This document provides an overview of financial markets and institutions. It discusses how the household and business sectors interact and how financial intermediaries help allocate capital between savers and investors. Financial markets facilitate the transfer of savings, provide pricing information, and bring liquidity. Different types of financial markets include money markets, capital markets, primary markets, and secondary markets. The document also outlines various financial institutions like investment banks, commercial banks, and mutual funds that operate within these markets. It explains how taking out a loan from a bank creates new money in the economy beyond what is held in reserves. Finally, it briefly mentions physical and over-the-counter stock exchanges.

1. CHAPTER 2: FINANCIAL
MARKETS AND INSTITUTIONS
June 22, 2015 - University of St. La Salle

2. ECONOMIC SYSTEM
Household sector
Who saves money
Business sector
Who needs money for their operations
How do these two sectors meet and transact with each
other?

3. LEARNING OBJECTIVES
Capital allocation, financial markets, and financial
institutions (LO1)
Stock markets (LO2)

4. INTRODUCTION

5. CAPITAL ALLOCATION (LO1)
Direct transfers - no need of financial institutions; little
capital for small firms
Primary market transactions - businesses’ securities and
savers’ money simply pass through the investment bank
Financial intermediary - wherein new forms of capital are
created (Certificates of deposit)

6. FINANCIAL MARKETS (LO1)
Facilitates the transfer of savings from savers to investors
Provides pricing information in the market
Provides liquidity
Saves time, money and efforts.

7. FINANCIAL MARKETS (LO1)
Physical asset markets vs financial asset markets
Spot Markets vs Futures Markets
Money markets vs Capital markets
Primary markets vs Secondary markets
Private markets vs Public markets
Derivatives

8. FINANCIAL INSTITUTIONS
(LO1)
Investment banks
Commercial banks
Financial services
corporation
Credit unions
Pension funds
Life insurance companies
Mutual funds
Exchange traded funds
Hedge funds
Private equity companies

9. FINANCIAL INSTITUTIONS
(LO1)
Where does money come from?
The money is created from thin air every time we make a
loan. When you take out P1 million to buy a car, a bank
doesn’t actually take P1 million in notes from its vaults to put
in your account. “At that moment, new money is created,”
according to the Bank of England’s report on “Money
Creation in the Modern economy.” Banknotes - which are
printed by the Central Bank - reflect only around 3 to 10% of
a country’s actual money. the Central Bank sets a monetary
policy, which among other things regulates loans and
therefore the amount of wealth that is created.

10. STOCK EXCHANGE (LO2)
Physical location stock exchanges
Over the counter market