There are 2 types of financial market: primary market and secondary market

1. Financial Markets andFinancial Markets and
InstitutionsInstitutions

2. Summary of Classification ofSummary of Classification of
FinancialFinancial MarketsMarkets
Classification by nature of claim.Classification by nature of claim.
– Debt market; Equity marketDebt market; Equity market
Classification by maturity of claim.Classification by maturity of claim.
– Money market; Capital marketMoney market; Capital market
Classification by seasoning of claimClassification by seasoning of claim..
– Primary market; Secondary marketPrimary market; Secondary market
Classification by immediate delivery or futureClassification by immediate delivery or future
deliverydelivery
– Cash or spot market; Derivative market.Cash or spot market; Derivative market. Stock RecommendationsStock Recommendations
Classification by organizational structureClassification by organizational structure
– Auction market; Over-the-counter market; Intermediated marketAuction market; Over-the-counter market; Intermediated market

3. Financial Instruments andFinancial Instruments and
MarketsMarkets
Primary MarketsPrimary Markets
– Market for issuing aMarket for issuing a new securitynew security and distributing toand distributing to
saver-lenders.saver-lenders.
– Investment BanksInvestment Banks—Information and marketing—Information and marketing
specialists for newly issued securities.specialists for newly issued securities.
Secondary MarketsSecondary Markets
– Market where existing securities can be exchangedMarket where existing securities can be exchanged
New York Stock ExchangeNew York Stock Exchange
American Stock ExchangeAmerican Stock Exchange
Over-the-counter (OTC) marketsOver-the-counter (OTC) markets

4. Types of Corporate StockTypes of Corporate Stock
Preferred StockPreferred Stock
– Fixed dividends, priority over common stockFixed dividends, priority over common stock
Common StockCommon Stock
– Variable dividends, based on company’sVariable dividends, based on company’s
profits.profits.
ConvertibleConvertible
– Preferred stock that can be converted intoPreferred stock that can be converted into
common stock at a stated pricecommon stock at a stated price

5. Measures of Trends in CommonMeasures of Trends in Common
Stock PricesStock Prices
Standard & Poor’s 500 Stock IndexStandard & Poor’s 500 Stock Index
– Based on prices of 500 individual stocksBased on prices of 500 individual stocks
NASDAQ Composite IndexNASDAQ Composite Index
– Based on all stocks listed in ExchangesBased on all stocks listed in Exchanges
Dow Jones Industrial AverageDow Jones Industrial Average
– Based on price of 30 “blue-chip” stocksBased on price of 30 “blue-chip” stocks

6. Options and Futures ContractsOptions and Futures Contracts
Contractual agreement between two parties toContractual agreement between two parties to
exchange an asset in the future at a stated priceexchange an asset in the future at a stated price
Derivative financial instrumentsDerivative financial instruments
– Derive value from underlying assetsDerive value from underlying assets
LongLong
– Buyer of the contract, receive commodity in the futureBuyer of the contract, receive commodity in the future
ShortShort
– Seller of the contract, provide commodity in the futureSeller of the contract, provide commodity in the future
SpeculatorsSpeculators
– Gamble on price fluctuations and hope to profitGamble on price fluctuations and hope to profit
HedgersHedgers
– Eliminate the risk of price fluctuationsEliminate the risk of price fluctuations

7. The Capital MarketThe Capital Market
ExchangeExchange of long-term securities—in excessof long-term securities—in excess
of one yearof one year
Generally used to secure long-term financing forGenerally used to secure long-term financing for
capital investmentcapital investment
– Stock marketStock market—Largest part of capital market and—Largest part of capital market and
held by private and institutional investorsheld by private and institutional investors
– Corporate bond marketCorporate bond market—Held by insurance—Held by insurance
companies, pension and retirement fundscompanies, pension and retirement funds
– Local and state government bondsLocal and state government bonds—Primarily held—Primarily held
for tax-exempt featurefor tax-exempt feature
– Government securitiesGovernment securities—Held by commercial banks,—Held by commercial banks,
the Fed, individual Americans/foreigners, and dealersthe Fed, individual Americans/foreigners, and dealers

8. Role of Financial IntermediariesRole of Financial Intermediaries
Act as agents in transferring funds from savers-Act as agents in transferring funds from savers-
lenders to borrowers-spenders.lenders to borrowers-spenders.
Acquire funds by issuing their liabilities to publicAcquire funds by issuing their liabilities to public
and use money to purchase financial assetsand use money to purchase financial assets
– Earn profits on difference between interest paid andEarn profits on difference between interest paid and
earnedearned
– Diversify portfolios and minimize riskDiversify portfolios and minimize risk
– ProvidingProviding MCX free tipsMCX free tips to commodity tradersto commodity traders
– Competition lowers interest rates—beneficial toCompetition lowers interest rates—beneficial to
economic growtheconomic growth

9. Economic Functions ofEconomic Functions of
Financial MarketsFinancial Markets
Interactions of buyers and sellersInteractions of buyers and sellers
determines price.determines price.
– Price discovery process.Price discovery process.
Provides a mechanism to sell.Provides a mechanism to sell.
– Liquidity.Liquidity.
Reduces transactions costs.Reduces transactions costs.
– Search costs.Search costs.
– Information costs.Information costs.

10. Commercial BanksCommercial Banks
Most prominent financial institutionMost prominent financial institution
Range in size from huge (BankAmerica) to small (localRange in size from huge (BankAmerica) to small (local
banks)banks)
Major sources of fundsMajor sources of funds
– used to be demand deposits of publicused to be demand deposits of public
– now rely more on “other liabilities”now rely more on “other liabilities”
– also accept savings and time depositsalso accept savings and time deposits
Uses of fundsUses of funds
– short-term government securitiesshort-term government securities
– long-term business loanslong-term business loans
– home mortgageshome mortgages

11. Pension and Retirement FundsPension and Retirement Funds
Concerned with long runConcerned with long run
Receive funds from workingReceive funds from working
individuals building “nest-egg”individuals building “nest-egg”
Accurate prediction of future use ofAccurate prediction of future use of
fundsfunds
Invest mainly in long-term corporateInvest mainly in long-term corporate
bonds and high-grade stockbonds and high-grade stock

12. Mutual FundsMutual Funds
Stock or bond market relatedStock or bond market related
institutionsinstitutions
Pool funds from many peoplePool funds from many people
Invest in wide variety of securities—Invest in wide variety of securities—
minimize riskminimize risk

13. Commercial and ConsumerCommercial and Consumer
Finance CompaniesFinance Companies
Acquire funds primarily by selling shortAcquire funds primarily by selling short
term loans (commercial paper)term loans (commercial paper)
Lend money for consumer purchases orLend money for consumer purchases or
business firms to finance inventoriesbusiness firms to finance inventories