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Financial Management

Financial Management. Lecture 2: Financial Markets and Institutions. An overview of the capital allocation process. Raise capital in Financial Markets Capital Market Transferring capital can be done in three ways Business <-------------- ---------------------> Savers

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Financial Management

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  1. Financial Management Lecture 2: Financial Markets and Institutions

  2. An overview of the capital allocation process • Raise capital in Financial Markets • Capital Market • Transferring capital can be done in three ways • Business <-----------------------------------> Savers • Business <--- Investment Banking-----> Savers • Business <--- Financial Intermediary--> Savers

  3. Financial Markets • If people and organizations need money they may raise capital in Financial Markets • Types of markets: • Spot Markets • Futures Markets • Money Markets • Capital Markets • Primary Markets • Secondary Markets • Private markets • Public Markets

  4. Derivative • Derivative • Any Financial assets whose value is derived from the value of some “underlying” assets • Hedging Operation • Reducing risk by hedge or limit the value or purchasing other underlying assets (derivative markets) when the others markets fall

  5. Financial Institutions • Direct funds transfer among individuals and small business where financial markets and institutions are less developed. • So, many companies rely on financial institution and markets to raise their capital • Investment Banking • Commercial Bank • Financial Services operation • Mutual funds

  6. Financial Institutions (Cont’) • Physical Location Exchanges • Formal organizations having tangible physical locations that conduct auction markets in designated (listed) securities • The over-the-counter Market • A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities

  7. Financial Institutions (Cont’) • Dealer market • Include all facilities that are needed to conduct security transaction not conducted on the physical location changes

  8. The Market for common stock • Closely Held Corporation • A corporation that is owned by a few individuals who are typically associated with the firm’s management (not actively traded) • Public Owned Corporation • A corporation that is owned by a relatively large number of individuals who are not actively involved in its management

  9. Types of Stock Market Transactions • Trading in the outstanding shares of established, publicly owned companies (secondary market) • Additional Shares sold by established, publicly owned companies (primary market) • Initial Public Offering (IPO) market - E.g. Google (2004) sold $85/ share and by September (2005) stock was selling $305

  10. Types of Stock Market Transactions (cont’) • Going Public • The act of selling stock to the public at large by a closely held corporation or its principal stockholders • IPO Market • The market for stocks of companies that are in process of going public

  11. Stock Market Efficiency Market in which the prices of securities fully reflect all known information quickly and on average accurately (Jones 1996).

  12. The form of stock market efficiency • Weak form efficient market – a condition in a market where the security prices reflect all trade-related information, such as historical security price movements and volume of securities trades. • Semi strong form efficient market – a condition in a market where security prices fully reflect all public information. Such as Financial Report • Strong form efficient market – a condition in a market where security prices fully reflect all information, including.

  13. Assignment • Find out any Stock Market reporting and analyze their performance based on historical data (4 or 5 years at least) it would be contained capital gain or loss and elaborate based on your reason (please also provide graph)

  14. Many Thanks…….

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