CHAPTER 2

Financial Markets
and Institutions
GROUP 2
 The Capital
Allocation Process
Direct Transfers
Indirect Transfers Through Investment Bankers
Indirect Transfers Through a Financial Intermediary

FINANCIAL MARKETS AND INSTITUTIONS

 Financial Markets
• this is where the people and
organizations wanting to borrow
money are brought

FINANCIAL MARKETS AND INSTITUTIONS

 Types of Markets
1. Physical assest markets vs Financial asset markets
2. Spot markets vs Future markets
3. Money markets vs Capital markets
4. Primary markets vs Secondary markets
5. Private markets vs Public markets

FINANCIAL MARKETS AND INSTITUTIONS

 Recent Trends
• Changing Technology Has Transformed
Financial Markets

FINANCIAL MARKETS AND INSTITUTIONS

 Financial Institutions
1. Investment Banks
2. Commercial Banks
3. Financial Service Corporations
4. Credit Unions
5. Pension Funds
6. Life Insurance Companies
7. Mutual Funds
8. Exchange Traded Funds
9. Hedge Funds
10.Private Equity Companies
FINANCIAL MARKETS AND INSTITUTIONS
 Stock market
• it is the venue where buyers
and sellers meet to exchange
equity shares of public
corporations.

FINANCIAL MARKETS AND INSTITUTIONS

Primary goal of Financial Manager

• Maximize the firms stock prices.

FINANCIAL MARKETS AND INSTITUTIONS

 Types of Market Procedures
Physical local exchanges - Electric dealer based or
tangible entities. Over the counter Market
-Formal organization that -large number of stock trade
conducts the auction market off connected electronically by
in designated ("listed") telephones, and computers.
markets.

FINANCIAL MARKETS AND INSTITUTIONS

 Dealer Markets
- all facilities that are needed to conduct security transactions are not
conducted on the physical location.
- Dealer market system consist of: DEALERS BROKER

ELECTRONIC

FINANCIAL MARKETS AND INSTITUTIONS

 Two-way Price
• Bid price
• Ask price
• Bid-ask price
FINANCIAL MARKETS AND INSTITUTIONS
 The Market for Common Stock
1. PRIVATELY OWNED OR CLOSELY
HELD CORPORATION
- Closely Held Stock
2. PUBLICLY OWNED
CORPORATION
- Publicly Held Stock
FINANCIAL MARKETS AND INSTITUTIONS
Type of Stock Market Transaction
1. Outstanding shares of established publicly owned companies
that are traded: the SECONDARY MARKET.
2. Additional shares sold by established publicly owned
companies: the PRIMARY MARKET.
3. Initial public offerings made by privately held firms: the IPO
MARKET.

FINANCIAL MARKETS AND INSTITUTIONS

 Stock Market Returns

FINANCIAL MARKETS AND INSTITUTIONS

 Measuring The Market
There are many approaches to measure the
overall performance of a stock market. A
common way of doing this is to use the stock
market index. Each country with a stock market
has its own stock index.

FINANCIAL MARKETS AND INSTITUTIONS

 Three (3) East Asian Market Indexes
1. Nikkei Index Average
- Stock market index for the Tokyo Stock Exchange.
2. Hang Seng Index
- Market capitalization-weighted stock market index in Hong
Kong.
3. Taiwan Capitalization Weighted Stock Index
- Index stocks traded on the Taiwan Stock Exchange.
FINANCIAL MARKETS AND INSTITUTIONS
 BEHAVIORAL FINANCE THEORY
Efficient Market Hypothesis
(EMH)

BEHAVIORAL FINANCE
FINANCIAL MARKETS AND INSTITUTIONS