Federal Reserve Bank have a capital letter C printed on them with the name of the bank indicated in the circle that surrounds the G.

Many of the new Federal Reserve notes are issued simply to replace old ones that are taken out of circulation because they are worn out or torn. However, more paper currency is demanded by the public at certain times of the year than at others. For example, each year during the Christmas shopping season Ameri­cans withdraw large amounts of cash from banks. To meet the increased demand for paper money, commercial banks withdraw additional Federal Reserve notes from their accounts with the Federal Reserve Banks. After Christmas, much of the currency is returned to commercial banks, and they find themselves with a surplus of currency on hand. They in turn redeposit that currency with the Federal Reserve Banks.

The most important function of the Fed is regulating the amount of money in circulation, which affects the cost and availability of credit and, thus, the level of business activity in the economy. Much of the remainder of this chap­ter will be devoted to an examination of how and why the Fed changes the money supply. As a first step toward understanding monetary pol­icy, let us see how banks create money.

Check Your Understanding

1.What are the primary functions of the Federal Reserve System? Which is the most important?

2.Describe the check-clearing pro­cess.

Why does the demand for paper currency change? How does the Fed
meet this changing demand?

Theme 10. International securities market

1. Types of capital market securities.

2. Stock exchange.

3. International Securities Markets Regulation

1. Types of capital market securities.

The two main types of are stocks (Common Stocks and Preference Shares or Preferred stocks) and bonds (Debt Instruments). Traded in separate markets, companies, corporations and governments use them to raise funds for various purposes. These funds are raised for long terms and are the regulatory to supervise the capital market securities and their respective market in every country.

Debt Instruments

A debt instrument is used by either companies or governments to generate funds for capital-intensive projects. It can obtained either through the primary or secondary market. The relationship in this form of instrument ownership is that of a borrower – creditor and thus, does not necessarily imply ownership in the business of the borrower. The contract is for a specific duration and interest is paid at specified periods as stated in the trust deed^* (contract agreement). The principal sum invested, is therefore repaid at the expiration of the contract period with interest either paid quarterly, semi-annually or annually. The interest stated in the trust deed may be either fixed or flexible. The tenure of this category ranges from 3 to 25 years. Investment in this instrument is, most times, risk-free and therefore yields lower returns when compared to other instruments traded in the capital market. Investors in this category get top priority in the event of liquidation of a company.

When the instrument is issued by:

The Federal Government, it is called a Sovereign Bond;

· A state government it is called a State Bond;

A local government, it is called a Municipal Bond; and

· A corporate body (Company), it is called a Debenture, Industrial Loan or Corporate Bond

Stocks

Another type of capital market security is known as stocks. These are favored by the investors as they can get huge returns from this capital market instrument. The estimated size of the global stock market is evaluated to be around $45 trillion. Used for trading of company stocks, companies and governments use it to raise funds for different purposes.

There exists every kind of investor in the capital market, both the individual investors and the institutional investors. Today, the market trend has completely changed and is mainly dominated by the institutions, which are increasing the volume of the market. Hence it’s very important for the investor to take proper care while selecting capital market securities, as the risk factor related to these securities are different.A proper research should be done before any investment.

Equities (also called Common Stock)

This instrument is issued by companies only and can also be obtained either in the primary market or the secondary market. Investment in this form of business translates to ownership of the business as the contract stands in perpetuity unless sold to another investor in the secondary market. The investor therefore possesses certain rights and privileges (such as to vote and hold position) in the company. Whereas the investor in debts may be entitled to interest which must be paid, the equity holder receives dividends which may or may not be declared.

The risk factor in this instrument is high and thus yields a higher return (when successful). Holders of this instrument however rank bottom on the scale of preference in the event of liquidation of a company as they are considered owners of the company.

Preference Shares

This instrument is issued by corporate bodies and the investors rank second (after bond holders) on the scale of preference when a company goes under. The instrument possesses the characteristics of equity in the sense that when the authorised share capital and paid up capital are being calculated, they are added to equity capital to arrive at the total. Preference shares can also be treated as a debt instrument as they do not confer voting rights on its holders and have a dividend payment that is structured like interest (coupon) paid for bonds issues.

Preference shares may be:

Irredeemable, convertible: in this case, upon maturity of the instrument, the principal sum being returned to the investor is converted to equities even though dividends (interest) had earlier been paid.

Irredeemable, non-convertible: here, the holder can only sell his holding in the secondary market as the contract will always be rolled over upon maturity. The instrument will also not be converted to equities.

Redeemable: here the principal sum is repaid at the end of a specified period. In this case it is treated strictly as a debt instrument.

The graphs below show a breakdown of the world markets in both 1900 and 2000 and the anomalous growth of the U.S. market during this time.

Worldwide Stock Markets map shows the current open | closed | holiday status and current time 24h format. Time mode:24 hours or 12 hours (AM/PM)

Date: 2014-12-28; view: 926