Unit 1. Financial Markets.

General Issues
I have no money, no resources, no hopes. I am the happiest man alive.
Henry Miller

Primary and secondary markets
The primary market is the market where new securities are sold to different investors
on the Stock Exchange. The secondary market is where securities are traded from investor to
investor either on an organized exchange or over-the-counter.
When you want to start your own business you do it as a private limited company
(Ltd); an Ltd does not issue shares, obviously is not quoted, it is more like a family business,
a partnership. If the business becomes successful you can apply for listing on the Stock
Exchange to become a public limited company (PLC); for this target to be achieved the
company has to issue shares and issuing shares for the first time is called flotation or making a
flotation or IPO (US). Newer and smaller PLCs use over-the-counter markets (OTC) to trade
their shares. The Over-the-Counter market is a network of dealers in particular securities,
companies traded here having the opportunity to negotiate the prices for different securities.
Those securities that are not traded on the organized exchanges are traded on OTCs, such as
NASDAQ in New York or the ex-RASDAQ in Romania. Very successful companies, those
companies that have been in business for a long time are quoted on major Stock Exchanges;
for their securities to be quoted on such Stock Exchanges, they have to fulfill some
requirements, such as sending their shareholders a report at the end of each year containing
the trading results of the year to be concluded and also a financial statement so as to justify
how the shareholders’ money has been invested and in what.
If the shares issued by a PLC are not traded on a secondary market, than the company
may choose to sell the issue to an investment bank, at a price, which is a kind of agreement
between the company and the investment bank, an agreement concluded before the shares
were issued on the primary market; in this case the investment bank is said to underwrite the
A financial market is a mechanism, which allows people to trade, governed by the
interaction between supply and demand, and thus resources are allocated through a price
There are, broadly speaking, two kinds of markets:
 general markets (where many commodities are traded)
 specialised markets (where only one commodity is traded)
Financial markets connect people who want capital to those who really have it.
1. There is a logical connection between two of the three terms mentioned below.
Which is the odd one out and why?
 flotation – initial public offering (IPO) – liquidation
 primary market – OTC – secondary market

These receipts are securities.  Futures markets.  The transfer of risk (in the currency/capital/derivatives markets). More complex transactions than a simple bank deposit require markets where lenders can meet borrowers and where existing borrowing or lending commitments can be sold to other parties. the lender/borrower will expect some compensation in the form of interest and/or dividends. which facilitate the redistribution of various risks.  Insurance markets. Types of financial markets:  Capital markets which consist of: o Stock markets. which may be freely bought and/or sold. . A good example of a financial market is a stock exchange.  Money markets. which provide short term debt financing and investment. Banks take deposits from those who have money to save. where financing is provided through the issuance of bonds  Commodity markets. Choose from the options mentioned in brackets what each financial market may facilitate:  The raising of capital (in the capital/derivatives/currency markets).    equities – shares – bonds securities – equities – debt Ltd – PLC – investment bank shareholder – creditor – market-maker 2. which provide standardized forward contracts for trading products at some future date.  Derivatives markets. Without financial markets. borrowers would have difficulties in finding lenders by themselves. where financing is provided through the issuance of shares o Bond markets. 3. In return for lending/borrowing money to the lender/borrower. there is also the forward market. which facilitate the trading of foreign exchange.  Foreign exchange markets. Choose the best option from the alternatives mentioned below: Typically. Intermediaries such as banks help in this process. which provide instruments for the management of financial risk.  International trade (in the capital/derivatives/currency markets). A company can raise money by selling shares to investors and its existing shares can be bought or sold. a borrower/lender issues a receipt to the borrower/lender promising to pay back the capital. They can then lend money from this pool of deposited money to those who seek to borrow. which facilitate the trading of commodities.

Task Make a list of the main Romanian cities. public corporations.  Investing in shares issued by a PLC. local authorities and other public sector bodies. surplus. When companies have…cash that is not needed for a.  Contributing to a pension plan. which are currently issuing munis. borrowers.  Companies borrow money to support short-term or long-term cash flows in order to invest in new equipment. they may seek to make money from their cash…. stock exchange.  Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments.of capital.  Governments often find their spending exceed their tax revenues. foreign exchange. short Companies tend to be…. period of time. long. To make up this difference. pension funds.….  Paying premiums to an insurance company. . central government. individuals.by lending it via….. municipalities. Fill in using: lenders. bond market. they need to borrow.term markets called money markets. deficit. Place the following items in the right column: banks. money market. PLCs insurance companies. Governments also borrow on behalf of nationalized industries. Borrowers  Individuals borrow money by means of bank loans for short-term needs or longer-term mortgages to help finance a house purchase. mutual funds Lenders Financial intermediaries Financial markets Borrowers Lenders Lending activities may be:  Putting money in a savings account at a bank. 4.4.  Governments borrow by issuing bonds or by taking funds from international creditors.  Investing in government bonds.