Term Paper

Topic : Securities Trade in Financial Market of Bangladesh

Course name: Management of Financial Institutions
Course code: MGT-2202

Submitted To
Debashis Saha
Assistant professor
Bangladesh University of Professionals

Submitted by
Mahmuda Akter 19241059

Danial Labib Dani 1921075

Authoi Afreen Shahariar 19241111

Fatima Mim 19241113

Mohammad Al Saif 19241121

Letter of Transmittal
1
August 25,2020
Debashis Saha
Assistant Professor
Bangladesh University of Professionals
Subject: Submission Of course Term Paper
Sir,
With due respect, we would like to inform we that, we are the students of Department of
Management Studies. Here is the term paper titled “Securities Trade in Financial Market of
Bangladesh”. The term paper and research have been completed by the knowledge we have
gathered from different sources.
Though we are in learning curve, this research has enabled us to gain insight into the core fact of
financial market. We would be happy if we kindly read the term paper carefully and we will be
trying to answer all the questions that we have about the paper. We have tried our level best to
complete this paper carefully and as accurately as possible. However, we will be glad to clarify
any discrepancy that may arise.
Finally, we would love to express our gratitude for your supportive thoughts and kind
consideration both inside and outside of the class.

Yours faithfully,
Members of Group – 2
Section – A
Session – 2018-19
Department of Business Administration in Management Studies
Faculty of Business Studies
Bangladesh University of Professionals

Acknowledgements
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We would first like to thank Almighty Allah for giving us this opportunity to work and complete
this term paper since preparing this paper has been a great challenge for all of us. We would also
like to thank our honorable Faculty Assistant Professor Debashis Saha. We thank the fellow
group members for their hard works without which the term paper would not be as it is now.

Executive Summary

In this report we will focus about how securities tread in financial market occurs. For this
purpose, we have collected data from different sources. This report shall try to define what is
securities and how it works in financial market. Further down we will also focus on the Growth
of the Securities Market in Bangladesh past decade as we will try to understand the effects of
trading the securities.

Table of contents

No. Page no

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1. Introduction 5
2. Financial market 6-7
3. Establishment of the Securities Market in Bangladesh 7-8
4. Types of Securities 9-11
 Debt securities
 Equity securities
 Derivative securities
How securities get issued through the capital markets

5. Trading of securities in financial market 11-13

 Money market
 Capital market
 Derivative securities
6. Valuing securities in financial market 14-18
 Meaning of Security Valuation
 Factors Influencing Security Valuation
 Securities Valuation in Bangladesh
7. Why are financial markets and institutions important 18-21

8. Conclusion 22

Introduction

A financial market is a market in which people trade financial securities and derivatives at

low transaction costs. Some of the securities include stocks and bonds, and precious metals.
The term "market" is sometimes used for what are more strictly exchanges, organizations that
facilitate the trade in financial securities, a stock exchange or commodity exchange. This may be

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a physical location or an electronic system. Much trading of stocks takes place on an exchange;
still, corporate actions are outside an exchange, while any two companies or people, for whatever
reason, may agree to sell stock from the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a
stock exchange, and people are building electronic systems for these as well, to stock exchanges.

Financial Market

Financial Market: a market in which financial assets (securities) such as stocks and bonds can
be purchased or sold.

 Financial markets provide for financial intermediation--financial savings (Surplus Units)

to investment (Deficit Units)

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  Financial markets provide payments system
 Financial markets provide means to manage risk

The financial market in Bangladesh is mainly of following types:

1. Money Market: The money market comprises banks and financial institutions as

intermediaries, 20 of them are primary dealers in treasury securities. reverse repo
auctions, BB bills auctions, treasury bills auctions are primary operations in the money
market, there is also active secondary trade in treasury bills (up to 1-year maturity).

2. Taka Treasury Bond market: The Taka treasury bond market consists of primary issues
of treasury bonds of different maturities (2, 5, 10, 15 and 20 years), and secondary trade
therein through primary dealers. 20 banks performing as Primary Dealers participate
directly in the primary auctions. Other bank and non-bank investors can participate in
primary auctions and in secondary trading through their nominated Primary Dealers.
Non-resident individual and institutional investors can also participate in primary and
secondary market, but only in treasury bonds. Monthly data on primary and secondary
trade volumes in treasury bills and bonds and data on outstanding volume of treasury
bonds held by non-residents can be accessed at Monthly data of Treasury Bills & Bonds.

