Financial Market and Institutions

1
Financial Markets and Institutions
2
Summary of Classification of Financial Markets

• Classification by nature of claim.
• Debt market Equity market
• Classification by maturity of claim.
• Money market Capital market
• Classification by seasoning of claim.
• Primary market Secondary market
• Classification by immediate delivery or future
  delivery
• Cash or spot market Derivative market. Stock
  Recommendations
• Classification by organizational structure
• Auction market Over-the-counter market
  Intermediated market

3
Financial Instruments and Markets

• Primary Markets
• Market for issuing a new security and
  distributing to saver-lenders.
• Investment BanksInformation and marketing
  specialists for newly issued securities.
• Secondary Markets
• Market where existing securities can be exchanged
• New York Stock Exchange
• American Stock Exchange
• Over-the-counter (OTC) markets

4
Types of Corporate Stock

• Preferred Stock
• Fixed dividends, priority over common stock
• Common Stock
• Variable dividends, based on companys profits.
• Convertible
• Preferred stock that can be converted into common
  stock at a stated price

5
Measures of Trends in Common Stock Prices

• Standard Poors 500 Stock Index
• Based on prices of 500 individual stocks
• NASDAQ Composite Index
• Based on all stocks listed in Exchanges
• Dow Jones Industrial Average
• Based on price of 30 blue-chip stocks

6
Options and Futures Contracts

• Contractual agreement between two parties to
  exchange an asset in the future at a stated price
• Derivative financial instruments
• Derive value from underlying assets
• Long
• Buyer of the contract, receive commodity in the
  future
• Short
• Seller of the contract, provide commodity in the
  future
• Speculators
• Gamble on price fluctuations and hope to profit
• Hedgers
• Eliminate the risk of price fluctuations

7
The Capital Market

• Exchange of long-term securitiesin excess of one
  year
• Generally used to secure long-term financing for
  capital investment
• Stock marketLargest part of capital market and
  held by private and institutional investors
• Corporate bond marketHeld by insurance
  companies, pension and retirement funds
• Local and state government bondsPrimarily held
  for tax-exempt feature
• Government securitiesHeld by commercial banks,
  the Fed, individual Americans/foreigners, and
  dealers

8
Role of Financial Intermediaries

• Act as agents in transferring funds from
  savers-lenders to borrowers-spenders.
• Acquire funds by issuing their liabilities to
  public and use money to purchase financial assets
• Earn profits on difference between interest paid
  and earned
• Diversify portfolios and minimize risk
• Providing MCX free tips to commodity traders
• Competition lowers interest ratesbeneficial to
  economic growth

9
Economic Functions of Financial Markets

• Interactions of buyers and sellers determines
  price.
• Price discovery process.
• Provides a mechanism to sell.
• Liquidity.
• Reduces transactions costs.
• Search costs.
• Information costs.

10
Commercial Banks

• Most prominent financial institution
• Range in size from huge (BankAmerica) to small
  (local banks)
• Major sources of funds
• used to be demand deposits of public
• now rely more on other liabilities
• also accept savings and time deposits
• Uses of funds
• short-term government securities
• long-term business loans
• home mortgages

11
Pension and Retirement Funds

• Concerned with long run
• Receive funds from working individuals building
  nest-egg
• Accurate prediction of future use of funds
• Invest mainly in long-term corporate bonds and
  high-grade stock

12
Mutual Funds

• Stock or bond market related institutions
• Pool funds from many people
• Invest in wide variety of securitiesminimize
  risk

13
Commercial and Consumer Finance Companies

• Acquire funds primarily by selling short term
  loans (commercial paper)
• Lend money for consumer purchases or business
  firms to finance inventories