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What is Three basic reasons is profit maximization inconsistent with wealth maximization?

Profit maximization is a narrow view which accounts for only the difference between sales and costs Wealth Maximization is broader and more philosophical in approach. Wealth maximization includes not exhaustively culture , synergy, value, potential and wealth.

The function of financial markets in the economy:
A market is a place where supply for a particular good is able to meet demand for it. In the case of financial markets, the good in question is money. In capital markets, supply agents are those with "positive savings capacity", i.e. mainly households (surprising as that may seem!), and businesses, although the latter generally prefer to reinvest profits or distribute dividends to shareholders. The demand side comes from governments, the modern welfare state having substantial cash requirements, or other companies. Such agents are said to have "financing requirements". Far from being an abstract entity, often described as both irrational and all-powerful, capital markets are in fact a driving force in the economy since they are places where the fuel, money, is made available to propel the machine forward, in other words generate wealth. This is the concept, but in practice of course the mechanism is a little more complex. The first difficulty resides in the fact that an exchange actually needs to take place between agents with savings capacity and agents with financing requirements. For a market to function, it is not enough that a good and its supply and demand exist; agents also have to want to trade it! However, agents with savings capacity, mainly households it should be recalled, are generally deeply averse to risk. An aversion furthermore which can be justified by common sense. Any book on the stock market for budding investors will begin with a warning urging readers to only invest funds in the stock market that will not be needed in the near future. Consequently, the bulk of savings generated by households are held on deposit in demand accounts or savings accounts where money is immediately available. In contrast, agents with financing needs, i.e. businesses, need to find long-term financing for development. The time horizon of agents with savings capacity is typically a few weeks (next pay day) to a few months (next tax payment date ...). The time horizon of agents with financing requirements is several years! This difference makes actual exchange in markets more complex.

Each bank has the right to distribute virtually all of the money deposited by customers on its current accounts (but not all! see below) as loans. Banks therefore create money. increase the cash resources of banks and thus their ability to distribute new loans etc. economic agents ready to lock-up large sums over long periods. etc.. they have always played. Institutional investors The main investors in capital markets today are "institutional investors" (often referred to simply as "institutionals"). the financial cost has an unsustainable impact on results and banks would no longer be willing to lend. Furthermore. Companies therefore have to find ways of obtaining even longer-term financing. To provide companies with equity capital.Banks This is where a third category of economic agents comes in. but it is not their primary purpose which is to ensure that money circulates. a crucial role in the financing of the economy. Banks are the only agents that have the power to transform very short-term resources (demand deposits i. The compulsory reserves ratio is one of the instruments used by central banks to control the quantity of money in circulation. are also involved in long-term corporate financing. the money creation power of banks is not infinite. in particular investment banks. to ensure that banks have the capacity to cope with withdrawals. contractual or legal obligation to build up savings in order to be able to pay. This is what is called the "credit multiplier". Banks therefore establish an essential link between households and businesses. fund managers (asset managers)..e. the banks. and for retirement funds retirement benefits to policyholders. The remainder will be converted into cash (notes) through cash withdrawals. obviously with the aim of generating profit. current accounts) into medium and long term resources: bank loans. only repayable in the event of dissolution of the company. companies cannot finance themselves solely through loans. are required: investors. beyond a certain level of debt. not available for lending. loans made available in this way by banks do not cancel the deposits that were made. namely insurance companies. granted in the form of demand deposits. However. for insurance companies insurance benefits. but these savings are locked up and cannot be immediately withdrawn in the same way as sums deposited in current accounts. The total of the capital and long-term debt of a company constitutes its "equity capital". The loans. Fortunately. and indeed still play. the institutions in question generally have a regulatory. or debt with very long maturities. It is limited firstly by the fact that only part of the loans granted will remain in the form of deposits. Banks. the central bank requires them to lock-up a percentage of their deposits in the form of reserves. In addition. the pension funds. for example bonds. Institutionals also drain public savings. . Furthermore. Deposits create loans. which continue to be available for the customer to use. retirement funds and their US equivalent. which themselves create deposits.

