The Financial Markets

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  • Financial Markets/Investment Banking (Chapter 3)
  • 2 Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • 2 Financial Markets/Investment Banking (Chapter 3)
  • 2 Financial Markets/Investment Banking (Chapter 3)
  • 4 Financial Markets/Investment Banking (Chapter 3)
  • 4 Financial Markets/Investment Banking (Chapter 3)
  • 4 Financial Markets/Investment Banking (Chapter 3)
  • 4 Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • Financial Markets/Investment Banking (Chapter 3)
  • The Financial Markets

    1. 1. What is a Financial Market? <ul><li>A mechanism by which borrowers (those with a need for funds) and lenders (those with excess fund) get together. </li></ul><ul><li>The primary role of financial markets is to facilitate the flow of funds from those who have surplus funds to those who have needs for funds in excess of their current income. </li></ul>
    2. 2. Flow of Funds <ul><li>Three financial phases </li></ul><ul><ul><li>Young adults borrow </li></ul></ul><ul><ul><li>Older working adults save </li></ul></ul><ul><ul><li>Retired adults use savings </li></ul></ul><ul><li>Funds transferred from savers to borrowers </li></ul><ul><ul><li>Direct transfer </li></ul></ul><ul><ul><li>Investment banking house </li></ul></ul><ul><ul><li>Financial intermediary </li></ul></ul>
    3. 3. Transfer of Funds Securities (stocks or bonds) Dollars Borrower (Business) Saver (Investor) Direct Transfers Borrower (Business) Indirect Transfers through an Investment Banker Saver (Investor) Investment Banker Securities Securities Dollars Dollars Indirect Transfers through a Financial Intermediary Borrower (Business) Saver (Investor) Financial Intermediary Business Securities Dollars (Loans) Dollars (Deposits) Intermediary Securities
    4. 4. Market Efficiency <ul><li>Economic Efficiency—funds are allocated to their optimal use at the lowest costs </li></ul><ul><li>Informational Efficiency—investment prices are adjusted quickly to reflect current information </li></ul><ul><ul><li>Weak-form—all information contained in past price movements is reflected in current market prices </li></ul></ul><ul><ul><li>Semistrong-form—current prices reflect all publicly available information </li></ul></ul><ul><ul><li>Strong-form form—current prices reflect all pertinent information, both public and private </li></ul></ul>
    5. 5. Types of Financial Markets <ul><li>Money versus capital markets </li></ul><ul><li>Debt versus equity markets </li></ul><ul><li>Primary versus secondary markets </li></ul><ul><li>Derivatives markets </li></ul>
    6. 6. General Stock Market Activities <ul><li>The secondary market—trading of outstanding, previously issued shares of stock </li></ul><ul><li>The primary market—new shares of stock sold by companies to raise funds </li></ul><ul><li>Initial Public Offering (IPO) market—privately/closely held firms go public for the first time </li></ul>
    7. 7. Stock Markets <ul><li>Physical stock exchanges </li></ul><ul><ul><li>NYSE, AMEX, and regional exchanges </li></ul></ul><ul><li>Exchange members </li></ul><ul><ul><li>Floor brokers </li></ul></ul><ul><ul><ul><li>House broker </li></ul></ul></ul><ul><ul><ul><li>Independent broker </li></ul></ul></ul><ul><ul><li>Specialists </li></ul></ul><ul><li>Listing requirements </li></ul>
    8. 8. Stock Markets <ul><li>Over-the-Counter Markets and the Nasdaq </li></ul><ul><ul><li>Network of brokers and dealers </li></ul></ul><ul><ul><li>Auction market </li></ul></ul><ul><ul><li>Organized Investment Network </li></ul></ul><ul><ul><li>Electronic Communications Networks </li></ul></ul>
    9. 9. Regulation of Securities Markets <ul><li>Securities and Exchange Commission (SEC) </li></ul><ul><ul><li>Jurisdiction over most interstate offerings of new securities to the general public </li></ul></ul><ul><ul><li>Regulation of national securities exchanges </li></ul></ul><ul><ul><li>Power to prohibit manipulation of securities’ prices </li></ul></ul><ul><ul><li>Control over stock trades by corporate insiders </li></ul></ul>
    10. 10. The Investment Banking Process <ul><li>Investment Banker </li></ul><ul><ul><li>Helps corporations design securities attractive to investors </li></ul></ul><ul><ul><li>Buys these securities from the corporation </li></ul></ul><ul><ul><li>Resells the securities to investors </li></ul></ul>
    11. 11. The Investment Banking Process <ul><li>Raising Capital: Stage I Decisions </li></ul><ul><ul><li>Dollars to be raised </li></ul></ul><ul><ul><li>Type of securities used </li></ul></ul><ul><ul><li>Competitive bid versus negotiated deal </li></ul></ul><ul><ul><li>Selection of an investment banker </li></ul></ul>
    12. 12. The Investment Banking Process <ul><li>Raising Capital: Stage II Decisions </li></ul><ul><ul><li>Reevaluating the initial decisions </li></ul></ul><ul><ul><li>Best efforts or underwritten issues </li></ul></ul><ul><ul><ul><li>Underwritten Arrangement—investment bank guarantees the sale by purchasing the securities from the issuer </li></ul></ul></ul><ul><ul><ul><li>Best Effort Arrangement—investment bank gives no guarantee that the securities will be sold </li></ul></ul></ul><ul><ul><li>Issuance (flotation) Costs </li></ul></ul><ul><ul><li>Setting the offering price </li></ul></ul>
    13. 13. The Investment Banking Process <ul><li>Selling Procedures </li></ul><ul><ul><li>Underwriting Syndicate—to spread risk </li></ul></ul><ul><ul><li>Lead Underwriter—manages the distribution </li></ul></ul><ul><ul><li>Selling Group—network of brokerage firms </li></ul></ul><ul><li>Shelf Registration—approved by the SEC, but held for sale at a later date </li></ul><ul><li>Maintenance of the Secondary Market—investment banker wants to “make a market” for the issue (especially for an IPO) </li></ul>
    14. 14. International Stock Markets <ul><li>U.S. stock markets </li></ul><ul><ul><li>Less than 40% of the total value worldwide </li></ul></ul><ul><ul><li>Still dominate the international stock markets </li></ul></ul><ul><li>U.S. investors can participate in international markets by through American Depository Receipts (ADR) </li></ul>
    15. 15. Types of Financial Intermediaries <ul><li>Commercial banks </li></ul><ul><li>Credit unions </li></ul><ul><li>Savings and loan associations </li></ul><ul><li>Mutual funds </li></ul><ul><li>Whole life insurance companies </li></ul><ul><li>Pension funds </li></ul>
    16. 16. The Roles of Financial Intermediaries <ul><li>Facilitate the transfer of funds from those who have funds (savers) to those who need funds (borrowers) </li></ul><ul><li>Manufacture a variety of financial products </li></ul>
    17. 17. Benefits of Financial Intermediaries <ul><li>Improved standard of living </li></ul><ul><li>Reduced costs </li></ul><ul><li>Risk/diversification </li></ul><ul><li>Funds divisibility/pooling </li></ul><ul><li>Financial flexibility </li></ul><ul><li>Related services </li></ul>
    18. 18. Financial Organizations in Other Parts of the World <ul><li>U.S. financial institutions are more heavily regulated than foreign institutions </li></ul><ul><li>U.S. financial institutions face greater limitations on branching, services, and relationships with non-financial businesses than foreign institutions </li></ul>

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