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Financial Markets & Institutions Chapter 2. CapitalAllocation Financial Markets Market Efficiency. FINANCIAL INTERMEDIARIES. JOB #1: ALLOCATING CAPITAL Direct investment Investment Bankers Advise Underwrite Distribute Indirect Financial Intermediaries

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financial markets institutions chapter 2

Financial Markets & InstitutionsChapter 2

CapitalAllocation

Financial Markets

Market Efficiency

Chapter 5

financial intermediaries
FINANCIAL INTERMEDIARIES
  • JOB #1: ALLOCATING CAPITAL
    • Direct investment
    • Investment Bankers
      • Advise
      • Underwrite
      • Distribute
    • Indirect Financial Intermediaries
      • Stock Brokerages (act as agents/principals)
      • Mutual Funds (invest savings)
      • Banks (lending capital)

Chapter 5

financial institutions
Financial Institutions
  • Investment Intermediaries
    • Investment Bankers
    • Mutual Fund Companies, Finance Companies
  • Depository Institutions
    • Banks, Credit Unions, Savings & Loan Associations
  • Contractual Savings Institutions
    • Insurance Companies, Pension Funds

Chapter 5

financial markets
FINANCIAL MARKETS

A. Types of Markets

  • Primary; where new issues are sold
    • IPO (Initial Public Offering)
    • Additional issues of new stock

2. Secondary; where seasoned issues are bought and sold.

3. Money markets; where short-term debt instruments are bought and sold.

Chapter 5

financial markets1
FINANCIAL MARKETS
  • Capital markets; where long-term debt instruments are bought and sold. Fig 5-1
  • Futures market; where derived claims are bought and sold on physical goods.
  • Options market; where derived claims are bought and sold on financial claims
    • Futures and options are termed derivative securities in that they derive their value from the value of the underlying asset.

Chapter 5

financial markets2
FINANCIAL MARKETS

B. Market Makers (Specialists and Dealers);

1. New York Stock Exchange (NYSE) Specialist System; (AMEX also) (auction market)

2. Over-The-Counter Market Maker/Dealer System (NASDAQ system); (dealer market)

  • Bid-Ask spread; cost of liquidity services.

Chapter 5

financial markets3
FINANCIAL MARKETS

C. Security exchanges

1. Owned by its members, regulated by the SEC.

2. Trade as principals or as agents.

  • Floor dominated by stock transactions.
  • Bonds mostly traded in the OTC market.

Chapter 5

financial markets4
FINANCIAL MARKETS

D. Reporting of transactions;

1. Reported on the ticker tape; Ticker Symbol, price, volume.

2. Summary of trading activity in the WSJ, Barron’s, other periodicals.

3. The "Market" = highest offer to buy (bid), lowest offer to sell (ask).

Chapter 5

financial markets5
FINANCIAL MARKETS

E. Foreign Securities; must be registered to trade in US markets.

1. ADR's; shares of foreign companies trading like those of American companies.

2. US. subsidiaries of foreign corporations which have stock outstanding.

Chapter 5

stock market reporting
STOCK MARKET REPORTING
  • Indexes

1. Dow Jones Industrial Average (DJIA); 30

2. S&P 500 (composite index) ; 400 (industrials

3. NASDAQ Series; Composite, Industrials

B. Media Sources

1. Nightly Business Report; daily wrap-up.

2. Wall Street Week; analysis, strategies, etc.

3. Barrons, Forbes, Financial Section of the NY Times, Investors daily, letters.

Chapter 5

market efficiency
MARKET EFFICIENCY

A. Efficient Markets Hypothesis

1. Prices reflect all known information.

2. Three Levels of Market Efficiency;

    • Weak form (old info)
    • Semi-Strong form (new info)
    • Strong form efficiency (inside info)
  • Implication of EMH; you cannot consistently outperform the market.

B. Investigate before you invest – and remember – there are NO SURE THINGS – ONLY FOOLS

Chapter 5

homework chapter 2
HOMEWORK CHAPTER 2
  • Self-Test: ST-1, parts a, b, c, f
  • Questions: 2-2, 2-4, 2-5, 2-10

Chapter 5