Financial Markets and Institutions PDF

**Importance of Financial Markets and Institutions** - **Why?**\ Financial markets and institutions are the primary channels through which capital is allocated in society. They: - Move funds from savers to investors, promoting efficiency. - Impact personal wealth, business p...

**Importance of Financial Markets and Institutions** - **Why?**\ Financial markets and institutions are the primary channels through which capital is allocated in society. They: - Move funds from savers to investors, promoting efficiency. - Impact personal wealth, business profits, and the broader economy. - **Therefore:** - Investment and finance decisions require understanding the flow of funds in the economy. - Managers must understand how domestic and international markets function and are structured. **Asset Transformation** - **Example:**\ A company buys securities from corporations, packages them into mutual funds, and sells these at a higher price than they originally paid - **Toy Ex)** - you want a playset. You buy a bunch of toy cars and dolls and - **Mutual Fund Definition:**\ A pool of money from many investors used to purchase stocks, bonds, and other securities. **Financial Markets** - Financial markets are structures that enable the flow of funds. **Two Key Market Dimensions:** 1. **Primary vs. Secondary Markets** - **Primary Market:** Issuance of new financial instruments. - **Secondary Market:** Trading of financial instruments after they\'ve been issued. - **Key Difference:**\ The primary market raises new capital for issuers, while the secondary market deals with the trading of existing securities. 2. **Money vs. Capital Markets** - **Money Market:** Deals with short-term securities (less than one year). - **Capital Market:** Deals with long-term securities (more than one year). - **Key Difference:**\ Money markets impact liquidity for the borrower (issuer), while capital markets handle long-term financing. **Direct vs. Indirect Financial Transactions** - **Direct Financial Transaction:** - Done directly between a lender and a borrower.\ (Example: Borrower has an obligation to repay, and the lender provides cash.) - **Indirect Financial Transaction:** - A third party, such as a financial intermediary, facilitates the transaction.\ (Example: Buying a car through a dealership where the dealership acts as the middleman between you and the bank.) **Primary Market** - The primary market is where corporations raise funds by issuing financial instruments such as stocks and bonds. - **Key Concepts:** - **Initial Public Offering (IPO):** When firms go public by issuing equity for the first time. - **Seasonal Equity Offering (SEO):** Issuance of more equity by already public firms. - **Debt Securities:** Include certificates of deposit (CDs), bills, notes, and bonds. **Participants:** - **Issuers:** Governments and corporations. - **Buyers:** Banks and investment companies. **Primary Market Flow:** - Users of funds ⇆ Underwriter ⇆ Suppliers of funds. Underwriter: person who asseses risk of seuirty to tell institution if they should take the risk **Secondary Market** - The secondary market deals with the trading of financial instruments once they have been issued. - It is larger and more active than the primary market. - **Key Features:** - Resale of common and preferred stocks. - Provides more liquidity for primary market purchasers. - Updates the price or value of primary market claims. - Reduces the cost of trading these claims. **Both Markets:** - **Instruments:**\ Both primary and secondary markets involve bonds and stocks, where money is exchanged for these financial assets. **Banks and Thrifts** - **Thrifts:** - Financial institutions funded by consumer deposits (savings and loans). - They help members grow their savings at a higher interest rate. - **Banks:** - Accept deposits and provide loans. - Serve as intermediaries between depositors and borrowers. **Differences:** - Banks primarily offer financial services to businesses, while thrifts cater more to consumer accounts and loans.