Chapter 5 Financial Markets and Institutions

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Chapter 5 Financial Markets and Institutions
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• Role of the financial market allocate scarce
  resources (capital) from savers (suppliers) to
  investors (users).
• Suppliers individuals and institutions with
  excess funds.
• Users or demanders individuals and institutions
  who need to raise funds to finance their
  investment opportunities

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I. Financial Markets

• Financial Market is market place for selling
  financial securities stocks, bonds and
  derivatives.
• A security is a piece of paper that represents
  the investors rights to certain prospects or
  property and the conditions under which he or she
  may exercise those rights.
• Stock or share represents ownership right in the
  corporation
• Bond is a debt instrument issued by corporations
  who borrow money.
• Derivative is a security that derives its value
  from the value of another security

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• Types of Financial Markets
• Spot vs. futures market
• Spot Market assets are delivered immediately.
• Futures markets participants agree to today to
  buy or sell an asset at some future date.
• Money vs. capital markets
• Money market short term financial assets are
  traded
• Capital market long-term financial assets are
  traded.
• Primary vs. secondary market
• Primary market market where financial securities
  are sold for the first time.
• Secondary market market for previously owned
  financial assets.

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Financial Institutions

• Commercial banks
• Investment banks
• Mutual savings banks
• Credit unions
• Pension funds
• Life insurance companies
• Mutual funds

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Stock Market

• Auction market vs. Dealer market
• (Exchanges vs. OTC)
• NYSE vs. NASDAQ
• Differences are narrowing

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• Stock market transactions
• Google decides to issue additional stock with the
  assistance of its investment bank. An investor
  purchases some of the newly issued shares. Is
  this a primary market transaction or a secondary
  market transaction?
• What if instead an investor buys existing shares
  of Google stock in the open market-is this a
  primary or secondary market transaction?

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What is an IPO?

• An initial public offering (IPO) is where a
  company issues stock in the public market for the
  first time.
• Going public enables a companys owners to
  raise capital from a wide variety of outside
  investors. Once issued, te stock trades in the
  secondary market.
• Public companies are subject to additional
  regulations and reporting requirements.

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Where can you find a stock quote, and what does
one look like?

• Stock quotes can be found in a variety of print
  sources (wall street Journal or the local
  newspaper) and online sources (Yhoo!Finance,
  CNNMoney, or MSN Money Central).

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Efficient Market Hypothesis

• Securities are normally in equilibriumand are
  fairly priced.
• Investors cannot beat the market except through
  good luck or better information.
• Level of market efficiency
• Weak-form efficiency
• Semi-strong-form efficiency
• Strong-form efficiency

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• Weak-form efficiency cant profit by looking at
  past trends.
• Semi-strong form all publicly available
  information is reflected in stock prices.
• Strong form all information, even inside
  information, is embedded in stock prices.

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• Empirical studies suggest the stock market is
• Highly efficient in the weak form.
• Reasonably efficient in the semi-strong form.
• Not efficient in the strong from. Insiders have
  made abnormal (and sometimes illegal) profits.