chapter 5 financial markets and institutions n.
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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.

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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
i financial markets
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 investor’s 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 (offers a return based on the return of some other underlying asset).

Example of Derivatives:

  • Stock Options: get their values from the value of a stock
    • Call option: gives the holder the right to buy a stock for a given price ( exercise price) prior to a certain date (maturity).
    • Put option ; gives the holder the right to sell a stock for a given price (exercise price) prior to a certain date (maturity).
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.
financial institutions
Financial Institutions
  • Commercial banks
  • Investment banks
  • Mutual savings banks
  • Credit unions
  • Pension funds
  • Life insurance companies
  • Mutual funds
stock market
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
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 company’s 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
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
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: can’t 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.