Basic issues about stocks and stock market

Commercial paper, also known as a promissory note, is a special type of debt paper that gives the holder the right to demand payment at maturity. Commercial paper includes:

- Bill of exchange: is a debit note

paid by seller

late signing for

A bill of exchange requiring the buyer to pay a certain amount of money at maturity to the seller or to whoever presents the bill (the payee).

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- Promissory note: is a debt acknowledgement signed by the buyer of goods on credit and given to the seller of goods on credit in which the buyer commits to pay a certain amount of money when due to the beneficiary.

- Warehouse certificate: is a paper issued by a warehouse business company, acknowledging that it has kept goods for the consignor and committing to deliver the goods to the consignor or someone designated by the consignor by endorsement.

Transferable certificates of deposit

A certificate of deposit and a debt instrument of the bank to the depositor. The certificate stipulates that the owner will receive a periodic interest and receive the full capital upon maturity. The holder of this certificate cannot withdraw the money before maturity but can only recover the money by reselling it on the secondary market. The certificate of deposit is an important tool in creating operating capital and ensuring liquidity for the bank.

Bank acceptance

A paper issued by a company, guaranteeing that a bank will unconditionally pay a certain amount of money at a certain time in the future to the holder of this paper. The company before issuing this instrument is required to deposit

into the bank account an amount corresponding to the amount stated on the acceptance

The holder of the bank note can also discount it in the market to collect advance payment. The interest rate on this instrument is relatively low due to its high safety.

3.2. Capital market instruments

Capital market instruments include equity instruments and debt instruments with maturities of more than one year. These instruments have greater price volatility and lower liquidity than money market instruments and are considered to be

Investing is quite risky. The main types of instruments are stocks (equity instruments) and bonds (debt instruments). There are also convertible instruments or derivative instruments.

Stock: is a certificate of ownership and legal interests in the income and assets of a joint stock company. Stock includes many different types such as common stock, dividend preference stock, participation preference stock...

Bond: is a certificate of borrowing capital from one entity (issuer) to another entity (lending entity). The bond stipulates the following:

the period when the issuer must pay the bondholder a certain amount of money

(bond interest) and at maturity must repay the initial loan principal. There are many different types of bonds such as corporate bonds, government bonds, municipal bonds, convertible bonds...

Mortgage loans: are loans to businesses or households to buy houses, land, real estate and use these assets as collateral for the loan.

Commercial credits: are medium and long-term loans from commercial banks or financial companies to consumers or businesses in need of capital. These credits are not traded on the secondary market, so liquidity is very low.

Investment fund certificate: is a type of security issued by a fund management company.

represent a fund

invest

securities issued, confirming the beneficiary's rights

investors for the fund.

4. Financial intermediaries

Financial intermediaries are organizations that act as a bridge between those who need capital and those who supply capital in the market. Financial intermediaries, regardless of their type, have one thing in common: they issue financial instruments to attract capital. The difference that the intermediary receives between the lending interest rate (or investment return) and the capital mobilization interest rate is the intermediary cost or intermediary commission. When people with capital deposit their capital in financial intermediaries, their investment is indirect investment; when financial intermediaries invest this capital, that investment is direct investment.

4.1. Types of financial intermediaries

Financial intermediaries fall into three main groups: depository institutions (banks), contractual savings institutions, and investment intermediaries.

a. Deposit-taking institutions

These are the largest financial intermediaries in the financial market in terms of scope of operations and capital capacity. They raise funds by opening checking and savings accounts for customers and use the funds raised to make various types of loans or invest in securities. Their income comes from two sources: income from loans and securities purchases; and income from fees.

Depository institutions include commercial banks, savings and loan associations (S&Ls), thrift banks, and credit unions.

b. Contractual savings institutions

Contractual savings institutions such as insurance companies and pension funds are financial intermediaries that raise funds on a contractual basis at regular intervals. They can predict with relative accuracy the amount they will pay out in the coming years and do not have to worry about a lack of funds as depository institutions do. Therefore, they can invest in long-term securities such as bonds, corporate stocks, and mortgages.

