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1. The City of London’s financial Services and Markets:
The City of London is one of the world’s three leading financial centres, along with Tokyo and New York, and is by far the largest in Europe. While New York and Tokyo rely on very large domestic economies to fuel their business, London’s success can be attributed to its international business. Major financial institutions and markets in the City include the Bank of England, the London Stock Exchange, Lloyd’s insurance market, and the London International Financial Futures and Options Exchange.
1.1 Facts and figures of Britain’s financial services industry:
There are more overseas banks in London than in any other city in the world:
555 branches, subsidiaries and representative offices at the end of February 1999.
Financial services account for almost 7 per cent of Britain’s Gross Domestic Product
Net overseas earnings of Britain’s financial sector reached a record £25,200 million
The London Stock Exchange is the largest market in the world for trading foreign
equities, accounting for 63 per cent of global turnover.
London is one of the world’s three major international bond centres. Some 70 per cent
of international bond trading in the Euromarket take place there.
It has by far the biggest foreign exchange market in the world, handling about 32 per
cent of worldwide dealing, and with an average daily turnover, which is more than that
of New York, and Tokyo combined.
It is one of the world’s largest international insurance markets, with a leading share
of aviation and marine insurance.
It is the largest fund management centre.
It is the world’s most important centre for advice on privatisation.
Supervision and regulation
2. Financial markets:
2.1 The Stock Exchange:
This is one of the world’s oldest marketplaces for the buying and selling of shares, but its advanced trading systems mean it is also one of the most modern. It is the world’s leading marketplace for international shares – more international companies choose to list in London than on any other exchange. It therefore plays a vital role in maintaining London’s position as a major financial centre.
The main market is where most British and international shares are listed, while the Alternative Investment Market (AIM), established in 1995, is for younger and fast-growing businesses.
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As well as providing the marketplace to buy and sell shares, the Exchange is also the means through which companies and the Government raise money. The main types of share, or “security”, are:
ordinary shares listed by British and foreign companies, known as equities;
gilts – bonds issued by the Government to raise money to fund its spending;
bonds issued by companies or local authorities; and
Eurobonds, warrants and depository receipts – specialist securities favoured mainly by
2.2 The Euromarket:
This began with Eurodollars – US dollars lent outside the US – and has developed into a major market in a variety of currencies lent outside their domestic markets. London is at the centre of the Euromarket and houses most of the leading international banks and securities firms. Its share of trading in the two main types of bonds – Eurobonds and foreign bonds – is around 70 per cent of the market. The bonds are seen as flexible alternatives to bank loans.
2.3 Foreign exchange market:
This market is dominated by financial institutions, which buy and sell foreign currencies, making a profit from differences between the exchange rates and rates of interest in the various financial centres. A survey by the Bank of England in April 1998 found that daily turnover in Britain on the London market had increased by 37 per cent since the previous survey in 1995.
Dealing is conducted entirely by phone or electronically, between the banks, other financial institutions, and a number of firms of foreign exchange brokers which act as intermediaries. The institutions keep close contact with financial centres overseas and quote buying and selling rates
Throughout the day for both immediate (“spot”) and future (“forward”) transactions. 52As London is the biggest international financial centre by far in Europe, its wholesale markets were well prepared for the introduction of the euro at the beginning of 1999, and the essential infrastructure for payments and settlements in euros is in place.
Foreign Exchange turnover in $bn April 1998 average
2.4 Financial futures and options:
“Futures” are contracts for the purchase or sale of financial assets or commodities on a specified future date at a price agreed in the present. “Options” are contracts giving the right but not the obligation to buy or sell financial assets or commodities on a stated date at a predetermined price. Both futures and options offer a means of protection against changes in prices, in exchange rates or in interest rates. They are traded at the London International Financial Futures and Options Exchange (LIFFE).
LIFFE has 235 members, including many of the world’s leading financial institutions. It provides facilities for dealing in the most internationally diverse range of futures and options products of any exchange in the world.
2.5 Other markets:
Other important City markets include:
the London bullion market – around 60 banks and other financial trading companies
participate in the London gold and silver markets
the London Metal Exchange – the primary base metals market in the world
The Baltic Exchange – the world’s leading international shipping market. Baltic
dealers handle more than half the world’s bulk cargo movements of oil, ore, coal and
3. Financial Investments available:
3.1 Short-term Savings and Investment Vehicles:
Savings Account: Often the first banking product people use, savings accounts earn a small amount in interest (anywhere from 2.0% to 4.0% today), making them a little better than that dusty piggy bank on the dresser.
Money Market Funds: Money market funds are a specialised form of mutual fund that invests in extremely short-term bonds. Unlike most mutual funds, shares in a money market fund are designed to be worth GBP1 at all times. Money market funds usually pay better interest rates than a conventional savings account, but below what you could get in certificates of deposit.
Certificate of Deposit (CD): This is a specialised deposit made at a bank or other financial institution. The interest rate on CDs is usually about the same as that of short- or intermediate-term bonds, depending on the duration of the CD. Interest payments are made at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest payments. CDs offered by banks are usually insured.