3. Capital market: The primary issues and secondary trading of equity securities of capital
market take place through two (02) stock exchanges-Dhaka Stock Exchange and
Chittagong Stock Exchange. The instruments in these exchanges are equity securities
(shares), debentures and corporate bonds. The capital market is regulated by Bangladesh
Securities and Exchange Commission (BSEC).

4. Foreign Exchange Market: Towards liberalization of foreign exchange transactions, a

number of measures were adopted since 1990s. Bangladeshi currency, the taka, was
declared convertible on current account transactions (as on 24 March 1994), in terms of
Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital
account, resident owned capital is not freely transferable abroad. Investment abroad of
resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed
only sparingly. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003.
Under the regime, BB does not interfere in the determination of exchange rate, but
operates the monetary policy prudently for minimizing extreme swings in exchange rate
to avoid adverse repercussion on the domestic economy. However, to avoid any unusual
volatility in the exchange rate, Bangladesh Bank, the regulator of foreign exchange
market remains vigilant over the developments in the foreign exchange market and
intervenes by buying and selling foreign currencies whenever it deems necessary to
maintain stability in the foreign exchange market.

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 Establishment of the Securities Market in Bangladesh

It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and
started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June
1962. Again, renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in
1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh. In 16
September 1986 DSE all-Share Price Index was started. The formula for calculating DSE all-
share price index was changed according to IFC in 1 November 1993. The automated
trading was initiated in 10 August 1998. In 1 January 2001 DSE 20 Index was started. Central
Depository System was initiated in 24 January 2004. As of November 15 2007, the benchmark
index of the Dhaka Stock Exchange (DSE) crossed 3000 points for the first time, setting another
new high at 3013 points.

Stock Exchange organized market for trading of stocks and bonds. In early 1952, five years
after the independence of Pakistan, the Calcutta Stock Exchange prohibited transactions in
Pakistani stocks. This necessitated the formation of a stock exchange in East Pakistan and the
East Pakistan Stock Exchange Association Ltd. was incorporated on 28 April 1954. It changed
its name to East Pakistan Stock Exchange Ltd on 23 June 1962 and finally to Dhaka Stock
Exchange (DSE) on 14 May 1964. Although incorporated in 1954, formal trading started in 1956
in Narayanganj. In 1958, the stock exchange was shifted to Narayanganj Chamber Building.
DSE purchased its own land, and moved to its own premises at 9/F Motijheel C/A in 1959. Prior
to independence in 1971, the number of listed companies in DSE was 196 with a total paid up
capital of Tk 4 billion. The daily average transaction during that period was about 20,000 shares.

After the Independence, the government of Bangladesh took charge of the abandoned industrial
units and pursued a policy, under which large industrial units were nationalized. The trading
activities of DSE remained suspended till 1975 and following change in the economic policy of
the government, DSE resumed its activities in 1976 with only 9 listed companies, having a total
paid up capital of Tk 137.52 million. The actual growth of the stock exchange in Bangladesh (the
DSE) started since 1983, when the market capitalization was Tk 812 million. The year 1987
experienced a relatively steep rise in the market with 92 listed companies. With the liberalization
of policies in the 1990’s the stock market gradually started to prosper. On 30 June 2001, the
number of securities listed in the DSE was 244, the number of listed companies 224, number of
listed debentures 10, number of shares of all listed companies 666,553 and that of all mutual
funds 72,250 and the market capitalization Tk 72,168 million ($1226 million).

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A stock exchange, securities exchange or (in Europe) bourse is a corporation or mutual
organization which provides “trading” facilities for stock brokers and traders, to trade stocks and
other securities. Stock exchanges also provide facilities for the issue and redemption of securities
as well as other financial instruments and capital events including the payment of income
and dividends. The securities traded on a stock exchange include: shares issued by
companies, unit trusts and other pooled investment products and bonds. To be able to trade a
security on a certain stock exchange, it has to be listed there. Usually there is a central location at
least for recordkeeping, but trade is less and less linked to such a physical place, as modern
markets are electronic networks, which gives them advantages of speed and cost of transactions.
Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is
by definition done in the primary market and subsequent trading is done in the secondary market.
A stock exchange is often the most important component of a stock market. Supply and demand
in stock markets are driven by various factors which, as in all free markets, affect the price of
stocks.

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.
This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global
market for securities.

