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Financial Markets.

General Issues
I have no money, no resources, no hopes. I am the happiest man alive.
Henry Miller

Primary and secondary markets

The primary market is the market where new securities are sold to different investors
on the Stock Exchange. The secondary market is where securities are traded from investor to
investor either on an organized exchange or over-the-counter.
When you want to start your own business you do it as a private limited company
(Ltd); an Ltd does not issue shares, obviously is not quoted, it is more like a family business,
a partnership. If the business becomes successful you can apply for listing on the Stock
Exchange to become a public limited company (PLC); for this target to be achieved the
company has to issue shares and issuing shares for the first time is called flotation or making a
flotation or IPO (US). Newer and smaller PLCs use over-the-counter markets (OTC) to trade
their shares. The Over-the-Counter market is a network of dealers in particular securities,
companies traded here having the opportunity to negotiate the prices for different securities.
Those securities that are not traded on the organized exchanges are traded on OTCs, such as
NASDAQ in New York or the ex-RASDAQ in Romania. Very successful companies, those
companies that have been in business for a long time are quoted on major Stock Exchanges;
for their securities to be quoted on such Stock Exchanges, they have to fulfill some
requirements, such as sending their shareholders a report at the end of each year containing
the trading results of the year to be concluded and also a financial statement so as to justify
how the shareholders money has been invested and in what.
If the shares issued by a PLC are not traded on a secondary market, than the company
may choose to sell the issue to an investment bank, at a price, which is a kind of agreement
between the company and the investment bank, an agreement concluded before the shares
were issued on the primary market; in this case the investment bank is said to underwrite the
A financial market is a mechanism, which allows people to trade, governed by the
interaction between supply and demand, and thus resources are allocated through a price
There are, broadly speaking, two kinds of markets:
general markets (where many commodities are traded)
specialised markets (where only one commodity is traded)
Financial markets connect people who want capital to those who really have it.

1. There is a logical connection between two of the three terms mentioned below.
Which is the odd one out and why?
flotation initial public offering (IPO) liquidation
primary market OTC secondary market
equities shares bonds
securities equities debt
Ltd PLC investment bank
shareholder creditor market-maker

2. Choose from the options mentioned in brackets what each financial market may
The raising of capital (in the capital/derivatives/currency markets);
The transfer of risk (in the currency/capital/derivatives markets);
International trade (in the capital/derivatives/currency markets).
3. Choose the best option from the alternatives mentioned below:
Typically, a borrower/lender issues a receipt to the borrower/lender promising to pay
back the capital. These receipts are securities, which may be freely bought and/or sold.
In return for lending/borrowing money to the lender/borrower, the lender/borrower
will expect some compensation in the form of interest and/or dividends.
Types of financial markets:
Capital markets which consist of:
o Stock markets, where financing is provided through the issuance of shares
o Bond markets, where financing is provided through the issuance of bonds
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial
Futures markets, which provide standardized forward contracts for trading products
at some future date; there is also the forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.
Without financial markets, borrowers would have difficulties in finding lenders by
themselves. Intermediaries such as banks help in this process. Banks take deposits from those
who have money to save. They can then lend money from this pool of deposited money to
those who seek to borrow.
More complex transactions than a simple bank deposit require markets where lenders
can meet borrowers and where existing borrowing or lending commitments can be sold to
other parties. A good example of a financial market is a stock exchange. A company can raise
money by selling shares to investors and its existing shares can be bought or sold.

4. Place the following items in the right column: banks, individuals, PLCs insurance
companies, pension funds, central government, stock exchange, money market, bond
market, public corporations, foreign exchange, mutual funds

Financial intermediaries

Financial markets


Lending activities may be:
Putting money in a savings account at a bank;
Contributing to a pension plan;
Paying premiums to an insurance company;
Investing in government bonds;
Investing in shares issued by a PLC.
4. Fill in using: lenders, borrowers, long, deficit, surplus, short
Companies tend to be..of capital. When companies havecash that is not needed for a..
period of time, they may seek to make money from their lending it via.term
markets called money markets.
Individuals borrow money by means of bank loans for short-term needs or longer-term
mortgages to help finance a house purchase.
Companies borrow money to support short-term or long-term cash flows in order to
invest in new equipment.
Governments often find their spending exceed their tax revenues. To make up this
difference, they need to borrow. Governments also borrow on behalf of nationalized
industries, municipalities, local authorities and other public sector bodies.
Governments borrow by issuing bonds or by taking funds from international creditors.

Municipalities and local authorities may borrow in their own name as well as
receiving funding from national governments.
Make a list of the main Romanian cities, which are currently issuing munis.