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Chapter 5 Financial Markets and Institutions


Chapter 5 Financial Markets and Institutions Role of the financial market : allocate scarce resources (capital) from savers (suppliers) to investors (users). – PowerPoint PPT presentation

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Title: Chapter 5 Financial Markets and Institutions

Chapter 5 Financial Markets and Institutions
  • 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

I. Financial Markets
  • Financial Market is market place for selling
    financial securities stocks, bonds and
  • 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
  • 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

  • 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
  • Capital market long-term financial assets are
  • Primary vs. secondary market
  • Primary market market where financial securities
    are sold for the first time.
  • Secondary market market for previously owned
    financial assets.

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

Stock Market
  • Auction market vs. Dealer market
  • (Exchanges vs. OTC)
  • Differences are narrowing

  • 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?

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.

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).

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

  • 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.

  • 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.
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