Financial Markets and the Investment Banking Process Chapter 3 Requests for permission to make copies of any part of the w...
Financial Markets <ul><li>A system comprised of individuals and institutions, instruments, and procedures that bring toget...
Flow of Funds <ul><li>Provides the ability to transfer income through time </li></ul><ul><ul><li>Borrowing  sacrifices  fu...
Flow of Funds <ul><li>1. Direct Transfer  </li></ul><ul><ul><li>business sells its stock directly to investors </li></ul><...
Flow of Funds <ul><li>2. Indirect Transfer through Investment Bankers </li></ul><ul><ul><li>investment banker acts as midd...
Flow of Funds <ul><li>3. Indirect Transfer through financial intermediary </li></ul><ul><ul><li>bank or mutual fund obtain...
Market Efficiency <ul><li>Economic Efficiency </li></ul><ul><ul><li>Funds are allocated to their optimal use at the lowest...
Market Efficiency <ul><li>Information Efficiency </li></ul><ul><ul><li>Prices of investments reflect existing information ...
Informational Efficiency <ul><li>Weak-form efficiency </li></ul><ul><ul><li>all information contained in past price moveme...
Informational Efficiency <ul><li>Semistrong-form efficiency </li></ul><ul><ul><li>current market prices reflect all public...
Informational Efficiency <ul><li>Strong-form efficiency </li></ul><ul><ul><li>current market prices reflect all pertinent ...
Types of Financial Markets <ul><li>Money Markets </li></ul><ul><ul><li>instruments traded mature in one year or less </li>...
Types of Financial Markets <ul><li>Debt Markets </li></ul><ul><ul><li>treasury, corporate, mortgage-backed, money market, ...
Equity Markets <ul><li>Primary </li></ul><ul><ul><li>corporations raise funds by issuing new securities </li></ul></ul><ul...
Derivatives Markets <ul><li>Options, futures and swaps are securities whose value is determined, or derived directly from ...
Types of Stock Market Transactions <ul><li>Secondary market </li></ul><ul><ul><li>trading existing stocks </li></ul></ul><...
The Physical Stock Exchanges <ul><li>Physical exchanges </li></ul><ul><ul><li>New York Stock Exchange (NYSE) </li></ul></u...
NYSE Members <ul><li>Commission brokers </li></ul><ul><li>Independent brokers </li></ul><ul><li>Competitive traders </li><...
Listing Requirements <ul><li>Quantitative and qualitative characteristics a firm must possess to be listed on an exchange ...
Organized Investment Networks—The Over-the-Counter Market (OTC) <ul><li>Collection of brokers and dealers connected electr...
Over-the-Counter Market (OTC) <ul><li>Dealers hold inventory and make a market </li></ul><ul><li>Brokers act as agents in ...
NASD <ul><li>Many of the dealers and brokers of the OTC are members of the National Association of Securities Dealers (NAS...
NASDAQ <ul><li>The computerized trading network used by NASD is the NASD Automated Quotation System (NASDAQ) and is a soph...
Electronic Communications Networks (ECN) <ul><li>Electronic systems that transfer information about securities transaction...
Investment Banker <ul><li>Organization that underwrites and distributes new issues of securities </li></ul><ul><li>Helps b...
Investment Banking Process <ul><li>Help corporations design securities with the features that are most attractive to inves...
Raising Capital:  Stage I Decisions <ul><li>Dollars to be raised </li></ul><ul><li>Type of securities used </li></ul><ul><...
Raising Capital:  Stage II Decisions <ul><li>Reevaluating the initial decisions </li></ul><ul><li>Best efforts or underwri...
Selling Procedures <ul><li>Registration statement </li></ul><ul><ul><li>filed with the SEC </li></ul></ul><ul><li>Prospect...
Shelf Registration <ul><li>Securities registered with the SEC for sale at a later date </li></ul>
Maintenance of the  Secondary Market <ul><li>To facilitate orderly market for the new security, the investment banker main...
Regulation of Securities Markets <ul><li>Securities and Exchange Commission (SEC) </li></ul><ul><ul><li>U.S. government ag...
SEC Regulation <ul><li>Jurisdiction over interstate offerings of new securities to the general public in amounts of $1.5 m...
SEC Regulation <ul><li>Control stock trades by corporate insiders </li></ul><ul><li>Prohibit manipulation of securities pr...
International Financial Markets <ul><li>Increasingly global markets </li></ul><ul><li>Greatest growth in emerging markets ...