Insurance company

Insurance companies are financial intermediaries that make payments when an event occurs, against a prior contribution from the person who wants to benefit from it. Insurance companies raise capital from contributions from policyholders and use most of the money raised to buy bonds. Insurance companies can also invest in stocks, but the amount is very limited because they are reluctant to invest in stocks because they are afraid of the high risk of stocks. The income of insurance companies is mainly from fees, but also from investment income from financial instruments.

Pension fund

Pension funds are established to pay benefits to employees when they retire. These funds are established by private businesses;

state or local authorities; labor unions on behalf of their members, and finally individuals in need.

The peculiarity of these funds is that they involve investing in a very illiquid asset, a pension contract. This asset cannot be used, not even as collateral for a loan, until retirement. However, the advantage of these funds is that the contributions of the employer, and a certain amount of the contributions of the employee, as well as the income from the assets of the fund, are taxed deferred. In essence, the pension fund is a form of compensation from the employer that is not taxed until the employee withdraws the money. This serves as an incentive for employees to stay with the company.

c. Investment intermediaries

Investment intermediaries include finance companies, mutual funds, and financial market mutual funds.

Finance company

Finance companies raise money by selling commercial paper or issuing stocks and bonds. They then use this money to lend to consumers to buy homes, appliances, cars, etc. Some finance companies are created by a parent company to sell its own assets. For example, Ford Credit can lend money to customers to buy Ford cars.

Mutual Fund

This is a type of financial intermediary that raises capital by selling fund certificates to individuals and uses that capital to invest in a diversified portfolio of stocks and bonds. Mutual funds are usually managed by a fund management company. A fund management company can manage many different funds to diversify investments because each fund usually focuses on investing in only certain types of securities.

Money Market Mutual Funds

This relatively new financial institution has the characteristics of a mutual fund but is allowed to open deposit accounts for customers. Like most mutual funds, it is allowed to sell shares to raise capital and use the capital to buy safe, liquid money market instruments. Interest on these assets is paid periodically to shareholders.

Above are some common types of financial intermediaries. Although the specific operation methods of these organizations are different, they clearly demonstrate the role of financial intermediaries mentioned below.

4.2. The role of financial intermediaries

a. Conversion of maturity of financial instruments

This function can be seen most clearly through the activities of deposit-taking institutions, mainly commercial banks. Thanks to financial intermediaries, both investors (depositors) and borrowers can choose terms appropriate to their goals.

b. Minimize risk by diversifying investments

The more diverse the financial intermediaries, the more diverse the financial products they create. When investors put their money in investment companies, these companies can invest that money in, for example, the shares of a large number of companies. In this way, the investment company diversifies its investments and reduces its risks. This can only be done if it has a large enough amount of money; and this explains why diversification, the conversion of risky assets into less risky ones, is a major advantage of financial intermediaries and, more broadly, an important economic benefit of financial markets.

c Minimize contract costs and information processing costs

Investors in financial assets must have the necessary skills to evaluate an investment, analyze the profitability and risk level of each financial asset as well as the entire investment portfolio, and then make a decision to buy or sell financial assets. However, individual investors often do not have the conditions to develop these skills, both in terms of time and knowledge. They often have to hire someone to write contracts, which incurs contract costs. In addition, to confirm the reliability and process the information collected about financial assets and the issuer of those assets, investors also have to spend a certain amount of time and cost, called information processing costs.

Financial intermediaries, as professional investors, can reduce all those costs due to their advantages of concentration, specialization and larger investment scale.

d. Provide a payment mechanism

Today, most transactions are made without using cash. Payments can be made by check, credit card, or electronic funds transfer. Some financial intermediaries will provide these payment methods.

Previously, non-cash payments were limited to checking accounts with commercial banks, but were later extended to credit unions and some investment firms. Credit card payments were also previously only available at commercial banks, but are now offered by public depository institutions. Thus, non-cash payments have become one of the important functions of financial intermediation.

5. Relationship between parts of financial markets

Through the study of the structure of financial markets, one can see that

between markets

constituent fields have relationship

tight

and dialectic with each other.