Types of Securities

Debt Securities

When a business borrows money to grow, first, it will borrow using traditional means: banks.
Banks don’t want to take too much risk, so they will only lend so much to a business. Once that
option has been exhausted, a business must go to the capital markets and issue a debt security

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called a bond. When you buy a bond, you are lending your money to a company (or municipal),
and they must pay it back with interest. These interest payments are called coupons payments
and typically issued semi-annually.

Equity Securities

When a business takes on additional owners to grow, it can either find private investors or go to
the capital markets and issue securities in the form of publicly-traded stock. Equity represents
ownership; when you buy a stock, you are purchasing ownership in a company, and as the
company makes a profit, you will participate in that profit in one of two ways.2 Either the
company will pay a dividend—which you will receive quarterly—or they will use their profits to
grow the business further. If the business continues to grow, you should subsequently see your
stock rise in value.

Derivative Securities

With derivative securities, instead of owning something outright, like shares of a stock, you own
the right to trade other financial securities at pre-agreed upon terms. Options contracts are a type
of derivative security. They give you the right to buy or sell shares of an existing security at a
specific price by a specified date in the future. You pay for this right, and the price you pay is
called the premium. There are three types of derivative securities. These are-

Forwards and futures

These are financial contracts that obligate the contracts’ buyers to purchase an asset at a pre-
agreed price on a specified future date. Both forwards and futures are essentially the same in
their nature. However, forwards are more flexible contracts because the parties can customize the
underlying commodity as well as the quantity of the commodity and the date of the transaction.
On the other hand, futures are standardized contracts that are traded on the exchanges.

Options
Options provide the buyer of the contracts the right but not the obligation to purchase or sell the
underlying asset at a predetermined price. Based on the option type, the buyer can exercise the
option on the maturity date (European options) or on any date before the maturity (American
options).
Swaps

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Swaps are derivative contracts that allow the exchange of cash flows between two parties. The
swaps usually involve the exchange of a fixed cash flow for a floating cash flow. The most
popular types of swaps are interest rate swaps, commodity swaps, and currency swaps.

The Securities Market

The securities market is not all that different than the real estate market. Just as the housing
market is composed of millions of families who all have a dream of homeownership, the
securities market is composed of thousands of business owners who all have a vision of building
and growing a successful, thriving business. Most of these large businesses would never be able
to achieve their level of success without borrowing or raising money in some way, just as most
of us would not be able to own a home without first taking out a mortgage. 

Every business idea must get capital from somewhere, as it is used to build the infrastructure
necessary to grow the business.

In rare cases, the business owners have enough money to fund the business themselves. In these
cases, the company remains privately owned, and the owners get to keep all the profits. If the
business owners don’t have the money they need to expand, they can either borrow it or take on
additional owners who do have capital—which is where you, the investor, become involved.

When businesses issue securities in the form of stocks and bonds, investors buy them and
provide the company with the capital it needs. Once these securities have been issued, they can
then be traded between investors on the secondary market. In the U.S., the securities market is
regulated by the Securities and Exchange Commission.

How Securities Get Issued Through the Capital Markets:

When a business has to go on the capital market, it hires an investment banking firm that looks at
the financials of the business and the total amount of money the business needs to raise. The
investment bank then advises the business on the best way to raise that money—by either issuing
stock or bonds—and then helps put together and sell a public offering of the securities. The

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newly issued stocks and bonds (securities) are offered to public investors through a network of
brokerage firms.

The Balance does not provide tax, investment, or financial services and advice. The information
is being presented without consideration of the investment objectives, risk tolerance or financial
circumstances of any specific investor and might not be suitable for all investors. Past
performance is not indicative of future results. Investing involves risk including the possible loss
of principal.

Trading of securities in financial market

Trading securities are investments in debt or equity that management plans to actively trade for
profit in the current period. In other words, trading securities are stocks or bonds that
management plans to purchase and sell in order to make money in the short term.
 Money market
 Capital market
 Derivative securities
Money Market:
Money markets facilitate the sale of short-term debt securities by deficit units to surplus units.
The securities traded in this market are referred to as money market securities, which are debt
securities that have a maturity of one year or less.
These generally have a relatively high degree of liquidity, not only because of their short-term
maturity but also because they are desirable to many investors and therefore commonly have an
active secondary market.