End of Chapter 3 <ul><li>Financial Markets  and the Investment  Banking Process </li></ul>
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Financial Markets_Ch03.ppt

  1. 1. Financial Markets and the Investment Banking Process Chapter 3 Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western 5191 Natorp Blvd. Mason, OH 45040
  2. 2. Financial Markets <ul><li>A system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers. </li></ul>
  3. 3. Flow of Funds <ul><li>Provides the ability to transfer income through time </li></ul><ul><ul><li>Borrowing sacrifices future income to increase current income. </li></ul></ul><ul><ul><li>Saving , or investing, sacrifices current income in exchange for greater expected income in the future. </li></ul></ul>
  4. 4. Flow of Funds <ul><li>1. Direct Transfer </li></ul><ul><ul><li>business sells its stock directly to investors </li></ul></ul>
  5. 5. Flow of Funds <ul><li>2. Indirect Transfer through Investment Bankers </li></ul><ul><ul><li>investment banker acts as middleman and facilitates issuance of securities by reselling the securities to savers </li></ul></ul>
  6. 6. Flow of Funds <ul><li>3. Indirect Transfer through financial intermediary </li></ul><ul><ul><li>bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities </li></ul></ul>
  7. 7. Market Efficiency <ul><li>Economic Efficiency </li></ul><ul><ul><li>Funds are allocated to their optimal use at the lowest cost </li></ul></ul><ul><ul><li>Transactions costs associated with buying and selling </li></ul></ul>
  8. 8. Market Efficiency <ul><li>Information Efficiency </li></ul><ul><ul><li>Prices of investments reflect existing information and adjust quickly when new information enters the market </li></ul></ul><ul><ul><li>Three categories </li></ul></ul>
  9. 9. Informational Efficiency <ul><li>Weak-form efficiency </li></ul><ul><ul><li>all information contained in past price movements is fully reflected in current market prices </li></ul></ul><ul><ul><li>information about recent or past price trends is of no use when searching for abnormal returns </li></ul></ul>
  10. 10. Informational Efficiency <ul><li>Semistrong-form efficiency </li></ul><ul><ul><li>current market prices reflect all publicly available information </li></ul></ul><ul><ul><li>financial analysis is of no use for finding mispriced securities </li></ul></ul><ul><ul><li>insiders can profit on their own company’s stock </li></ul></ul>
  11. 11. Informational Efficiency <ul><li>Strong-form efficiency </li></ul><ul><ul><li>current market prices reflect all pertinent information, whether publicly available or privately held </li></ul></ul><ul><ul><li>even insiders cannot earn abnormal returns </li></ul></ul>
  12. 12. Types of Financial Markets <ul><li>Money Markets </li></ul><ul><ul><li>instruments traded mature in one year or less </li></ul></ul><ul><li>Capital Markets </li></ul><ul><ul><li>includes instruments with maturities greater than one year </li></ul></ul>
  13. 13. Types of Financial Markets <ul><li>Debt Markets </li></ul><ul><ul><li>treasury, corporate, mortgage-backed, money market, municipal, etc... </li></ul></ul><ul><li>Equity Markets </li></ul><ul><ul><li>stock markets </li></ul></ul>
  14. 14. Equity Markets <ul><li>Primary </li></ul><ul><ul><li>corporations raise funds by issuing new securities </li></ul></ul><ul><li>Secondary </li></ul><ul><ul><li>securities are traded among investors after they have been issued </li></ul></ul>
  15. 15. Derivatives Markets <ul><li>Options, futures and swaps are securities whose value is determined, or derived directly from other assets </li></ul><ul><li>These can be used to manage risk or to speculate </li></ul>
  16. 16. Types of Stock Market Transactions <ul><li>Secondary market </li></ul><ul><ul><li>trading existing stocks </li></ul></ul><ul><li>Primary market </li></ul><ul><ul><li>existing firm issues additional shares </li></ul></ul><ul><li>Initial Public Offering (IPO) </li></ul><ul><ul><li>privately held company offers stock to the public for the first time </li></ul></ul><ul><ul><li>called “going public” </li></ul></ul>
  17. 17. The Physical Stock Exchanges <ul><li>Physical exchanges </li></ul><ul><ul><li>New York Stock Exchange (NYSE) </li></ul></ul><ul><ul><li>American Stock Exchange (AMEX) </li></ul></ul><ul><ul><li>Chicago Stock Exchange (CHX) </li></ul></ul><ul><ul><li>Philadelphia Stock Exchange (PHLX) </li></ul></ul>