Fluctuations in this market will directly or indirectly affect other markets. As the economy develops, financial markets become increasingly sophisticated and complex, and traditional boundaries between financial instruments or between types of markets become increasingly relative. Financial instruments are circulated intertwined.

between different types of markets and are transformed into each other. New tools are not

The emergence of new instruments, including many types of hybrid instruments with the characteristics of many different types of instruments. Therefore, the parts of the financial market become more closely linked together. Below will present some of the relationships that exist today in the financial market.

The relationship between the money market and the foreign exchange market.

The foreign exchange market and the money market are closely related to each other, no market operates in absolute independence, they interact and influence each other. Any fluctuation in the money market leads to changes in the foreign exchange market. The relationships formed between these two markets are mainly through two basic variables: interest rates and exchange rates. Fluctuations in interest rates in the money market can impact capital flows between these two markets, affecting the supply-demand relationship of foreign currencies, causing exchange rates in the foreign exchange market to change. To illustrate this relationship, we can consider a fact.

As follows: Until June 2000, within more than a year, the US Federal Reserve had continuously increased interest rates 6 times. In a chain reaction, the European Central Bank also raised interest rates and interest rates on the interbank market increased accordingly. Affected by this trend, Vietnamese commercial banks also gradually raised foreign currency mobilization interest rates, so a large amount of VND deposits were withdrawn from bank accounts to buy foreign currency on the market and then deposited in banks in USD to enjoy higher interest rates. Foreign currency mobilization capital increased sharply at a number of commercial banks. On the other hand, although the USD mobilization interest rate has been raised, it is still lower than the USD interest rate in the international market (the difference is about 1.4 - 1.8% in early 2000), making the mobilization of foreign currency domestically and transferring it abroad to enjoy higher interest rates an attractive profitable activity for commercial banks. The demand for foreign currency in the foreign exchange market therefore increases rapidly and thus the exchange rate tends to be pushed up.

The relationship between the money market and the stock market

The relationship between the money market and the stock market is shown through the impact of interest rates and exchange rates on stock prices.

Exchange rate is a factor that strongly affects investment decisions in the stock market. When investors invest in stocks, they will replace them with foreign currency assets because stocks are money, if money loses value, the value of stocks will decrease. These investors may transfer their investment capital abroad. Thus, the impact of exchange rate has shifted investment from the stock market to the foreign exchange market or vice versa.

Market interest rates are factors that directly affect stock prices through changes in the required yield of investors when accepting to invest in those stocks. When the money market shows signs of changing the discount rate and rediscount rate from the central bank, it will immediately affect the money supply and credit supply from commercial banks, and also affect stock prices. However, the impact of interest rates on bond and stock prices is different. Interest rates directly affect bond prices, when the discount rate increases (or decreases), the price of bonds on the market will decrease (or decrease).

increase). As for stocks, the relationship between interest rates and prices is not a direct and completely one-way relationship. The extent to which interest rates affect stock prices depends on the cause of the change and the extent to which this change affects the future income stream of the stock. However, research shows that the relationship between interest rates and stock prices is often inverse because when market interest rates increase and bond prices decrease, investors tend to shift their investments from stocks to bonds, causing stock prices to decrease and vice versa.

In summary, the process of capital circulation in the financial market is shown in the following cash flow diagram:

DIAGRAM (CAPITAL FLOW IN FINANCIAL MARKET)

Through the diagram above, we can see that the level of development of the financial market is important for encouraging savings, encouraging investment and promoting the capitalization process in the economy. In particular, we must mention the role of financial intermediaries, which have transferred a significant amount of savings into investment and actively contributed to accelerating the speed of capital circulation.

CONTINUED DIAGRAM

Through the diagram above, it can be seen that the financial market is the subject of the impact of the monetary policies of the central bank (or more broadly, the fiscal and monetary policies of the government), in order to achieve the goals of the economy. All policy measures affect parts of the financial market in different and overlapping ways. The more developed the financial market is, the more contact channels there are (due to the existence of many types of financial intermediaries; providing many financial services through increasingly diverse financial instruments), the more sensitive it is to the measures.

the higher the policy

II. GENERAL ISSUES OF THE STOCK MARKET

1. Brief history of formation and development of stock market

Basic issues about stocks and stock market - 2

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