Chapter 5 Financial Markets and Institutions

• Suppliers: individuals and institutions with excess funds.• Role of the financial market : allocate scarce resources (capital) from savers (suppliers) to investors (users). • Users or demanders: individuals and institutions who need to raise funds to finance their investment opportunities .

• Derivative: is a security that derives its value from the value of another security . • Stock or share represents ownership right in the corporation • Bond is a debt instrument issued by corporations who borrow money. • A security is a piece of paper that represents the investor’s rights to certain prospects or property and the conditions under which he or she may exercise those rights.I. bonds and derivatives. Financial Markets • Financial Market: is market place for selling financial securities: stocks.

Secondary market: market for previously owned financial assets.• • • • • • • • • • Types of Financial Markets: Spot vs. futures market: Spot Market: assets are delivered “immediately”. . Money vs. secondary market: Primary market: market where financial securities are sold for the first time. Futures markets: participants agree to today to buy or sell an asset at some future date. Primary vs. capital markets Money market: short term financial assets are traded Capital market: long-term financial assets are traded.

Financial Institutions • • • • • • • Commercial banks Investment banks Mutual savings banks Credit unions Pension funds Life insurance companies Mutual funds .

Stock Market • Auction market vs. Dealer market (Exchanges vs. OTC) NYSE vs. NASDAQ Differences are narrowing .

An investor purchases some of the newly issued shares. Is this a primary market transaction or a secondary market transaction? • What if instead an investor buys existing shares of Google stock in the open market-is this a primary or secondary market transaction? .• Stock market transactions • Google decides to issue additional stock with the assistance of its investment bank.

te stock trades in the secondary market. Once issued.What is an IPO? • An initial public offering (IPO) is where a company issues stock in the public market for the first time. • “Going public” enables a company’s owners to raise capital from a wide variety of outside investors. . • Public companies are subject to additional regulations and reporting requirements.

Where can you find a stock quote. CNNMoney. or MSN Money Central). . and what does one look like? • Stock quotes can be found in a variety of print sources (wall street Journal or the local newspaper) and online sources (Yhoo!Finance.

 Investors cannot “beat the market” except through good luck or better information.Efficient Market Hypothesis  Securities are normally in equilibriumand are “fairly priced”.  Level of market efficiency  Weak-form efficiency  Semi-strong-form efficiency  Strong-form efficiency .

even inside information. • Semi-strong form: all publicly available information is reflected in stock prices.• Weak-form efficiency: can’t profit by looking at past trends. is embedded in stock prices. . • Strong form: all information.

Insiders have made abnormal (and sometimes illegal) profits. – Not efficient in the strong from. . – Reasonably efficient in the semi-strong form.• Empirical studies suggest the stock market is: – Highly efficient in the weak form.

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