NEHA SIDDIQUE

02-111201-222
BBA-4B
FUNDAMENTALS OF FINANCE
INTEGRATED CASE STUDY
-SMYTH BARRY & COMPANY
-FINANCIAL MARKETS AND INSTITUTIONS

 PART: A

Transfers of capital can be made through three ways;

 1: DIRECT TRANSFER
In Direct transfer of money and securities Business Sells its stocks to investors (i.e. savers) and business
(borrowers) receives money (dollar) from savers. As shown below,

 2: INDIRECT TRANSFER THROUGH INVESTMENT BANKS

In this process money flows from savers to borrowers through an investment bank that

underwrites the share. An underwriter acts as a facilitator for the issuance of securities. The
company sells its stock or bond to investment bank which bank sells same securities to the
savers. As shown below,
  3: INDIRECT TRANSFER THROUGH A FINANCIAL
INTERMEDIARY

A financial intermediary is an entity that acts as the middleman between two

parties in a financial transaction. Bank obtain funds from savers in exchange for
its securities. Then bank land money to the business in a form of mortgage, in
return they raise its capital. Financial intermediaries offer the benefit of pooling
risk, reducing cost, and providing economies of scale, among others. As shown
below,

 PART: B
MARKET: A market is a venue where goods and services are exchanged.

PHYSICAL ASSET MARKETS VERSUS FINANCIAL ASSET MARKETS

- Physical assets are tangible assets and can be seen and touched, with a very identifiable
physical presence. e.g., wheat, autos, real estate, computers, and machinery. Whereas,

-Financial markets refer broadly to any marketplace where the trading of securities occurs,
including the stock market, bond market, forex market, and derivative securities whose values
are derived from changes in the prices of other assets.

spot markets versus futures markets,

SPOT MARKETS VERSUS FUTURE MARKETS

- spot prices are for immediate buying and selling. Whereas,

- In futures market contracts they agreed today and delivery to predetermined future dates. In
either situation, the futures price is expected to eventually converge with the current market
price. In this both hold risk.

MONEY MARKETS VERSUS CAPITAL MARKETS

- Money Markets is a financial market in which funds are borrowed or loaned for short term
period (less than one year). These are short term securities. This includes Promissory
notes, bills of exchange, commercial paper, T bills, call money. Whereas,

- capital markets is a financial market in which long-term debt or equity-backed securities are
bought and sold. This Capital markets includes Equity shares, debentures, bonds, preference
shares, etc. This include primary and secondary market

PRIMARY MARKET VERSUS SECONDARY MARKET

-PRIMARY MARKET When a company publicly sells new stocks or bonds for the first time—such
as in an initial public offering where new security and corporation is formed to raise capital.

-SECONDARY MARKET in which traders and investors subsequently traded already issued
securities among one another where no new capital is received by the firm.

PUBLIC MARKET VERSUS PRIVATE MARKET

-Private companies where transactions are negotiated directly between two or more parties. Bank
loans and private debt placements with insurance
companies are examples of private market transactions. Because these transactions are private,
they may be structured in any manner to which the relevant parties agree.

-public companies are publicly traded on the stock market and can be invested in by the general
public. where standardized contracts are traded on organized exchanges. By contrast, securities
that are traded in public markets (for example, common stock and corporate bonds) are held by a
large number of individuals.
  PART: C
FINANCIAL MARKETS ESSENTIAL FOR HEALTHY ECONOMY & ECONOMIC GROWTH

Financial markets play a critical role in the accumulation of capital and the production of goods
and services. They channel funds from those who do not have a productive use for them to
those who do, thereby resulting in higher economic efficiency. In this way, financial markets
direct the allocation of credit throughout the economy and facilitate the production of goods and
services. A stable financial system creates a favorable environment for depositors and
investors, encourages financial institutions and markets to function effectively and efficiently,
and hence, promotes investment and economic growth.

 PART: D
Derivatives are any financial assets whose value is derived from the value of some other
“underlying” assets. This is contracts that allow businesses, investors, and municipalities to

transfer risks and rewards associated with commercial or financial outcomes to other

parties. There’s no obligation to buy, it’s an option.

