Financial Markets

A system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers.

Why study financial markets and institutions?

RISK
BRING YOUR FRIENDS CLOSE, BUT YOUR ENEMIES CLOSER! analysis of the FINANCIAL SYSTEM in which financial managers operate. understanding the FLOW OF FUNDS throughout the economy as well as the operation and structure of domestic and international financial markets. analysis of the RISKS faced by investors and savers. development of STRATEGIES to control and manage risks.

FINANCIAL MARKETS
-are structures through which funds flow. Two types of financial markets Money markets Capital markets

Primary market Secondary market

Two types of financial markets

Money market- a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames; overthe-counter markets; e.g. Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities. Capital market- a market in which money is provided for periods longer than a year.

Capital Market: PRIMARY market vs SECONDARY

market PRIMARY MARKET
Markets in which users of funds raise funds through new issues of financial instruments ( stocks and bonds). Purpose: to raise additional funds. Issue stocks and bonds in exchange for money. Through INVESTMENT BANKS who serve as intermediaries between fund users and fund suppliers. Investment banks provide the funds user with advice on the securities issue (price, # of securities to issue) and attract the fund suppliers to purchase.
Benefit: save risk and cost of creating a market for the fund users securities

SECONDARY MARKET
Once financial instruments are issued in primary markets, they are then traded (resold and rebought) in secondary markets. Buyers: economic agents with excess funds Sellers: economic agents in need of funds. Benefits: centralized marketplace where economic agents know they can transact quickly and efficiently. The user of fund is not usually involved in the transaction. Offers buyers and sellers liquidity (the ability to turn an assets into cash quickly). ILLUSTRATION: PRIMARY market vs SECONDARY market

How are securities sold?

Primary Market: How are securities sold?

PUBLIC OFFERING An offer of sale to the investment public at large. PRIVATE PLACEMENT The fund users seek to find an institutional buyer (pension fund) or group of buyers to purchase the whole issue.

Primary Market: financial instruments sold

Stocks of an already publicly traded firm Bonds of an already publicly traded firm initial Public Offerings- first-time issues of firms initially going public. BACK: Secondary Market

ILLUSTRATION
FUND USERS
INVESTMEN T BANK FUND SUPPLIERS PRIMARY MARKET (newly-issued financial instruments)

FINANCIAL MARKETS SECURITIES BROKERS OTHER FUND SUPPLIERS

SECONDARY MARKET (already-issued financial instruments)

Function of Financial Markets

1. Allows transfers of funds from person or business without investment opportunities to one who has them 2. Improves economic efficiency

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Financial Markets:
Direct finance: through securities (IOUs) Indirect: intermediaries Saving transaction costs (search) Maturity, Stocks, Dividends (residual claim), Debt, IPOs (underwriting), Brokers, Dealers

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Classifications of Financial Markets

1. Debt Markets Short-term (maturity < 1 year) Money Market Long-term (maturity > 1 year) Capital Market 2. Equity Markets Common stocks 1. Primary Market New security issues sold to initial buyers 2. Secondary Market Securities previously issued are bought and sold 1. Exchanges Trades conducted in central locations (e.g., New York Stock Exchange, Chicago Commodity) 2. Over-the-Counter Markets Dealers at different locations buy and sell
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Financial Intermediaries

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Regulatory Agencies

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Regulatory Agencies

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