Types of money market instruments:

Treasury Bills (T-bills)
Treasury bills are short-term notes issued by the U.S. government. They come in three different
lengths to maturity: 90, 180, and 360 days. The two shorter types are auctioned on a weekly

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basis, while the annual types are auctioned monthly. T-bills can be purchased directly through
the auctions or indirectly through the secondary market.
Certificates of Deposit (CDs)
Certificates of deposit are certificates issued by a federally chartered bank against deposited
funds that earn a specified return for a definite period of time. They are one of several types of
interest-bearing "time deposits" offered by banks. An individual or company lends the bank a
certain amount of money for a fixed period of time, and in exchange the bank agrees to repay the
money with specified interest at the end of the time period.
Commercial Paper
Commercial paper refers to unsecured short-term promissory notes issued by financial and
nonfinancial corporations. Commercial paper has maturities of up to 270 days (the maximum
allowed without SEC registration requirement). Dollar volume for commercial paper exceeds the
amount of any money market instrument other than T-bills.

Capital Market:
Capital markets are venues where savings and investments are channeled between the suppliers
who have capital and those who are in need of capital. The entities that have capital include retail
and institutional investors while those who seek capital are businesses, governments, and people.
Capital markets facilitate the sale of long-term securities by deficit units to surplus units. Capital
market securities are commonly issued to finance the purchase of capital assets, such as
buildings, equipment, or machinery.
Types of capital market instruments:
Bonds
Bonds are long-term debt securities issued by the Treasury, government agencies, and
corporations to finance their operations. They provide a return to investors in the form of interest
income (coupon payments) every six months. Since bonds represent debt, they specify the
amount and timing of interest and principal payments to investors who purchase them. At
maturity, investors holding the debt securities are paid the principal. Bonds commonly have
maturities of between 10 and 20 years.
Mortgages
Mortgages are long-term debt obligations created to finance the purchase of real estate.
Residential mortgages are obtained by individuals and families to purchase homes. Financial

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institutions serve as lenders by providing residential mortgages in their role as a financial
intermediary. They can pool deposits received from surplus units, and lend those funds to an
individual who wants to purchase a home.
Mortgage-Backed Securities
Mortgage-backed securities are debt obligations representing claims on a package of mortgages.
There are many forms of mortgage backed securities. In their simplest form, the investors who
purchase these securities receive monthly payments that are made by the homeowners on the
mortgages backing the securities.
Stocks
Stocks (or equity securities) represent partial ownership in the corporations that issue them. They
are classified as capital market securities because they have no maturity and therefore serve as a
long-term source of funds. Investors who purchase stocks (referred to as stockholders) issued by
a corporation in the primary market can sell the stocks to other investors at any time in the
secondary market.

Derivative Securities:
Derivative securities are financial contracts whose values are derived from the values of
underlying assets (such as debt securities or equity securities).
Many derivative securities enable investors to engage in speculation and risk management.

Valuing securities in financial market

 Meaning of Security Valuation

 Factors Influencing Security Valuation

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  Securities Valuation in Bangladesh

Meaning of Security Valuation:

Security valuation is important to decide on the portfolio of an investor. All investment decisions
are to be made on a scientific analysis of the right price of a share. Hence, an understanding of
the valuation of securities is essential. Investors should buy underpriced shares and sell
overpriced shares. Share pricing is thus an important aspect of trading. Conceptually, four types
of valuation models are discernible.
They are:
(i) Book value,
(ii) Liquidating value,
(iii) Intrinsic value,
(iv) Replacement value as compared to market price.
(i) Book Value:
Book value of a security is an accounting concept. The book value of an equity share is equal to
the net worth of the firm divided by the number of equity shares, where the net worth is equal to
equity capital plus free reserves. The market value may fluctuate around the book value but may
be higher if the future prospects are good.
(ii) Liquidating Value (Breakdown Value):
If the assets are valued at their breakdown value in the market and take net fixed assets plus
current assets minus current liabilities as if the company is liquidated, then divide this by the
number of shares, the resultant value is the liquidating value per share. This is also an accounting
concept.

