THE ROLE AND FUNCTIONING OF FINANCIAL MARKETS 10
The Role and Functioning Of Financial Markets
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Executive Summary
The document provides financial planning and investments basing on the markets contained in the United Kingdom (UK) in response to Coventry who serves as the client in the case tackled. While the client as provided in the report assumes to be “fictional” the provided description depicts on the real formation of what is needed for every individual intending to invest with the financial markets in the UK. There is no template used, and thus every plan displayed is crafted for individual circumstances. All human elements that are relevant to their financial life in their daily life are included. The report uses Coventry as the client; he/she is at the age of 23 working up to 50 years after retiring with a life expectancy of 90. Coventry is a single intending to get married at 28, starting salary of 28,000 increasing to 38,000 at 33 and 48,000 at 40 and 2% increment annually after that. Coventry also is entitled to inheritance of 325,000 from the aunt.
Coventry wishes to acquire a car for transportation to work or relocate, he/she also hopes to save for the wedding the cost of 9,000, purchase a house in Hertfordshire priced at 400,000. Coventry wants assistance in preparing his/her financial plans and thus the preparation of the following report.
Introduction
Many times when the term “market” is used people often think about places to buy and sell goods as well as services (Amadeo, 2019). However, the world market as introduced bares a broader scope in itself. According to Amadeo (2019), the market provides for the total supply and demand for services and particular commodities exchanged. It is therefore right to state that the financial market is as well a market by itself or institution facility developed to render financial securities and financial instruments. The economic apparatus in question includes stocks, bonds, commercial papers, shares, debentures, foreign exchange, and derivatives.
Nevertheless, the price to the instruments mentioned above is determined by the market laws of demand and supply (Amadeo, 2019). Furthermore, the financial markets are formed from the tools namely the stock market, bond market, commodities market, and derivatives. The paper depicts research on the role and functioning of the financial markets based on the United Kingdom financial systems to facilitate the financial plan for the Coventry case study provided.
Financial Planning
Coventry, as provided in the case study, will have to understand the four functions of financial markets before venturing into any investments and exchange with them. The services are given as follows:
Mobilizing funds: to realize a thriving economy, money should never be kept idle, and thus the potential investors with savings should link with industrial institutions that are need of funds to explore their products (Gan, 2010, 3). The financial markets play a significant role in enabling the transactions between industries and investors as well as completing the risk assessment tasks before an individual venturing into the business. By mobilizing funds, the idle funds will be put into use, and the economy will boom.
Price determination: the prices are set by the rule of demand and supply provided by the financial commodities involved in the financial markets setting the prices (Gan, 2010, 3). The investors are primary sources in supplying the funds used as the market commodities while the industries are at the receiving ends offering services as well as meeting other individuals demands. The interaction between the investors and enterprises help create value and if Coventry is involved in such exchange will have increased gains on return from the invested sum.
Liquidity: the financial markets engage in the exchange of the provided instruments that tend to carry high liquidity (Smith, 2015, 2). It, therefore, means that the involved investors can opt to sell their financial commodities at any given time with lots of ease and convert them to cash. The prerogative is quite essential to short term investors who wish not to engage in long term investments.
Easy access: for a stable and prosperous economy, both the industries and investors need each other (Smith, 2015, 2). The financial markets are there to create a platform where the parties mentioned above meet each other inform of buyers and sellers with simplest means and ease.
Moreover, there are primary three factors forming the financial plan to ensure the success of the long term project. The financial planning factors include the individual’s income, expenses, and investments.
Your Income
It entails the current salary stream from employment, Pension Plan and Old Age Security. The individual’s primary income is generated from the continued employment as for the case of Coventry 28,000 at 23 years, 38,000 at 33 and 48,000 on reaching 40 years with the substantial increment of 2% per year after that. The given income will gain supplement from the UK Pension Plan and Old Age Security (OAS) when at 65 years or older. The individual’s gain plan is dependent on the decision of working period as well as the age to start gaining from pension plan and OAS.
Your Investment
It includes investment income, asset allocation, and portfolio performance. The aforementioned is much dependent on the individuals’ asset classes. Coventry is needed to cautiously look into his four main asset classes including cash, stocks, bonds, and Certificate of Deposits. The investor is in full control over the allocation of assets purchased as though with little power of the returns generated from the same asset classes (Kent et al., 1035).
Your Expenses
The expenses comprise of annual spending and one-time expenditures. The financial plan is often affected by individuals’ spending which is under their control as well.
In summary, the financial plan completed entails detailed strategies starting from the first day Coventry resumed work at the age of 23-year-old to 90 years anticipated live. Coventry’s beginning assets are derived from the existing investments as well as the acquisitions.
