Podcast
Questions and Answers
What is the primary function of financial markets?
What is the primary function of financial markets?
- Bringing together borrowers and lenders (correct)
- Selling goods and services
- Providing consulting services
- Manufacturing products
Why is it important for financial markets to be somewhat efficient?
Why is it important for financial markets to be somewhat efficient?
- To ensure fair pricing of financial assets (correct)
- To limit the types of financial assets available
- To encourage speculative investments
- To reduce the number of financial transactions
Which statement best describes money markets?
Which statement best describes money markets?
- Markets for buying and selling physical currency
- Markets for trading company stocks
- Markets for long-term debt securities
- Markets for short-term debt securities (correct)
What distinguishes capital markets from money markets?
What distinguishes capital markets from money markets?
In a primary market transaction, stocks are:
In a primary market transaction, stocks are:
What is the key role of financial markets in an economy?
What is the key role of financial markets in an economy?
What is the primary difference between money markets and capital markets?
What is the primary difference between money markets and capital markets?
In which market do existing firms issue additional shares?
In which market do existing firms issue additional shares?
What type of market does an Initial Public Offering (IPO) fall under?
What type of market does an Initial Public Offering (IPO) fall under?
What are the instruments traded in money markets known for in terms of maturity?
What are the instruments traded in money markets known for in terms of maturity?
What does the secondary market primarily involve the trading of?
What does the secondary market primarily involve the trading of?
Which type of financial market includes instruments with maturities greater than one year?
Which type of financial market includes instruments with maturities greater than one year?
What are the two main types of participants in financial markets?
What are the two main types of participants in financial markets?
What are the two main types of securities mentioned in the text?
What are the two main types of securities mentioned in the text?
What is the primary role of well-functioning financial markets?
What is the primary role of well-functioning financial markets?
What do well-functioning financial markets promote, according to the text?
What do well-functioning financial markets promote, according to the text?
What is the definition of market efficiency given in the text?
What is the definition of market efficiency given in the text?
What is behavioral finance, according to the text?
What is behavioral finance, according to the text?
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Study Notes
Financial Markets
- A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.
- These groups are willing to pay a rate of return on the capital they borrow.
Types of Financial Markets
- Physical assets vs. Financial assets
- Spot vs. Futures
- Money vs. Capital
- Primary vs. Secondary
- Public vs. Private
- Money Markets: instruments traded mature in one year or less
- Capital Markets: includes instruments with maturities greater than one year
Stock Market Transactions
- Secondary market: trading existing stocks
- Primary market: existing firm issues additional shares
- Initial Public Offering (IPO): privately held company offers stock to the public for the first time, also known as "going public"
Role of Financial Markets
- Surplus units: participants who receive more money than they spend, such as investors
- Deficit units: participants who spend more money than they receive, such as borrowers
- Securities: claims on an issuer, including debt securities and equity securities
Importance of Financial Markets
- Facilitate the flow of capital from investors to users of capital
- Provide savers with returns on their money, which provide them with money in the future
- Provide users of capital with necessary funds to finance their investment projects
- Promote economic growth, with well-developed markets performing better than poorly-functioning markets
Market Efficiency
- Markets are efficient when security prices reflect all available information
- Behavioral finance: application of psychology to make financial decisions, explaining why markets are not always efficient
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