Holding a derivative contract sometimes can reduce the risk of bad harvests, adverse

market fluctuations, or negative events, like a bond default. Derivatives help increasing

savings and investments in the long run.

Also, derivatives can increase risk by betting on the direction of future stock, prices, interest

rate, exchange rates and commodity prices. In some cases, these transactions produce high
return.
  PART: E
 INVESTMENT BANKS
An investment bank is a financial services company or corporate division that engages in advisory-
based financial transactions on behalf of individuals.

 COMMERCIAL BANK
commercial bank refers to a financial institution that accepts deposits, offers checking account
services, makes various loans, and offers basic financial products like certificates of deposit
(CDs) and savings accounts to individuals and small businesses.

 FINANCIAL SERVICE CORPORATIONS

A firm which offers a wide range of financial services, including investment banking, brokerage
operations, insurance, and commercial banking. It provides protection from risks and supporting
the creation of new jobs and enterprises. It is critical that the sector operates to provide these
functions for society in a stable, sustainable way.

 PENSION FUNDS

Pension funds, which are also known as retirement funds, is a kind of savings scheme where
you (as an employee) invest a small portion of your income/salary into a designated savings
plan. A pension plan will help you get an income and support your family when you have no
other income source.

 MUTUAL FUNDS

A mutual fund is a company that pools money from many investors and invests the money in
securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual
fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an
investor’s part ownership in the fund and the income it generates.

 EXCHANGE TRADED FUNDS

An exchange-traded fund, or ETF, is a fund that can be traded on an exchange like a stock,
meaning it can be bought and sold throughout the day. ETFs often have lower fees than other
types of funds.

 HEDGE FUNDS

A hedge fund is a type of actively managed fund that focuses on high risk high return
investments. Hedge funds invest very aggressively using leverage and shorting to try and
increase their returns.

 PRIVATE-EQUITY FIRM

A private-equity firm is an investment management company that provides financial backing and
makes investments in the private equity of startup or operating companies through a variety of
loosely affiliated investment strategies including leveraged buyout, venture capital, and growth
capital

 PART: F
A stock market is a group of markets where the securities of public companies are issued, sold, and
purchased. 

The two major U.S. financial securities markets are 

 New York Stock Exchange
 Nasdaq

There are two basic types of stock markets: 

(1) physical location exchanges, which include the New York Stock Exchange (NYSE) where
securities trading and related activities take place on a physical location. physical location
exchanges have operated on an open outcry system, but, increasingly, trading takes place over
computers on the exchange.
(2) electronic dealer-based markets that include the Nasdaq stock market, In the former, the
highest bid for a stock is matched with the lowest asking price. In the latter, buying and selling
happens in split seconds electronically through dealers.

 PART: h
 Initial public offering

It is a process by which a private company work with investment banks to bring their shares to
the public, which requires tremendous amounts of due diligence, marketing, and regulatory
requirements to sale of its stocks to general public. After IPO, the company's shares are traded
in an open market. Those shares can be further sold by investors through secondary market
trading. An IPO allows a company to raise capital from public investors.

Example of an IPO that incurred investor risk and raised the necessary capital for the company
is the IPO of Facebook in 2012. The buzz around the then innovative company had raised
investor expectations.

PART: I
Market efficiency refers to the degree to which market prices reflect all available, relevant
information. If markets are efficient, then all information is already incorporated into prices, and
so there is no way to "beat" the market because there are no undervalued or overvalued
securities available.

A truly efficient market eliminates the possibility of beating the market, because any information
available to any trader is already incorporated into the market price. As the quality and amount
of information increases, the market becomes more efficient reducing opportunities for arbitrage
and above market returns.

If markets are efficient, investors can buy and sell stocks and be confident that they are getting
good prices. There is an “efficiency continuum” with the market for some companies’ stocks
being highly efficient and that for other stocks highly inefficient. The key factor is the size of the
company—the larger the firm, the more analysts tend to follow it, and thus the faster new
information is likely to be reflected in the stock’s price. Also, different companies communicate
better with analysts and investors generally, and the better the communications, the more
efficient the market for the stock.

THANKYOU!