Friday, September 19, 2008

Introduction to Securities and Investment

The world economy is growing rapidly and becoming increasingly integrated and interdependent as trade and investment flows rise.
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This has been accompanied by even faster growth and integration in the financial services sector. Here are some examples of this:
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Growth in wholesale financial services between 1997 and 2005 is estimated to have outstripped general economic growth by 70% on average.
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The UK’s financial services industry employs over 1 million people, it accounts for 9% of GDP and is the world’s largest single exporter of financial services.
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The increasing integration of markets can be seen in the proposed link-ups between the New York Stock Exchange (NYSE), Euronext and the Tokyo Stock Exchange (TSE).
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India’s stock exchanges are amongst the fastest growing in the world.
Looking ahead, China’s financial services are likely to average over 11% real growth per annum over the next fifteen years and its imports of financial and insurance services are likely to increase ten-fold by 2020.
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With this background, therefore, it is important to understand the core role that the financial services industry undertakes within the economy and some of the key features of the global financial services sector.
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The Role of the Financial Services Industry
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The financial services industry in developed countries is a major contributor to the economy. In the UK, for example, the activities of the firms headquartered in and around the City of London provide considerable employment, as well as overseas earnings for the economy.
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The financial services industry provides the link between organisations needing capital and those with capital available for investment. An organisation needing capital might be a growing company, and the capital might be provided by individuals saving for their retirement in a pension fund.
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It is the financial services industry that channels the money invested to those organisations that need it, and provides transmission, payment, advisory and management services. It is accepted that the financial services industry plays a critical role in all advanced economies and that the services it provides can be broken down into three core functions:
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Investment Chain - through the investment chain savers and borrowers are brought together, bringing finance to business and opportunities for savers to manage their finances over their lifetime. The efficiency of this chain is critical to allocating capital to the most profitable investments, providing a mechanism for saving, raising productivity and, in turn, improving competitiveness in the global economy.
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Risk - in addition to the opportunities that the investment chain provides for pooling investment risks, the financial services sector allows other risks to be managed effectively and efficiently through the use of insurance and increasingly sophisticated derivatives. These tools help business cope with global uncertainties as diverse as the value of currencies, the incidence of major accidents or the weather and protect households against everyday contingencies.
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Payment Systems – payment and banking services operated by the financial services sector provide the practical mechanisms for money to be managed, transmitted and received quickly and reliably. It is an essential requirement for commercial activities to take place and for participation in international trade and investment. Access to payment systems and banking services is a vital component of financial inclusion for individuals.
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Global Financial Services Industry
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A recent report by the Centre for Economics and Business Research has highlighted both the scale and importance of the financial services industry to the global economy. Key elements of the report include:
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• World trade in financial and insurance services reached €141 billion in 2004, or 8.2% of world trade in commercial services.
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• Wholesale finance’s contribution to global economic activity has averaged 6.3% annual growth over the past eight years, compared to 3.7% for global output generally.
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• The US accounts for 39% of world wholesale finance services and is growing at an average 7% each year.
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• The EU contributes to over half of world trade in finance and insurance services, whilst the UK is the single largest exporter of such services, enjoying 24% of world exports.
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• The EU leads a number of financial markets - such as international equity, foreign exchange and derivatives - whilst it is growing strongly in others, such as internationally-issued bonds, regulated funds and hedge funds.
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• In real terms, China’s wholesale financial sector is growing at nearly three times the pace of the EU’s and now accounts for 4% of the world market.
The number of organisations operating in the financial services industry is wide and varied. Each carries out a specialised function and an understanding of their role is important in order to understand how the industry is organised and interacts.
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The following sections detail the function of the main participants within the industry. For firms, although each is described as a separate organisation, the nature of financial conglomerates means that some of the largest global firms may have divisions carrying out each of these activities.
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Wholesale and Retail Business
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Within the financial services industry there are two distinct areas, namely the wholesale and institutional sector and the retail sector. The financial activities that make up the wholesale financial sector include:
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International banking - cross-border banking transactions.
Equity markets - the trading of quoted shares.
Bond markets - the trading of government, supranational or corporate debt.
Foreign exchange - the trading of currencies.
Derivatives - the trading of options, swaps, futures and forwards.
Fund management - managing mutual, pension and insurance pooled funds.
Insurance - re-insurance, major corporate insurance (including professional indemnity), captive insurance and risk-sharing insurance.
Investment banking - tailored banking services to organisations, such as undertaking mergers and acquisitions, equity trading, fixed income trading and private equity.
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By contrast, the retail sector focuses, unsurprisingly, on services provided to personal customers including:
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Retail banking - traditional range of deposit accounts, lending and credit cards;
Insurance - provision of a range of life insurance and protection solutions for areas such as medical insurance, critical illness, motor, property, income protection and mortgage protection;

Pensions - provision of investment accounts specifically designed to capture savings during a person’s working life and provide benefits on retirement;
Investment services - a range of investment products and vehicles ranging from execution-only stockbroking to full wealth management services and private banking;
Financial planning and financial advice.

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