3.2 Long-term Investment Vehicles:
They're known as "fixed-income" securities because the amount of income the bond generates each year is "fixed," or set, when the bond is sold. Bonds are very similar to CDs, except that they are issued by the government or by corporations instead of banks.
There are three basic kinds of bonds, all defined by who is selling the debt. The first are bonds sold by the government and government agencies. The second are bonds sold by corporations. The third types of bonds are Eurobonds.
1. Government bonds are called Treasuries because the Treasury Department sells them. Treasuries come in a variety of different "maturities," or lengths of time until maturity, ranging from 3 months to 30 years. Various types of Treasuries include Treasury notes, Treasury bills, Treasury bonds, and inflation-indexed notes. These all vary based on maturity and amount of interest paid.
2. Corporate Bonds. Companies sell debt through the public securities markets just as they sell stock. A company has a lot of flexibility as to how much debt it can issue and what interest rate it will pay, although it must make the bond attractive enough to interest investors or no one will buy them. Corporate bonds normally carry higher interest rates than government bonds because there is a risk that the company could go bankrupt and default on the bond, unlike the government, which can just print more money if it really needs it. High-yield bonds, also known as junk bonds, are corporate bonds issued by companies whose credit quality is below investment grade. Some corporate bonds are called convertible bonds because they can be converted into stock if certain provisions are met.
Eurobonds grant access to international investors. They are denominated in bearer form, allowing the investor almost complete anonymity. Investors holding bonds outside their own countries are normally able to escape tax.
Shares are a way for businesses or individuals to own parts of businesses. A share represents a proportional share of ownership in a company. As the value of the company changes, the value of the share in that company rises and falls.
Types of Shares:
Common Shares is aptly named, as it is the most common form of shares an investor will encounter. It is an ideal investment vehicle for individuals because anyone can own it; there are absolutely no restrictions on who can purchase it. Common shares are more than just a piece of paper; it represents a proportional share of ownership in a company - a stake in a real business. By owning shares - the most amazing wealth-creation vehicle ever conceived you are a part owner of a business. Shareholders "own" a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This increase in the value of the business is what drives up the value of the shares in that business.
Different Classes of Shares:Occasionally, companies find it necessary for various reasons to concentrate the voting power of a company into a specific class of shares where the majority is owned by a certain set of people. For instance, if a family business needs to raise money by selling equity, sometimes they will create a second class of stock that they control that has ten votes per share of stock and sell a class of stock that only has one vote per share to others. However for investors this is less attractive and they avoid companies where there are multiple classes of voting stock. This kind of structure is most common in media companies and has been around only since 1987.
Mutual funds are a way for investors to pool their money to buy shares, bonds, or anything else the fund manager decides is worthwhile. Instead of managing your money yourself, with a mutual fund you turn over the responsibility of managing that money to a "professional." Unfortunately, 9 of 10 "professionals" tend to underperform the market indexes.
Stock Derivatives - Options and Futures:
Arguably the most volatile and risky investments possible, options and futures are "derivative" securities, meaning their value is "derived" from that of another security or commodity. Options and futures are both very volatile because they often carry an incredible amount of leverage. For instance, each options contract on an individual stock controls 100 shares of that stock for a fraction of the stock's current value. This can make for huge upward moves, but this is offset by the risk of losing 100% of the money put into the option. (Most purchasers of options lose money.) If an investor owns an option and the underlying stock is not within the given price range within the given time period, the option expires worthless.
4.The risk-reward trade-off:
Includes cash, deposits, fixed interest investments held to maturity, guaranteed income bonds, zero dividend preference shares.
The aim is preservation of the nominal value of capital. I.e. £10,000 today will be £10,000 in ten years time. The risk is that inflation may erode the real value of that capital. If inflation is 5% for 10 years then at the end of that time your fund is only really worth £6000.
These investments are fine as a short-term home for funds whose capital value must be protected, but are not suitable for long term money. You pay for short-term safety with long term lack of performance.
One has to be cautious as to the amount deposited with any one institution in case the institution itself collapses.
These are funds that try to preserve, or slowly increase the capital value of the investment over time, (i.e. after the effect of inflation).
They usually use a mixture of investments to match their needs but in general those that will accept short term risk for long term gain weight in favour of equities and roll with the market, while those that seek to minimise short term losses will adopt protective measures from time to time. However such measures come at the cost of long term growth.
Most income oriented investments that are not cash based fall into this group.
The investment might include equities, convertibles, futures, options and other (protective) derivatives, fixed interest holdings, split capital investment trusts, with profit bonds.
This covers the "fun" money. Money invested in the hope, but not expectation of, very high returns.
Covers speculative funds in emerging economies, technology funds, aggressive futures and options funds, other speculative derivatives, capital units in split capital investment trusts, penny shares, AIM shares, or individual exposure to any of the above.
The only general rule for these investments is to keep a watch on any that you buy, and take profits if you make them as leaving it too long will enable you to see them evaporate as the market shifts.
the FCO web site: http://www.fco.gov.uk/
For further information see also:
FSA web site: http://www.fsa.gov.uk
HM Treasury web site: http://www.hm-treasury.gov.uk
Bank of England web site: http://www.bankofengland.co.uk
Produced by the Foreign & Commonwealth Office, London