(iii) Intrinsic Value:

Market value of a security is the price at which the security is traded in the market and it is
generally hovering around its intrinsic value. There are different schools of thought regarding the
relationship of intrinsic value to the market price. Market prices are those which rule in the
market, resulting from the demand and supply forces. Intrinsic price is the true value of the

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share, which depends on its earning capacity and its true worth. According to the fundamentalist
approach to security valuation, the value of the security must be equal to the discounted value of
the future income stream. The investor buys the securities when the market price is below this
value.
Thus, for fundamentalists, earnings and dividends are the essential ingredients in determining the
market value of a security. The discount rate used in such present value calculations is known as
the required rate or return. Using this discount rate all future earnings are discounted back to the
present to determine the intrinsic value.
According to the technical school, the price of a security is determined by the market demand
and supply and it has very little to do with intrinsic values. The price movements follow certain
trends for varying periods of time. Changes in trend represent the shifts in demand and supply
which are predictable. The present trends are the offshoot of the past and history repeats itself
according to this school.
According to efficient market hypothesis, in a fairly large security market where competitive
conditions prevail, market prices are good proxies for intrinsic values. The security prices are
determined after absorbing all the information available to market participants. A share is thus
generally worth whatever it is selling for in the market.
Generally, fundamental school is the basis for security valuation and many models are in use,
based on these tenets.
(iv) Replacement Value:
When the company is liquidated and its assets are to be replaced by new ones, their prices being
higher, the replacement value of a share will be different from the Breakdown value. Some
analysts take this replacement value to compare with the market price.

Factors Influencing Security Valuation:

Security price depends on a host of factors like earnings per share, prospects of expansion, future
earnings potential, possible issue of bonus or rights shares, etc. Some demand for a particular
stock may give pleasure of power as a shareholder or prestige and control on management.
Satisfaction and pleasure in the non-monetary sense cannot be considered in any practical and
quantifiable sense. Many psychological and emotional factors influence the demand for a share.

In money terms, the return to a security on which its value depends consists of two
components:

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(i) Regular dividends or interest, and
(ii) Capital gains or losses in the form of changes in the capital value of the asset.
If the risk is high, return should also be high. Risk here refers to uncertainty of receipt of
principal and interest or dividend and variability of this return.

ADVERTISEMENTS:
The above returns are in terms of money received over a period of years. But money of Re. 1
received today is not the-same as money of Re. 1 received a year hence or two years hence etc.
Money has time value, which suggests that earlier receipts are more desirable and valuable than
later receipts. One reason for this is that earlier receipts can be reinvested and more receipts can
be got than before. Here the principle operating is compound interest.
Thus, if Vn is the terminal value at the period n, P is the initial value, g is rate of compounding or
return, n is the number of compounding periods, then Vn = P (1 + g)n.
If we reverse the process, the present value (P) can be thought of as reversing the compounding
of values. This is discounting of the future values to the present day, represented by the formula-
P = Vn /(1+ g)n
where the meaning of the terms used is the same as indicated above.
The major factor which influences security prices is the return on equity capital to the investor.
This return may be in the form of dividends or net earnings of the company. Thus, the value of a
share is a function of the company’s dividend paying capacity or its earnings capacity. The
dividends may be different from the earnings depending on the amount of profits retained by the
company for the requirements of liquidity, expansion, modernization, etc.
Normally, the value of a share is its book value, if the shares are not quoted on the market. On
the other hand, the market price of shares quoted will differ from the book value based on
investors’ perception of the future earning potential of the company, growth prospects and the
industry prospects, quality of management, the goodwill or the intangibles of the company.
If the security is a bond or debenture and has a fixed return like 14% per annum, its market price
depends upon investor’s perception of the capitalization rate which may be assumed to be 15%
In this case-

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If the security is an equity share, its return is Dividend + Capital appreciation. Then the future
dividends may not be constant or fixed as also the degree, of capital appreciation.

Securities Valuation in Bangladesh:

Net Asset Value (NAV) and Profit-Earning Capacity Value (PECV) as the basis for fixing up the
premium on shares. The NAV is calculated by dividing the net worth by the number of equity
shares. The net worth includes equity capital plus free reserves and surplus less contingent
liabilities. The PECV is estimated by multiplying the earnings per share by a capitalization rate
of 15% for manufacturing companies, 20% for trading companies and 17.5% in the case of
intermediate companies. Earnings Per Share (EPS) is calculated by dividing the three-year
average post-tax profits by the total number of equity shares. Thus, if EPS is Rs. 5 and if the
price earnings multiplier is 15, the price of share, which is reflected by the PECV, should be Rs.
5 x 15 = 75 (if it is a manufacturing company).
To be more specific,
The Net Asset Value of a company (NAV) = Total assets less liabilities, borrowings, debts,
preference capital and contingent liabilities which is to be divided by the number of shares.
The (PECV) is obtained by capitalizing the average profits after tax (over the past three years) by
a rate varying from 15% to 20% depending on the nature of the activity of the company.
The fair value of the share is the average of the NAV and PECV. This Fair Value (FV) is taken
into account for comparison with the average market price over the preceding three years and the
average market price should be less than the fair value by at least 20%. If the average market
price is 20% to 50% of the FV, the capitalization rate to be used is 12%. If it is 50% to 75% of
the FV, the capitalization rate is 10% and if it is more than 75% of FV, the capitalization rate is
8%.

