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CHAPTER 8

FINANCIAL MARKET
Meeting place for people, corporation, and
institutions that either need or lend money
Public Financial Market- local government
that borrows funds for public activities
Corporate Financial Markets- where large
corporations raise funds
Also vary depending on: maturity of the
traded securities and the type of assets used
to back the securities

TYPES OF MARKETS

1. Physical Asset VS Financial Asset Market
A. Physical Asset Market
Also called as tangible or real asset
markets
Are for products such as wheat,
autos, real estate, computers and
machinery
B. Financial Asset Market
Deal with stocks, bonds, notes and
mortgages, derivative securities
whose values are derive from
changes in prices of assets

2. Spot Market VS Future Market
A. Spot Market
Assets are bought or sold for on-
the-spot delivery
B. Future Market
Participants agree today to buy or
sell an asset at some future date
3. Money Market VS Capital Market
A. Money Market
Funds are borrowed or loaned for
short periods (less than a year)
B. Capital Market
For stocks and for immediate or
long-term debt (more than 1 yr)

4. Primary Market VS Secondary Market
A. Primary Market
Corporations raise capital by issuing
new securities
B. Secondary Market
Securities and other financial assets
are traded among investors after
issued by corporation.
5. Private Markets VS Public Market
A. Private Market
Transactions are working out directly
between two parties
B. Public Market
Standardized contracts are traded on
organized exchanges

CATEGORIES OF FINANCIAL
INSTITUTIONS

1. Investment Banks- organization that
underwrites and distributes new investment sec
and help business obtain financing

2. Commercial Banks- traditional dept store o
finance serving a variety of savers and borrower

3. Financial Services Corporations- a firm that
offers a wide range of financial services

4. Credit Unions- cooperative associations whose
members are supposed to have a common bond.
Cheapest source of funds available to borrowers

5. Pension Fund- retirement funds funded by corp
or govt agencies for their workers and
administered by trust department of commercial
banks or by life insurance companies

6. Life Insurance Companies- savings in the
form of annual premiums

7. Mutual fund- organizations that pool investor
funds to purchase financial instrument thus
reduce risk through diversification

8. Exchange Trade Funds (ETF)- similar to
regular mutual funds and are often operated by
mutual fund companies. Buy a portfolio of stock
of a certain type and then sell their own shares
to the public.

9. Hedge Funds- similar to mutual funds bec they
accept money and use the funds to buy various
securities, but there are important differences

10. Private Equity Companies- organizations that
operate much like hedge funds, but rather
purchasing stock of the firm, private equity
players buy and then manage entire firm.

THE STOCK MARKET

Business Finance- concerned with provision of
funds for investment in business enterprise

Play Market- where new issues of securities are
available

Stock Market- a secondary market where securities
that are already outstanding and owned by investors
are bought and sold

Gilt Edged Market- securities of government that
are traded in stock market

Kinds of Stock Market

1. Organized Stock Exchange
- will take place in physical location where
stocks buying and selling transactions take
place in the stock exchange floor
2. Over-the-Counter
- Where shares, bonds and money market
instruments are traded using a system of
computer and telephones.

REASONS FOR TRANSACTIONS IN STOCK
MARKET

1. Information Motivated Reasons
- Investors believe that they have superior
information about a particular security than
other market participants that leads them
believed that securities are not correctly
priced. If infos are good, this suggest that
securities are currently underpriced and
investors will want to buy the security. If
infos are bad, the security is overprices and
investor want to sell the security

2. Liquidity Motivated Reasons
- Transact in secondary market because they
are currently in a position of either excess
(buy securities) or insufficient (sell security)

MEANING OF STOCK EXCHANGE

Stock Exchange
- organized secondary market where
securities like shares, debentures of public
companies, govt securities and bonds are
purchased and sold.
- An entity which is in business of bringing
buyers and sellers of stocks and securities
together
- PURPOSE: to facilitate the exchange of
securities, providing a marketplace

Outcry Method
- share brokers assembled in a place called
trading ring and bought and sold shares

Listing Agreement
- Ensures the company provides all the
information pertaining to its working from
time to time, including events that affect its
valuation

Stock Market
- Known as barometer of the companys
ecocomy

Listing
- Admission of securities to dealings on a
recognized stock exchange of any
incorporated company
- OBJECTIVE: provide liquidity and
marketability to listed securities and ensure
effective monitoring of trading for the
benefit of all participants in the market

Recognized Stock Exchange
- A stock exchange being recognized by
government through SEC

Brokers
- One who bought and sold the securities in
recognized stock exchanges

Official Quotation
- Price at which securities are bought and sold

SECURITIES MAY BE LISTED AT THE FF
STAGES:
1. At the time of public issue of shares or
debentures
2. At the time of rights issue of shares or debenture
3. At the time of bonus issue of shares
4. Shares issued on amalgamation or merger

Seller- one who sell security
Buyer- one who is willing to buy
Rate of stock
- depends on Law of Demand and Supply