The agent arranges all the economic characteristics of the issue. However for this to happen. To this end. rating agencies are independent organisations which assess the quality of issuers and assign a rating designed to determine their reliability as debtors. each one responsible for maintaining relations with the central depository in its country. while investors increasingly tend to internationalise their investments. Custodians The agent of the issuer manages the relationship with the central custodian . they assume a key intermediation role. the central custodian keeps up-to-date records in its accounts of the total amount of securities that have been issued and the amount held by each institution that has a registered account with it (the total amount held by all institutions clearly has to match the total amount of the issue!). formerly SICOVAM. or long-term borrowing: bonds.Instead of distributing loans like banks. a key player in securities markets. A global custodian is appointed by investors to act as account keeper for all transactions involving the purchase and sale of securities in markets worlwide. For each issue it manages. the market has to be organised appropriately to facilitate the process. Lastly. However. In this regard. and once the securities trade on the market. capital increases etc. banks once again play an important role. the paying agent of the issuer (which may be the same as the agent or another institution) will be responsible for ensuring smooth operations throughout the life of the security: payment of coupons for bond issues or dividends for shares. more commonly referred to as the "Stock Exchange". in other words undertakes to buy all the securities issued and has a responsibility to find final investors willing to buy the securities issued. Given the needs of companies to obtain financing from the market and institutional investors' needs to invest savings in their care. These securities represent either equity capital: shares.e. Each member of Euroclear France is a local custodian. a number of different players contribute to this. repayments. As account-keepers and liquidity providers. . Any investor that does not have a registered account with Euroclear France must open an account with a local custodian in order to be able to hold securities. The issuance of securities Issuers wishing to raise capital from the market turn to a bank or group of banks (a "bank syndicate") which acts as an agent for the issue. at the time the securities are issued. After the issue. or on the secondary market. Purchases are made on the primary market. the global custodian works hand-in-hand with local custodians in every market in the world. In France the central custodian for almost every issue is Euroclear France. The agent "underwrites" the issue. i. As a result. it is clear that there has to be a way for supply and demand to meet. the central custodian practically only manages securities issued in its own country. the function of "global custodian" has developed. institutional investors buy securities issued by companies requiring financing.

but also exercise of subscription rights. or through fast-growing electronic markets. All have special cash management needs and may have to hedge against movements in prices or interest rates. An investor may need to obtain foreign currency. Once a trade has been completed. the investor turns to a custodian to take charge of "after trade" aspects. hence the necessity to carry out transactions in currency markets. exchange offers etc. at the branch level for small and medium-sized companies or directly via the trading room for the largest customers.To be a global or local custodian. Banks are able to respond to these needs. giving rise to the need for derivative products. The custodian is also responsible for maintaining the accounts of investor customers to take account of the many transactions that can have an impact on investment portfolios: coupon or dividend payments. Lastly. he may want to protect a portfolio against market fluctuations. an institution must be authorised not only to keep securities accounts on behalf of investors but also cash accounts. a stock exchange. repayments. securities provided by the seller have to be exchanged for cash provided by the buyer. Market transactions Investors typically buy securities through a broker. Such institutions are therefore usually banks. The broker provides a number of services to investors. Salesmen pass on the recommendations of analysts to investors and collect their orders. Total cumulative positions generated for the various products are processed by traders in the trading rooms. The activity of a trading room reflects the total amount of requests coming from all of the bank’s customers! Speculation and arbitrage Financial institutions and funds dedicated to this type of activity use some of their resources for speculation. This aspect of trading activity. Lastly. . Trading between brokers is carried out either directly through an "OTC" market or organised market. This process is referred to as settlement and delivery. traders buy or sell securities in the market. whether or not it be as extensive as many claim. or on the contrary need to invest liquidity on a temporary basis to optimise cash flow. Trading floors Market transactions by institutional investors are not limited to the purchase and sale of securities. additional needs arise. takeover bids. Non-financial companies ("corporates") face similar types of need: importers may require foreign currency and processing companies may have to protect themselves against fluctuations in raw material prices. Given the sums involved and the large number of markets in which investors trade. An investor may also require loans. For a transaction to be registered correctly. Financial analysts study markets and issuers and make recommendations.