  18. 18. NYSE Members <ul><li>Commission brokers </li></ul><ul><li>Independent brokers </li></ul><ul><li>Competitive traders </li></ul><ul><li>Specialists </li></ul>
  19. 19. Listing Requirements <ul><li>Quantitative and qualitative characteristics a firm must possess to be listed on an exchange </li></ul><ul><li>Vary by exchange </li></ul><ul><li>Number of shareholders, number of public shares, market value of public shares, pre-tax income, etc... </li></ul>
  20. 20. Organized Investment Networks—The Over-the-Counter Market (OTC) <ul><li>Collection of brokers and dealers connected electronically </li></ul><ul><li>Provides for trading in securities not listed on the organized exchanges </li></ul>
  21. 21. Over-the-Counter Market (OTC) <ul><li>Dealers hold inventory and make a market </li></ul><ul><li>Brokers act as agents in bringing together dealers with investors </li></ul><ul><li>Electronic network provides communications link </li></ul>
  22. 22. NASD <ul><li>Many of the dealers and brokers of the OTC are members of the National Association of Securities Dealers (NASD), which licenses and oversees trading practices. </li></ul>
  23. 23. NASDAQ <ul><li>The computerized trading network used by NASD is the NASD Automated Quotation System (NASDAQ) and is a sophisticated market of its own, separate from the OTC. </li></ul>
  24. 24. Electronic Communications Networks (ECN) <ul><li>Electronic systems that transfer information about securities transactions to facilitate the execution of orders </li></ul><ul><li>Automatically matches buy and sell orders for a large number of transactions </li></ul>
  25. 25. Investment Banker <ul><li>Organization that underwrites and distributes new issues of securities </li></ul><ul><li>Helps businesses and other entities obtain needed financing </li></ul>
  26. 26. Investment Banking Process <ul><li>Help corporations design securities with the features that are most attractive to investors given existing market conditions. </li></ul><ul><li>Buy these securities from the corporations. </li></ul><ul><li>Then resell the securities to investors (savers). </li></ul>
  27. 27. Raising Capital: Stage I Decisions <ul><li>Dollars to be raised </li></ul><ul><li>Type of securities used </li></ul><ul><li>Competitive bid or negotiated deal </li></ul><ul><li>Selection of an investment banker </li></ul>
  28. 28. Raising Capital: Stage II Decisions <ul><li>Reevaluating the initial decisions </li></ul><ul><li>Best efforts or underwritten issues </li></ul><ul><li>Issuance (flotation) costs </li></ul><ul><li>Setting the offering price </li></ul>
  29. 29. Selling Procedures <ul><li>Registration statement </li></ul><ul><ul><li>filed with the SEC </li></ul></ul><ul><li>Prospectus </li></ul><ul><ul><li>summarizes a new security issue and the issuing company </li></ul></ul><ul><li>Underwriting syndicate </li></ul><ul><ul><li>group of investment banking firms to distribute the new issue </li></ul></ul>
  30. 30. Shelf Registration <ul><li>Securities registered with the SEC for sale at a later date </li></ul>
  31. 31. Maintenance of the Secondary Market <ul><li>To facilitate orderly market for the new security, the investment banker maintains a market for the security following its issue. </li></ul>
  32. 32. Regulation of Securities Markets <ul><li>Securities and Exchange Commission (SEC) </li></ul><ul><ul><li>U.S. government agency regulates the issuance and trading of stocks and bonds </li></ul></ul><ul><ul><li>to ensure investors receive fair financial disclosures </li></ul></ul><ul><ul><li>to discourage fraud and misleading stock manipulation </li></ul></ul>
  33. 33. SEC Regulation <ul><li>Jurisdiction over interstate offerings of new securities to the general public in amounts of $1.5 million or more </li></ul><ul><li>Regulates national securities exchanges, and listed companies must file annual reports </li></ul>
  34. 34. SEC Regulation <ul><li>Control stock trades by corporate insiders </li></ul><ul><li>Prohibit manipulation of securities prices by pools or wash sales </li></ul>
  35. 35. International Financial Markets <ul><li>Increasingly global markets </li></ul><ul><li>Greatest growth in emerging markets of the Pacific Rim </li></ul><ul><li>U. S. exchanges still dominate worldwide trading activity </li></ul>
  36. 36. End of Chapter 3 <ul><li>Financial Markets and the Investment Banking Process </li></ul>
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