Example:
This example will make the above exercise clear (year 1993).
Take a manufacturing company (BSEC)
Average Market Price over the last three years = tk. 123
Net Asset Value (NAV) computed as shown above = tk. 68
Profit-Earning Capacity Value (PECV) = Earnings per share tk. 5.4
capitalized by 15% for manufacturing company = 5.4×100/15 = tk. 36.

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Average of NAV and PECV is (68 + 36)/2 = tk. 52 which is the fair value.
The market price is more than 75% of the Fair Value (tk. 52). Hence, the capitalization rate of
8% is to be applied as referred to above to the earnings per share.
Earnings per share is tk. 5.4.
At the capitalization rate of 8%, the PECV = tk. 67.50.
Book value per share or NAV is tk. 68.
The average of the two above is tk. 67.75.
For a share of tk. 10 of face value, the premium is thus tk. 57.75.
The price of new issue can be decided by the company and its Merchant banker. As per the
existing guidelines of SEBI, the merchant banker need not submit the proposals regarding the
share price, premium, if any, etc. of new issues to the SEBI for vetting, but the justification for
the same is to be provided in the prospectus. A margin of 20% on either side is permitted to
change the actual premium from the premium submitted to SEBI for record or vetting.

Why are financial market important?

Financial markets play a critical role in the accumulation of capital and the production of goods
and services. The price of credit and returns on investment provide signals to producers and
consumers—financial market participants. Those signals help direct funds (from savers, mainly
households and businesses) to the consumers, businesses, governments, and investors that would
like to borrow money by connecting those who value the funds most highly (i.e., are willing to
pay a higher price, or interest rate), to willing lenders. In a similar way, the existence of robust
financial markets and institutions also facilitates the international flow of funds between
countries.
In addition, efficient financial markets and institutions tend to lower search and transactions
costs in the economy. By providing a large array of financial products, with varying risk and
pricing structures as well as maturity, a well-developed financial system offers products to

18
participants that provide borrowers and lenders with a close match for their needs. Individuals,
businesses, and governments in need of funds can easily discover which financial institutions or
which financial markets may provide funding and what the cost will be for the borrower. This
allows investors to compare the cost of financing to their expected return on investment, thus
making the investment choice that best suits their needs. In this way, financial markets direct the
allocation of credit throughout the economy—and facilitate the production of goods and services.
A recent example: Integrating existing EU financial markets
The European Union, with its single banking market and single currency, the Euro, has created
Europe-wide financial markets and institutions. These markets use the Euro to facilitate saving,
investment, borrowing, and lending. Euro-denominated stock, bond, and derivative markets
serve all of the EU countries that use the Euro—replacing smaller, less-liquid, offerings and
products that previously were available mostly on a country-by-country basis.
In addition, the Euro likely increases the attractiveness of Euro-based financial markets and
instruments to the rest of the world. Within the EU, the Euro eliminates the cross-border
exchange rate risks that are part of transactions between countries with different currencies. The
Euro and integrated “Euro-based” financial markets and institutions should make the credit
allocation process in Europe more competitive and more efficient in the long run.

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 Conclusion
Financial markets have particular characteristics that make them unique. They are considered to have
Cardinal regulations on trading, clear pricing strategy and as well as costs and fees which are well
defined. Financial markets are institutions and procedures that facilitate transactions in all types of
financial securities. If the financial markets did not exist, the wealth of the economy would decrease
and the rate of capital formation would not be as high. They exist in order to allocate the supply of
savings from those economic units with a surplus to those with a deficit. The economy would suffer
without a developed financial market system because the wealth of the economy would be less without
them. Rate of capital formation would not be as high, followed by the slowed rate of stock
contribution to durables. Normal business activities would be funded slowly or not at all.

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