Non-registered cash account
350,000.00
Salary Income
28,000.00
Overall Asset Allocation
Cash & Equivalents
5.00%
OAS Payment at 65 (Monthly)
20.00%
UK Pension Plan at 50 years (Monthly)
Employees’ Contribution
1.00%
Employers’ Contribution
10.00%
Insurance
Coventry needs to take the insurance policy plan to cover on all sorts of investments he/she intends to venture into. Among the insurance plan are life and health, motor and accidents as well as general liability. The UK pension and insurers are among the most significant operating companies in the State featuring in the thirteen topmost in the FTSE100 index.
Investment Advice
Car Purchase
Coventry would need a car to travel to the job to avoid relocation and lateness to the workplace. He/she can opt to obtain the vehicle from direct purchase, loan or hire. However, considering that Coventry is merely starting to work, it will be expensive and challenging to purchase a new car directly. Car hiring is usually expensive as well, and thus Coventry needs to buy on loan the personal vehicle. Coventry can approach the Association of British Insurers (ABI) the UK Insurance and Long-term Savings market and open an account with them, request for the car and service the loan as at the same time guaranteed insurance and pension plan (Keith, 2003, 12). Toyota Primo is the car to go for at the start with the value of 14,000 and annual depreciation of 20%.
House, Marriage, and Saving
Discipline and consistent savings from the monthly income is the way to go for Coventry to achieve future dreams. With the first ten years, Coventry is entitled to 28,000 salary income; always save 30% (8400) of the revenue towards marriage and buying a house in Hertfordshire. Saving 8400 per month from the age of 23 to 28 when Coventry is ready to get married would have accumulated to 504,000. Coventry can as well purchase the house on 50% down payment totaling to 200,000 through the bank or any other microfinance mortgage with the least interest rate.
Kids’ Education
The idea of taking kids to private school is awesome. However, the increasing rate at 10 % per year until the age of 18 is non-viable. To mitigate the extra cost of education, Coventry should take kids’ education insurance cover once given birth and start servicing the policy (Keith, 2003, 18).
Retirement and Investment
The intention to retire at 50 years is quite early, and thus Coventry should work up to 60 years of age. Working from 23 years to 60 would have accumulated to 37 years of service with a total of (8400×12) = 100,800 per year. It, therefore, means that Coventry will have gathered 3,729,600 as savings and 932,400 as pension calculated at 25% tax-free. Coventry will be taking home 4,662,000 on retirement. With the accumulated monies, Coventry can venture into real estate, farming or purchase of government bonds as well as stock exchange markets.
Assumptions
Investment advise, and financial planning is based on the following assumptions:
That Coventry is purportedly working on 28,000 as income for the entire lifetime. The arithmetic will change positively considering a salary increase at the age of 33 and 40.
The report assumed constant interest rates as though they might change due to the long-term plans
The total retirement savings are calculated on the current rates both income salary and pension rates
The payable tax plan is way out the presented report and thus might affect the final endings as well
Recommendations to Coventry
The report recommends based on the client’s desire to maintain the present standard of living until the life expectancy of 90; extent the financial assistant to the kids’ and at least have an estate to pass to the heirs. Coventry’s makeup to investment portfolio carries a vital role in meeting the financial goals, and thus the critical decision to adopt is asset allocation. The asset allocation taken should be suitable, and by the risk, Coventry is willing and able to make. Among the financial and investment plans to take are individual bonds and stocks, mutual funds or Index ETFs. The report, therefore, concludes by recommending to Coventry the following:
The preferred scenario that can provide ease to sell the house in the 70s: the action may be necessity resulting from aging.
Move into a rental dwelling: the shift will happen once the personal home is sold after retirement and at the age of 70s
Collect your OAS and pension at the age of 70s; the timeline will help maximize the accumulated monies as savings. As long as the retirement benefit is not dependent for the living, it is therefore right to delay on claiming.
Always finalize on one annual planning before venturing into other commitment of expenditures
Coventry should consider the amount of inheritance to leave as it is paramount to budget commitment and saving while working.
References
Amadeo, K 2019, ‘An Introduction to the Financial Markets:’ The Balance Article. Retrieved 16th February 2019, https://www.thebalance.com/an-introduction-to-the-financial-markets-3306233
Gan, C 2010, Role and Function of Financial Markets, pp. 1-17
Keith, R 2003, ‘Introducing Investments’: A Personal Finance Approach, Chapter 3, 8, 12, 18, 19
Kent, D., Grinblatt, T. & Wermers, R 1997, ‘Measuring Mutual Fund Performance with Characteristic-Based Benchmarks’: The Journal of Finance, Vol. 52 (3), Pg. 1035-1058
Smith, J 2015, ‘Financial Planning Services’: Life stages Journal; pp. 2-12
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