the primary market refers to the market where securities are created. For our purposes. and the functions that they provide Primary And Secondary Markets The word "market" can have many different meanings. For example. Conclusion Economic literature. after drawing a sharp distinction between the financing of companies through bank lending (debt financing) and financing through the issuance of securities (marketbased economy). how do they interact. or becoming a buyer when you think they will rise. you can think of the primary market as being synonymous with an initial public offering (IPO). an IPO occurs when a private company sells stocks to the public for the first time. Arbitragists also play a harmonising role: they take advantage of price differences between different markets to generate gains. Instead. . there is a need for both an active organised financial market and a reliable banking system. The activity of arbitragists helps eliminate marketing inconsistencies. as. It is a risky activity. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. Studies suggest that for an economy to grow. speculators provide liquidity to the market: they are the sellers for investors who want to buy and the buyers for those who want to sell. Without them. By adopting a stance. "primary market" and "secondary market" are both distinct terms. speculators bet on the future. Simply put. while the secondary market is one in which they are traded among investors. However. and therefore more expensive. Knowing the functions of the primary and secondary markets is key to understanding how stocks trade. unlike investors or corporates. the stock market would be much harder to navigate and much less profitable. but it is used most often as a catch-all term to denote both the primary market and the secondary market. now attributes a complementary role to both. in currency markets they buy dollars in a market where it is cheap and sell in a market where it is most demanded. In fact.nevertheless remains necessary. Speculation involves taking a position that is contrary to current market trends: it means becoming a seller when you think that prices will fall (and are therefore at their highest!). Primary Market The primary market is where securities are created. since the assets purchased are immediately resold. We'll help you understand how these markets work and how they relate to individual investors. the financial products that are traded. the content of this site focuses on "how" aspects: who are the players. It is a risk-free activity. The purpose of this website is not to discuss the whys and wherefores of financial markets or their beneficial or harmful role. this requires substantial financing as capital gains on each transaction are low.

commercial paper. In the auction market. These are referred to as bid and ask prices. Nasdaq and all major exchanges around the world. investors trade previously-issued securities without the involvement of the issuing companies. The relationship between financial Institutions and financial markets: Financial institutions actively participate in the financial markets as both suppliers and demanders of funds. all individuals and institutions that want to trade securities will congregate in one area and announce the prices at which they are willing to buy and sell. Domestic or foreign individuals.Secondary Market The secondary market is what people are talking about when they refer to the "stock market". We then end this section with a discussion of the capital market. the best price of a good need not be sought out because the convergence of buyers and sellers will cause mutuallyagreeable prices to emerge.1 depicts the general flow of funds through and between financial institutions and financial markets as well as the mechanics of private placement transactions. if you go to buy Microsoft stock. The idea is that an efficient market should prevail by bringing together all parties and having them publicly declare their prices. a savings account is often more beneficial as some money market accounts . U. bankers acceptances. The defining characteristic of the secondary market is that investors trade amongst themselves. This includes the New York Stock Exchange (NYSE).S. Thus. Definition of 'Money Market' A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. Most broker/dealers and mutual fund companies offer money market accounts in some form. Figure 2. We next briefly discuss the money market. Money market securities consist of negotiable certificates of deposit (CDs). Microsoft (the company) is in no way involved with the transaction. and governments may supply and demand funds. which is of key importance to the firm. from several days to just under a year. The money market is used by participants as a means for borrowing and lending in the short term. The best example of an auction market is the NYSE. That is. Treasury bills. theoretically. including its international equivalent—the Eurocurrency market. federal funds and repurchase agreements (repos). in the secondary market. you are dealing only with another investor who owns shares in Microsoft. How does the money market work? A money market account is very similar in nature to a savings account with the most significant difference being that you often have the ability to write checks from it. The secondary market can be further broken down into two specialized categories: auction market and dealer market. municipal notes. For small balances. For example. businesses.

earnings. where if you deposit $1 you will get $1 back . Interest may be compounded semiannually. What is the difference between effective interest rates and nominal interest rates? Nominal interest rate is also defined as a stated interest rate. In general stated or nominal interest rate is less than the effective one. month. The stated annual rate is usually referred to as the nominal rate. an effective annual interest rate can be determined. . Some banks also impose restrictions on the number of withdrawals that are allowed. quarterly.can charge substantial fees unless a minimum balance is maintained. This is the interest rate compounded annually which is equivalent to a nominal rate compounded more frequently than annually. Money market funds are stable funds. Interest rates are typically stated as annual percentages. This interest works according to the simple interest and does not take into account the compounding periods. And the later depicts the true picture of financial payments. When compounding is done more frequently than annually. Be sure before you invest in any money market fund whether it is with your local bank or a broker/dealer or mutual fund that you thoroughly investigate fees. year etc. The two rates would be considered equivalent if both result in the same compound amount. and monthly. Effective interest rate is the one which caters the compounding periods during a payment plan.this is known as the "Net Asset Value" (NAV) of the fund. the interest earned during a year is greater than if compounded annually. and whether or not the funds are insured. It is used to compare the annual interest between loans with different compounding periods like week.