LOS a Explain Market Organization and Structure

Financial System Functions

 Allow entities to borrow, save, issue equity,
Equity Investments (1) manage risk, exchange assets, utilize info
 Determine the returns that equate savings and
Market Organization and borrowing across the economy
 Allocate capital efficiently (to its highest valued
Structure uses)

© Kaplan, Inc. 2

LOS a Explain Market Organization and Structure LOS b Describe Market Organization and Structure

Financial System Functions Classifications of Assets

An investor expects to earn equilibrium (fair) returns
over time.
An information trader expects to earn positive risk-
adjusted returns (i.e., active management strategies).
A hedger takes on a position to offset an existing
risk.
© Kaplan, Inc.
 Financial vs. real assets
 Debt vs. equity securities
 Public vs. private securities
 Physical derivatives vs. financial derivatives
3 © Kaplan, Inc. 4

1
LOS b Describe Market Organization and Structure LOS c Describe Market Organization and Structure

Classifications of Markets Types of Assets

 Spot markets (immediate delivery) vs. futures markets Equities
 Primary markets vs. secondary markets Fixed income securities
 Call vs. continuous markets Pooled investments
 Money markets vs. capital markets  Mutual funds (including REITs)
 Traditional markets vs. alternative investment markets  Exchange-traded funds (ETFs)
 Asset-backed securities
 Hedge funds
© Kaplan, Inc. 5 © Kaplan, Inc. 6

LOS c Describe Market Organization and Structure LOS d Describe Market Organization and Structure

Types of Assets (continued) Financial Intermediary Roles

Currencies Brokers, exchanges: Connect buyers and sellers
of same security at same location and time
Contracts: Forwards, futures, swaps, options,
insurance Dealers: Match buyers and sellers of same security
at different points in time
Commodities
Arbitrageurs: Transact with buyers and sellers of
Real assets same security at same time but in different markets

© Kaplan, Inc. 7 © Kaplan, Inc. 8

2
LOS d Describe Market Organization and Structure

Financial Intermediary Roles

Securitizers, depository institutions: Sell
interests in a diversified pool of assets
Insurance companies: Manage a diversified pool
of risks
Clearinghouses: Reduce counterparty risk and
promote market integrity
© Kaplan, Inc. 9