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Module 5 - Understanding the Role of Financial Markets and Institutions.pdf

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Understanding the Role of Financial Markets and InstitutionsLEARNING OBJECTIVESAfter studying this module, you should be able to:1.Define financial markets.2.Identify the participants in the financial markets.3.Appreciate the importance of financial markets as providers of funds to businessestablishments.4.Enumerate and distinguish the types of markets.5.Familiar with the categories of financial institutions.6.Understand the role of the stock market.7.Know the kinds of stock market.8.Explain the reasons for transactions in stock market.9.Discuss the role and operation of a stock exchange10.Know how securities are listed on the stock exchange.UNDERSTANDING THE ROLE OF THE FINANCIAL MARKETS ANDINSTITUTIONSINTRODUCTIONOne may wonder how a financial manager knows whether he or she is maximizing shareholdervalue and ethical (unethical) behavior may affect the value of the company. This information isprovided daily to financial managers through price changes determined in the financial markets.But what are the financial markets?Financial markets are the meeting place for people, corporations and institutions that either needmoney or have money to lend or invest. In a broad context, the financial markets exist as a vastglobal network of individuals and financial institutions that may be lenders, borrowers or ownersof public companies worldwide. Participants in the financial markets also include national, stateand local governments that are primarily borrowers of funds for highways, education, welfare andother public activities; their markets are referred to as public financial markets. Large corporationsraise funds in the corporate financial markets.Corporations rely on the financial markets to provide funds for short-term operations and for newplant and equipment. A firm may go to the markets and raise financial capital by either borrowingmoney through a debt offering of corporate bonds or short-term notes, or by selling ownership inModule 5 - Understanding the Role of FinancialMarkets and Institutions
Understanding the Role of Financial Markets and Institutionsthe company through an issue of common stock. When a corporation uses the financial markets toraise new funds, the sale of securities is said to be made in the primary market by way of a newissue. After the securities are sold to the public (institutions and individuals), they are traded in thesecondary market between investors. It is in the secondary market that prices are continuallychanging as investors buy and sell securities based on their expectations of a corporation'sprospects. It is also in the secondary market that financial managers are given feedback about theirfirm's performance. Those companies that perform well and are rewarded by the market with highpriced securities have an easier time raising new funds in the money and capital markets than theircompetitors. They are also able to raise funds at a lower cost.

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Term
Fall
Professor
Maxine
Tags
Financial Markets, Stock exchange, Role of Financial Markets and Institutions

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