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Financial Markets & Institutions Chapter 2

Financial Markets & Institutions Chapter 2. CapitalAllocation Financial Markets Market Efficiency. FINANCIAL INTERMEDIARIES. JOB #1: ALLOCATING CAPITAL Direct investment Investment Bankers Advise Underwrite Distribute Indirect Financial Intermediaries

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Financial Markets & Institutions Chapter 2

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  1. Financial Markets & InstitutionsChapter 2 CapitalAllocation Financial Markets Market Efficiency Chapter 5

  2. FINANCIAL INTERMEDIARIES • JOB #1: ALLOCATING CAPITAL • Direct investment • Investment Bankers • Advise • Underwrite • Distribute • Indirect Financial Intermediaries • Stock Brokerages (act as agents/principals) • Mutual Funds (invest savings) • Banks (lending capital) Chapter 5

  3. Financial Institutions • Investment Intermediaries • Investment Bankers • Mutual Fund Companies, Finance Companies • Depository Institutions • Banks, Credit Unions, Savings & Loan Associations • Contractual Savings Institutions • Insurance Companies, Pension Funds Chapter 5

  4. FINANCIAL MARKETS A. Types of Markets • Primary; where new issues are sold • IPO (Initial Public Offering) • Additional issues of new stock 2. Secondary; where seasoned issues are bought and sold. 3. Money markets; where short-term debt instruments are bought and sold. Chapter 5

  5. FINANCIAL MARKETS • Capital markets; where long-term debt instruments are bought and sold. Fig 5-1 • Futures market; where derived claims are bought and sold on physical goods. • Options market; where derived claims are bought and sold on financial claims • Futures and options are termed derivative securities in that they derive their value from the value of the underlying asset. Chapter 5

  6. FINANCIAL MARKETS B. Market Makers (Specialists and Dealers); 1. New York Stock Exchange (NYSE) Specialist System; (AMEX also) (auction market) 2. Over-The-Counter Market Maker/Dealer System (NASDAQ system); (dealer market) • Bid-Ask spread; cost of liquidity services. Chapter 5

  7. FINANCIAL MARKETS C. Security exchanges 1. Owned by its members, regulated by the SEC. 2. Trade as principals or as agents. • Floor dominated by stock transactions. • Bonds mostly traded in the OTC market. Chapter 5

  8. FINANCIAL MARKETS D. Reporting of transactions; 1. Reported on the ticker tape; Ticker Symbol, price, volume. 2. Summary of trading activity in the WSJ, Barron’s, other periodicals. 3. The "Market" = highest offer to buy (bid), lowest offer to sell (ask). Chapter 5

  9. FINANCIAL MARKETS E. Foreign Securities; must be registered to trade in US markets. 1. ADR's; shares of foreign companies trading like those of American companies. 2. US. subsidiaries of foreign corporations which have stock outstanding. Chapter 5

  10. STOCK MARKET REPORTING • Indexes 1. Dow Jones Industrial Average (DJIA); 30 2. S&P 500 (composite index) ; 400 (industrials 3. NASDAQ Series; Composite, Industrials B. Media Sources 1. Nightly Business Report; daily wrap-up. 2. Wall Street Week; analysis, strategies, etc. 3. Barrons, Forbes, Financial Section of the NY Times, Investors daily, letters. Chapter 5

  11. MARKET EFFICIENCY A. Efficient Markets Hypothesis 1. Prices reflect all known information. 2. Three Levels of Market Efficiency; • Weak form (old info) • Semi-Strong form (new info) • Strong form efficiency (inside info) • Implication of EMH; you cannot consistently outperform the market. B. Investigate before you invest – and remember – there are NO SURE THINGS – ONLY FOOLS Chapter 5

  12. HOMEWORK CHAPTER 2 • Self-Test: ST-1, parts a, b, c, f • Questions: 2-2, 2-4, 2-5, 2-10 Chapter 5

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